Decoding upgrading in middle-income countries: the political economy of IT industrial policy in two Mexican states

Abstract In an era of fragmented global production and domestic decentralization, middle-income countries confront the complex challenge of industrial upgrading. While national governments remain central to industrial policy design and funding, upgrading unfolds through multi-level interactions between state and business actors across international, national, and subnational spheres. This raises a critical question: How do local political-economic coalitions between firms and governments shape the implementation of national industrial policies and leverage them for upgrading? This paper moves beyond the predominantly national-level analysis of industrial policy, which often treats implementation as straightforward. Instead, it presents a novel theoretical framework that emphasizes how the interplay of executive leadership, business cohesion, and bureaucratic quality fundamentally shapes industrial upgrading outcomes in today’s globalized, decentralized economy. The framework is tested and refined through a longitudinal comparative study of a key technology sector industrial policy (Prosoft) in two Mexican states - Nuevo León and Puebla - from 2000 to 2015. Drawing on semi-structured interviews with key stakeholders and secondary sources, the analysis demonstrates how distinct regional state-business configurations critically influence both policy implementation and upgrading trajectories.