Research on Global Value Chains (GVC) and their potential for encouraging industrial upgrading in developing economies has proliferated during the last two decades, but an in-depth understanding of what the scope for implementing industrial policy is in the GVC context is lacking in the literature. This thesis aims to fill this gap by creating a theoretical framework to link the theory of industrial policy with that of GVCs with insights from the innovation economics literature. Using a mixed methods approach (interviews to key actors, archival research, analyses of official documents and descriptive statistical analyses), the framework is then used to examine the empirical case studies of industrial policy in the electronics industry in Guangdong province of China and in Malaysia.

While integration into GVCs can provide firms with some opportunities for upgrading, developing country firms often find it difficult to accumulate enough capabilities to operate in the technological frontier, even after decades of supplying lead firms. Drawing on three literatures (industrial policy, GVCs and technological capabilities), this thesis argues that in the absence of industrial policy to provide incentives for investing the accumulation of capabilities and to build a domestic system of innovation, it is difficult for firms to overcome the market failures associated with industrialization and technological learning.

The two case studies provide further evidence that industrial policy remains relevant for contemporary industrial development. Both Guangdong province and Malaysia attempted to leverage integration into GVCs to promote the development of an electronics industry, but while Guangdong has developed indigenous firms with high-tech capabilities, in Malaysia the industry remains technologically weak and lacks indigenous firms with advanced capabilities. This thesis argues that Guangdong followed a mixed strategy, where both integration at the lower end of export-oriented GVCs and engaging in import-substitution were leveraged to improve the technological capabilities of firms. However, the lack of access to credit for the private sector and the lack of research capabilities in the public sector may constrain the future development of the industry. In Malaysia, industrial policy focused on attracting export-oriented foreign direct investments (FDI) and increasing the sophistication of foreign subsidiaries. Efforts to encourage indigenous firm development lacked coherence, consistence and adequate resources, leading to poor results. This meant that the few indigenous firms developed capabilities to become GVC suppliers and those that did, lacked sufficient incentives and resources to scale up and develop more sophisticated capabilities. At the same time, Transnational Corporations (TNCs) continued to be reluctant to shift frontier activities to the country. As a result, the industry in Malaysia has struggled to enhance its position in GVCs and has faced pressures from emerging, low-cost locations in the region.