China and India have one of the largest telecommunications equipment markets in the world. The paper employs a sectoral system of innovation framework towards understanding the differential outcomes in innovation capability building in the industry achieved by China and India. The countries have pursued widely diverging strategies for developing their domestic innovation capability. India followed a very rigid policy of indigenous development of domestic technologies by establishing a stand-alone public laboratory that developed state-of-theart switching technologies. These were then transferred to manufacturing enterprises in both public and private sectors. The enterprises themselves did not have any in-house R&D capability. The public laboratory was also not given any strategic direction, even though it was technologically speaking, very competent. Consequently the country, despite possessing good quality human resource was unable to keep pace with changes in the technology frontier and the equipment industry has now become essentially dominated by affiliates of MNCs. China, on the contrary, first depended on MNCs for her technology needs in this area. But subsequently encouraged the emergence of three national champions, two of which are erstwhile public laboratories. The country has built up considerable hardware capability in both fixed line and mobile communications technology and has also emerged as a major player in world markets. Although the sectoral system of innovation in both the countries were promoted and nurtured by the state through a variety of instruments, the quality of such interventionist strategy is found to be better in China. The final outcome proves this line of argument.