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This paper analyses the evolution of clusters and 'interactive learning' in upgrading manufacturing capabilities. We analyse the upgrading process in line with key concepts constituting 'interactive learning', which include clusters and agglomeration (regional) innovation systems, open innovation and localised learning. On the basis of analysis at fi rm and industry-wide levels, this paper contributes to current literature concerning clusters and innovation that relate to technological upgrading in locally based fi rms by (1) examining the role of governments in promoting clusters and regional development;(2) identifying the conditions important for fi rm agglomeration and how agglomeration leads to knowledge-sharing at horizontal, vertical and institutional levels; (3) discussing the role of foreign fi rms in transferring technology and encouraging their suppliers to share knowledge within the production network; and (4) reporting on the characteristics and determinants of R&D cooperation within the Thai manufacturing sector. The main fi ndings reveal that developing countries, including Thailand at this moment, may have limitations in their science and technology base. This can hinder their upward progression on the global value chain. It is of particular importance for government policy to be more supportive, rather than regulative, in order to strengthen the scientifi c knowledge base and promote cooperation between indigenous fi rms and innovation in supporting organisations.

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This chapter discusses the case of Thailand and argues that technological learning by firms has been slow and passive owing to three factors: the failure of the educational system to create a strong cadre of technically trained people, the inability of government to develop and enforce policies to enhance Thai firms to develop technological and innovative capabilities, and little pressure on multinationals to build and upgrade their technological and innovative capabilities locally. Thai intellectual property regime was, until the early 1990s, characterized by weak protection and yet it was not pro‐diffusion either. That is, it was not particularly favorable to catch‐up and the lack of preconditions did not help either, for instance, the absence of sufficient indigenous absorptive capacity of firms, the lack of mechanisms or coordinated policy for knowledge diffusion and utilization, and the environment in general not being favorable to innovation.