Public funding for research and development is an important instrument of state innovation policy, particularly in countries with modest private investment in research. Allocation of public funds must take into account both the need to ensure the sustainability of R&D activities and the promotion of excellence research and ensuring economic and social impact. Small countries face additional problems in the process, especially related to the objective evaluation of projects’ proposals. The paper examines the case of Moldova, focusing on the allocation of public funds, on specific problems and possible ways to improve this process. There has been a reduction of their competitive financing, poor compliance with the principles of peer-review and insufficient involvement of experts from abroad, the lack of clear criteria for the allocation of institutional funding. However, the current way of public funding does not stimulate R&D and industry cooperation. The findings suggest the need to strike a balance between different modes and tools of public funding for R&D in Moldova