All over the world the telecommunication sector is being liberalized and subject to an increasing international division of labor. The Austrian telecom cluster – i.e., the complete value chain spanning the production of equipment, basic telephone services and advanced value-added services – is also affected by these changes and at present experiences the most severe structural change in its history. Technology policy must live up to this challenge and break down regulatory barriers to this dynamically developing innovation and growth process. It must take an active role in the shaping of the imminent "information society" by promoting innovative applications of new technologies. Technology policy defined at a national level can only play a very limited role in the development and production of equipment. The majority of the relevant firms located in Austria are owned by transnational corporations and are exposed to competition in core areas within their organisation. With respect to production technology policy is limited to applying the traditional instruments of research promotion, of improving training and research infrastructures and of attracting firms to locate their operations in Austria. A far more decisive role for technology policy lies in reforming the regulatory and organizational basis of this sector by liberalizing markets and restructuring the public network organisation (Post Office). Comparative OECD studies show that the elimination of monopolies in telecom has brought more price discipline, improved quality of service and more choice for consumers in the countries concerned. So far there is no evidence that liberalization has reduced universal services, rather to the contrary. It can be expected that lower prices of transmission and switching services after liberalization will play the decisive role in the diffusion of new telecom applications. At present the most important bottlenecks are the limited absorptive capacity of demand for new technologies and advanced applications. During the introductory phase of new services, the lack of critical mass, network externalities and hard to calculate risks represent the most important barriers to wider diffusion. This is where technology policy could play a supportive role by promoting innovative applications (e.g., new forms of tele-cooperation between private firms in research and development; tele work places, etc.), pilot applications and demonstration projects. Public administration could play a leading role in the introduction of new services. The process of tendering a licence to a second firm to run the GSM mobile communication network offers a concrete and real opportunity for raising the money necessary to finance these technology policy measures, without burdening the strained public budget. The frequencies available for mobile communication are scarce commodities, the use of which should exact a price from the (public as well as private) licencee which reflects this scarcity. If the proceeds from these licence fees are not at least partially channelled back into the teleommunications industry, they would most likely increase the prices to the end users of telecom services and thus lower the growth potential of the entire sector. We propose therefore to channel the proceeds back by promoting innovative applications of the new communications technologies. This mechanism could bring dynamic innovation and growth impulses to the entire telecom cluster.