This paper is one of five case studies which is a part of a larger project looking at the various effects that trade and investment can have on innovation. This paper studies the effect of the ending of the Multi-Fibre Agreement (MFA) on innovation in the Sri Lankan textile and clothing sector. The ending of the quota system under the MFA led to an increase in the US and EU markets which has motivated a large number of innovations in the Sri Lankan textile and clothing sector. Some large companies have become a total services provider while some are trying to establish their own brands. Product innovations with foreign partners, process innovations such as introduction of CAD/CAM and various marketing and organisational innovations have been implemented.