What determines the production structure of an economy, and how can industrial policy influence it? Theories of the product space suggest that industrial policy can raise aggregate productivity by building the capabilities needed for a modern industrial structure. Product-level export data show a relationship between incomes and the production structure of countries. However, less is known about the channels through which policies determine production capabilities and the resulting production structure. Building on the theory of the firm, this paper takes a microeconomic view of the role of industrial policy in determining production capabilities. We provide a model of policy-driven input capabilities which determine the industry mix and sales of establishments. Taking the theory to data from India in the 2000s, we show that idiosyncratic input capabilities enabled establishments to benefit from the removal of size-based entry barriers in their input markets. We quantify the impact of entry liberalization in the intermediate input market in tariff equivalent terms.