This article analyses the innovation agenda of the European Union (EU), places it in the context of globalisation and explores its foundation in the theoretical innovation systems perspective. It analyses a number of the central policy domains of this agenda: higher education, doctoral education, research and knowledge transfer. In the second part of the article, some major challenges of the EU innovation agenda for European higher education and research are discussed. These challenges concern: future shortages of higher education graduates, the issue of access and equity, limited world-class research excellence, the need to further increase knowledge transfer efforts, the lack of private funding in higher education and research, and the processes of academic stratification and regional differentiation.