Creative cities are increasingly attracting the interest of academics and policy makers around the world, as is the relationship between creativity and innovation. Within creative industries, newmedia is considered an innovative, growth sector which holds potential for developing countries.This paper examines innovation in new media firms situated in Cape Town, South Africa.Theoretically, the dynamics of creativity, innovation and economic development in contemporaryurban contexts are considered; as are the interactions between creative cities and innovationsystems. This paper draws on purposive interviews with new media firms concerning their innovationactivities. This study found that the new media sector in Cape Town is a small, but an emergingcreative sector and that new media firms are dynamic in terms of technological innovation.However, for the most part their innovation activities tend to be incremental and localised.Furthermore, various barriers limit their innovation enhancement and growth prospects. These firmsneed to be nurtured and supported in order to grow, create more novel innovations and becomeinternationally competitive. The paper also provides policy implications for fostering innovation increative cities in developing countries, as well as local policy recommendations for the enhancement of creative industries.