Two theoretical paradigms namely, the ‘resource curse’ and ‘developmental state’ would predict that industrial development in countries with abundance of capital-intensive natural resources and in states with patrimonial tendencies is doomed to failure. Iran’s success in developing a dynamic auto industry, which in 2011 became the world’s 12th largest automobile manufacturer with 1.6 million vehicles produced per year seems to contradict these perspectives. How was this technical capacity created in an oil-based economy—which provides little incentive for industrialization—and, in a country that has been under the United States and international sanctions since 1979 Revolution? In this paper, I will expand on the implications of these theoretical traditions to identify the structural factors that enabled the Iranian state to develop a large automobile sector and relatively diversify the economy. © 2020 John Wiley & Sons, Ltd.