Due to the emphasis on the important role played by small and medium sized enterprises in the economy, policies to encourage innovation in these small firms are attracting increasing attention from researchers and policy makers. The differences and similarities between approaches in the three countries the USA, Japan and China - form the basis for this paper. The research process involves an overview of secondary data available about innovation and the small firm sector, and then moves on through two other stages to more in-depth review of particular aspects before taking a qualitative approach to identify effective business support measures for small firms. While the research is at an early stage, here we explore the definition of an SME, the importance of the SME sector and summarize the current policies to encourage innovation in each country. Comparative analysis is the main method in this paper in terms of definitions, roles of SMEs, as well as philosophies, basic law and policy systems for SMEs in China, Japan and USA. However, compared with developed countries such as Japan and USA, China has no effective system to help SMEs overcome the obstacles of financing, avoid the risks of lack of credit system, unfair or illegal competition and so on. Experiences in policy making from Japan and USA can be divided in to two groups. One group of lessons and experiences can be imitated as soon as possible, and the other one can only be used for references in the long run. Based on these findings, policymakers, especially from China, can make use of previous experiences from other countries and avoid policy risks at the same time