Most studies of industrial policy in Japan, South Korea, Taiwan and China have been concerned with the state’s role in framing industrial policy, and have taken a cross-sectional approach, limited in time. This thesis explores industrial policy longitudinally, as a dynamic, evolving relationship between the state and firms, one in which the positive contribution of the state tends to diminish as capabilities in the wider economy increase. It does so through an examination of the development of firms in China’s electricity-generating equipment industry since 1978, based on more than 70 case study interviews. Three sub-sectors – thermal power equipment, wind turbines, and photovoltaics – are examined in order to track state industrial policy development and the evolution of firm-level capabilities and strategies over four decades. A multi-disciplinary theoretical foundation is constructed from development economics studies and economic and strategic management theory. The findings point to inevitable tension between the early-stage, centralising support for technological learning by a strong developmental state and the more fluid, dynamic and disruptive capabilities that define successful firms’ strategies once basic manufacturing skills are acquired. While the developmental state’s strengths are reflected in the steady, conservative nurturing of manufacturing capabilities, successful firm strategy increasingly requires dynamic capabilities reflected in systems integration, and strategic risk taking in the choice of activities in the business chain and technology sourcing, in turn favouring private ownership. The thesis findings recommend policies that explicitly recognise the need for transitions from state-led development to decentralised, entrepreneurial and market-led growth. It is concluded that strategic management research could contribute significantly to our understanding of economic development if researchers focused attention on political economy transitions in developmental-state-led economies.