The purpose of the article is to study innovation mechanisms of the domestic economy, as well as analyse its current state and substantiate perspective development directions. Research methods. Based on the dialectical method of cognition, the monographic method (for analysing approaches to innovation implementation), empirical method (for evaluating innovative support for economic development), and abstract and logical method (for theoretical generalizations and formulation of conclusions) were used. Research results. Functioning of the domestic economy on principle of innovative development model is of objective necessity currently, and requires a new quality of the domestic science that takes into account advanced technological trends, existing options for socio-economic development, as well as justification of the feasibility of scientific and technological results and their adaptation to public needs. In the research course the state of innovative development of the Ukrainian economy was determined. The main sources for financing an innovation activity of enterprises, dynamics of capital investments by individual types of economic activity were analysed, and a specific share of innovations in the GDP of Ukraine was compared. Elements of scientific novelty. There were justified development directions of the domestic economy, in particular the usage of innovative technologies, introduction of modern equipment, investments in improving skills of personnel, which allow to increase the efficiency and competitiveness of production. Practical significance. Research shows that innovation has not yet become a real economic policy priority. In terms of the chosen model of economic growth, the state of innovation activity was determined by the majority of domestic experts-scientists as such, which does not correspond to the current level of innovation processes in most industrialized countries. The recommendations will help to solve the problem of improving the efficiency of the domestic economy through the activation of innovative processes, achieve higher level of sustainability of enterprises’ development and strengthen competitive positions of domestic producers in the market. Tabl.: 5. Refs.: 20