This paper briefly reviews the historical development of the university system in Chile, and describes the current structure of funding, supply and demand for tertiary education, research and university services. Both public and private universities in Chile have expanded and restructured, access to tertiary education has improved, and universities have contributed to the country's national innovation system. However, steep challenges related to structure and performance in education and research remain, if universities are to meet the growing economy's demands for productivity and competitiveness. This paper outlines the principal areas which need improving: market access; quality of services; R&D and innovation spending; fiscal support; institution building and strategy co-ordination.