Taiwan’s post-war economic development has been the showcase for two competing theories of late industrialization: the developmental state theory (state-centric approach) and the varieties of inter-firm network theories (societal approach). Yet, this situation is a puzzle for development theories because while being a poster child of the developmental state, Taiwan has also evolved a decentralized industrial structure of SMEs to compete globally, although the latter has been conventionally thought to be unfavorable to driving industrial upgrading. Furthermore, how could a strong state work with a series of SMEs, as the assumption is that they would cause coordination problems?

This paper engages in a reinterpretation of Taiwan’s post-war development that centers on the two pillars of the Taiwanese miracle: the state and the SMEs. Through the analysis of this tensional dynamic, it proposes an alternative model for late developers. I will first discuss how Taiwan has made advancements in the two previously mentioned theoretical frameworks and then show the limitations of both approaches as a way of motivating the inquiry. I next postulate the propositions for an alternative model and illustrate the kind of public support and institutional arrangements that have been crucial in generating learning and trust in a decentralized economy through in-depth case studies in various machinery industries, ranging from bicycles to machine-tool parts.