An examination of the process of diversification as a strategy to promote innovation and growth within firms and to foster structural change in industry. Through a comparative case study of the aerospace industry, using cases of diversification at Dassault (France) Saab (Sweden) and Daewoo (South Korea), the author examines interactions between the firm and the state, and critically evaluates the role of national and sectoral institutions during the diversification process. He then uses these findings to propose a model for diversification. Key features include: an exploration of the ways in which the systems of innovation approach can be used to analyze strategies in firms; insights into the concept of "institutions"; an examination of the relationship between the behaviour of diversifying firms and institutions; and research on the South Korean aerospace industry.