Slovenia’s rapid catch-up process owes much to a favourable business environment. The 2008 level of product market regulation (PMR) index is much lower than in the Czech Republic and Poland, while being closer to the levels noted for neighbouring countries (Austria, Hungary and Italy) or the OECD average. Keener competition since EU accession has set the stage for large numbers of small and medium-sized enterprises to be created. Foreign direct investment (FDI) inflows, though, have remained low, pointing to a sub-optimal transfer of best-practice knowledge. In key service sectors (financial services, energy and telecommunication), low contestability linked to state involvement and strong market concentration may have deterred inward FDI. In this setting, competitive forces in state-controlled services sectors need to be spurred through economic restructuring, improved corporate governance practices and, ultimately, through further privatisation when the economy recovers. A more efficient financial service sector is particularly needed to develop sophisticated financial products for a rapidly ageing population. Furthermore, overall prospects of reduced potential output growth strengthen the call for a comprehensive innovation system to allocate resources to knowledge-intensive sectors. The quality of Slovenia’s future business environment will largely depend upon the success of innovation policies, including the provision of efficient, innovation-oriented support services. The key challenge in this area is the optimisation of collaborative links connecting the research community, the business sector and the State. Evidence suggests that it is the combination of framework conditions rather than a reform in one single area that matters for long-run economic performance.