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The purpose of this paper is to identify the drivers of manufacturing transformation and upgrading and examine their influencing paths and effects. The study also dynamically evaluates and compares the achievements of the manufacturing transformation and upgrading of various economies.

This paper establishes the mechanism model of manufacturing transformation and upgrading based on the partial least squares approach to structural equation modeling. With the help of a mechanism model, the study carries out empirical analysis using panel data from the G20 for 2005–2015.

Innovation, measured by innovation input and innovation output, has the largest positive effect on manufacturing transformation and upgrading. Economic development has a negative direct effect, as well as positive indirect effects. Its total effect is positive but small. Economic openness has no significantly direct effect, but has significantly positive indirect effects. Its total effect is significantly positive, but is the smallest among drivers. Developed economies have relatively higher but decreasing achievements, whereas emerging economies have lower but increasing achievements and maintain the catch-up trend toward developed economies.

Few macro empirical studies examine the drivers and achievements of manufacturing transformation and upgrading. A need has arisen for evidence-based research and policies to guide governments in their efforts to promote manufacturing transformation and upgrading. This may be the first macro-level study to empirically analyze the drivers of manufacturing transformation and upgrading, and their influencing paths as well as achievements.