Technological Capabilities and the Architecture of Catch-Up

This chapter places technological capabilities at the centre of structural transformation and economic catch-up in the digital era. It argues that market liberalization, digitalization, and policy alignment alone are insufficient for sustained progress. Instead, development depends on the coordinated accumulation of four interrelated capabilities: technological, organizational, institutional, and transformative. Among these, technological capabilities are the most immediate lever for upgrading productivity, fostering innovation, and enabling firms to move into higher-value activities. Drawing on insights from development and innovation systems theory, the chapter develops an integrated framework to understand how these capabilities emerge, interact, and evolve. Using examples from Western Balkan economies, it identifies six key pathways of capability formation: learning by doing, supplier upgrading, vocational reform, innovation system strengthening, cross-sectoral enablers, and governance sequencing. It also diagnoses major barriers such as underinvestment in research and development, skills mismatches, weak firm learning, limited digital absorption, and institutional fragmentation. The chapter concludes that industrial policy must function as a platform for learning and coordination, rather than a set of fixed interventions. Sustainable transformation arises not from imitation of external models but from building adaptive systems that integrate technology, governance, and learning into a coherent process of cumulative development.