Globalization has compelled state governments to embrace economic liberalization as a means to participate purposely in an increasingly ‘borderless’ world economy. At a general level, this is seen to enable the economies in their charge to engage more effectively in the integrated international linkages of production, finance, distribution and investment being created by transnational business activities. Economic liberalization refers to an opening up of markets to greater competition, which had previously been constricted by various forms of state regulation or intervention, e.g. import tariffs. Hence, liberalization can under many circumstances lead to a general retreat of the state's position in matters of economic governance. However, it is argued here that smart approaches to economic liberalization do not necessarily require a weakening of state capacity but rather its upgrading. As such, questions about `how much' state involvement or economic liberalization is required to meet the challenges posed by globalization need to be replaced with those of ‘what kind’.