This chapter considers the middle-income trap is a product of the interaction between institutional and policy settings and the developmental level. In particular, it looks at the importance of trade and foreign direct investment (FDI) for catch-up growth and inquires into the nature of its importance for innovative growth. The experience of many Asian countries demonstrates that second-best institutions and policies have been a feature during rapid catch-up growth. The Asia-Pacific region, especially East Asia, is home to a number of economies that have managed to graduate from middle-income status into the high-income group of economies. China and other countries in South East Asia have succeeded in emulating the rapid catch-up growth of Japan and the newly industrialized economies (NIEs), but have yet to make the transition to high income. That trade and investment are important for economic growth and development is widely accepted; they are a necessary but not sufficient condition for growth.