While the importance of technological capabilities to economic development is widely acknowledged, there is little agreement about the processes governing these capabilities, or about the links with government policy and the internationalization of economic activity. In South Africa, technology policy was historically driven by government imperatives associated with objectives, including developing defence industries and reduced reliance on oil imports. The policy developments in the last ten years have had fundamentally different objectives; however, technology policy has largely developed separately from industrial policy. This paper explores the development of technological capabilities as an integral part of firms' production decisions. It addresses issues such as the importance of different types of links with the international economy, and local inter-firm relationships.