The changing context for AGRICULTURAL development has highlighted a strong need to understand and adopt innovation systems thinking. Science, technology and innovation policy has equated rural development to AGRICULTURAL development. The main objective of this paper was to examine the role of innovation capacity in AGRICULTURAL SECTOR. With the growing diversification of rural livelihood options into non-farm activities and with the increasing interconnectedness of rural areas and activities to the global environment, a new rural economy is emerging. This is bringing with greater pressures on farmers, companies and governments to innovate in response to different situations. So ideas of what constitutes “research capacity” have evolved, along with approaches for investing in the capacity to innovate, there for this study was done. This paper is to review and to describe, innovation system and AGRICULTURAL innovation.