The chapter discusses how multi-level networks can stimulate public sector innovation. The case studied is the new water governance system in Norway. In accordance with the ecosystem principle in the EU Water Framework Directive, new multilevel networks are established in catchment areas, cutting across municipal, regional and national borders. The chapter first examines, on the basis of national surveys and empirical case-studies, whether the new networks stimulate cross-sector, multi-level coordination. Then, it discusses if and how coordination influences collaborative innovation. The study finds that the networks stimulate coordination, first and foremost understood as information- and knowledge sharing, and the coordination of world views. This type of coordination seems to spur public-sector innovation, by establishing common platforms of understanding, where the friction and conflicting interests can play out in constructive ways. Our informants report about rhetorical innovation and strategic innovation, as well as governance innovation. However, the full potentials are far from realized. Obstacles include lack of national harmonization of policy goals and sector legislation, and the lack of regional and local political will to engage actively and recognize the innovative potential in the new collaborative arenas.