Although much has been written about the implications of the structural reforms of the 1990s for industrial progress in developing countries, particularly in Latin America, less attention has been given to the role of meso and micro factors in sector and firm-level technological capability building. Most existing studies are based on aggregated analyses that argue either for or against such reforms. Seeking to offer an alternative view on this debate, this paper examines firm-level capabilities in
association with inter-organisational knowledge links (as sources of such capabilities) in the light of government policies. The paper draws on first-hand empirical evidence from a sample of 75 organisations (46 firms and 29 innovation system supporting organisations) in Northern Brazil. The study found a diversity of firms’ capability types and levels and a variety of sources to build up and/or sustain such capabilities (knowledge links). Overall, firms and the local innovation system have been exhibiting a positive response to those structural reforms, but such responses were not a mere consequence of trade openness. Indeed, the evidence here does not support a Washington Consensus type of argument; neither does it suggest a return of the ISI strategy. Instead, a combination of government policy, foreign competition, firms’ capability building efforts, and the emergence supporting organisations in the local innovation system has been proving essential for innovative
capability accumulation in some of the sampled firms. Thus policies for accelerating industrial technological capability building in a developing area such as the one examined here should involve not only macro-level incentives and competition, but, very importantly, measures that facilitate and stimulate intra-firm capability building efforts.