Knowledge creation and mobilization is the economic driver of industrial economies, yet developing countries moving from a developing, to a developed economy, are struggling through this transition period. A variety of theories and a range of speculations have been offered as to why some nations are more innovative than others however, little of this literature examines the theoretical applicability of innovation theory based on industrial societies to developing nations. This thesis examines the theoretical rationale for applying technology transfer models developed on experiences from industrial economies to the market realities of transitional economies. In the fifteen years since the 1994-95 collapse of Mexico‟s financial sector and resulting economic crisis, the Mexican economy has made impressive progress towards macro-economic consolidation and stability. The OECD (2004) observes that inflation has fallen from a rate ranging around 50% before and during the economic collapse of 1995, to a rate of about 4% in 2006. Trade liberalization that has been experienced as a partner in the North American Free Trade Agreement has allowed Mexico to consolidate its export base and to specialize in medium- and high-technology manufacturing. However, the industrial sector in Mexico still shows a lack of interest in developing, adopting and investing in technology. The Mexican industrial sector is lead by multinational firms that have located in Mexico due to the cheap costs of labour, while most of the research and development performed by these firms takes place outside of Mexico. Innovation and technology transfer are fundamental components that drive the knowledge economy. As countries transition from developing countries to developed countries, technology transfer plays an important role in facilitating this transition. In Mexico, technology transfer is not efficient. This thesis explores the national system of innovation in Mexico by contrasting the technology transfer process against the theoretical rationale of technology transfer. This highlights the crucial barriers and challenges of the Mexican technology transfer process that will need to be addressed to facilitate Mexico's transition to the developed world.