This chapter reconceptualizes governance as a core driver of structural transformation in latecomer economies. It argues that conventional indicators of “good governance,” such as regulatory efficiency or institutional alignment, are insufficient for capability building in digitally evolving and fragmented contexts. Drawing on developmental state theory, innovation systems, and adaptive governance, the chapter defines governance as a meta-capability: the ability of institutions to learn, coordinate, and embed policies within their social and institutional environments. Using evidence from Kosovo, Albania, and North Macedonia, it identifies seven interlinked constraints: fragmentation, donor dependence, political volatility, low absorptive capacity, capability traps, policy incoherence, and weak embeddedness. These constraints undermine institutional performance. The chapter develops a functional framework centered on three key governance functions: learning, coordination, and embeddedness. It shows how their absence limits policy effectiveness and how their integration can build adaptive capacity even under constraint. The chapter concludes that governance should be understood not as a static set of institutions but as an evolving capability that enables societies to learn, collaborate, and steer transformation in uncertain environments. This conceptual foundation prepares the ground for Chapter 4, which introduces the Developmental Network State as a practical framework for operationalizing these governance functions in latecomer economies.