National production systems have been fragmented from above and below � by emerging global production networks and regional systems of production. Increasingly, national systems of production do not sit between global and local but are formed out of them (Castells, 1997). Yet the relationship between global and local production networks is a tense one: while regional industrial systems enable more rewarding participation in global networks, participation in those networks simultaneously presents potential problems of the `hollowing out' of the region and of the `locking in' of the region at lower levels of the hierarchy of the international division of labour (O'Hearn, 2001). Strategic participation in global networks of production and innovation is crucial to developing strong regional systems. But in order to negotiate access to the upper reaches of the production and innovation hierarchy, a strong regional system is crucial. A dilemma presents itself for regions seeking to grow and develop industrially: how to use global networks to develop the very local systems that will enable regions to bargain their way into a more favourable position within those networks. The information technology industry in the Republic of Ireland is a useful case for exploring these industrial development dilemmas. Since the 1950s, industrial policy in Ireland has focused on the attraction of foreign investment. After initial growth in the 1960s and 1970s, an economy increasingly based on branch plants and transfer pricing ran into economic problems in the 1980s. Mass unemployment and emigration in the 1980s gave little sign of the economic boom to follow in the 1990s. Driven by foreign investment and governed by new `social partnership' institutions, the Celtic Tiger years of the 1990s represented a startling turnaround in economic fortunes so that Irish GDP outstripped the EU average by the late 1990s (O� Riain and O'Connell, 2000). But if the economic growth of the 1990s is unquestioned, the extent and character of the industrial transformations underpinning it are more controversial. Some see the Celtic Tiger years as bringing industrial upgrading led by foreign firms, while others see the influence of foreign firms as more pernicious, with Ireland in the 1990s largely the beneficiary of enormous entrepot flows of international capital (Barry, 1999; O'Hearn, 2001). However, while there are striking entrepot characteristics to foreign firms in Ireland, significant industrial upgrading has occurred across a wide range of sectors. We see growth almost completely across the board in investment, R&D, employment, professionalization and productivity (O� Riain, 2004a). Perhaps the central contradiction of Irish industrial development that has fostered the controversies of recent years is that entrepot activity and industrial upgrading occurred within the same sectors and even within the same firms. An intriguing aspect of Irish development is the emergence of local deepening and upgrading from within these non-productive flows of capital. This article uses these contradictions within the Irish industrial structure to explore the dilemmas of development in a world of global and local networks. Through a case study of the development of the software industry, the most dynamic sector of the Irish economy in the 1990s, the article explores how an industry and region that was `locked Volume 28.3 September 2004 642-63 International Journal of Urban and Regional Research � Joint Editors and Blackwell Publishing Ltd 2004. Published by Blackwell Publishing. 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA 02148, USA in' to a dependent relationship of routine production within the global software production network managed to partially move up the production and technology chain to develop more sophisticated operations among foreign firms and an increasingly sophisticated Irish-owned sector. The analysis suggests that state strategies are central to the ability of firms and territories to integrate into particular niches in global production networks. Relations within production networks tend to become institutionalized and self-reproducing. Firms and territories tend to remain locked in to a particular niche, in the absence of a `development project' or coalition that mobilizes resources and cooperation to generate a push into a niche further up the network hierarchy. The push for moving up the network comes when a marginalized or vulnerable group within or on the edges of the network makes an alliance with supportive public agencies (O� Riain, 2004b). Global production networks tend to institutionalize hierarchical relations, but this does not mean that it is impossible for developmental coalitions to mobilize around the connections and resources within those networks to enter new niches further up these hierarchies. In practice, this requires a concerted and ongoing state policy of industrial development and innovation promotion.