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Contributing to the debate on the state's role in helping domestic firms to internationalise, this paper compares the divergent performance of the Italian and Spanish telecommunications incumbents Telefonica and Telecom Italia (TI). Telefonica has grown since the early 1990s to become one of the largest telecommunications utilities worldwide, while TI is now a small firm controlled by the French media group Vivendi. This divergence occurred even though both the Italian and Spanish government implemented an activist industrial policy strategy aimed at favouring the internationalisation of, respectively, TI and Telefonica. The paper shows how these contrasting outcomes can be traced to the different regulatory power relationship between the state and domestic blockholders in the two countries. The findings shed light on the factors that lie behind the successful internationalisation of inward-looking firms active in regulated sectors. [ABSTRACT FROM AUTHOR]