This paper develops a growth model for understanding the mechanisms behind industrial upgrading in a catching-up economy. In the model, when the market of new consumption varieties emerges, the rising demand drives the incentives of domestic innovation, resulting in technology progress and cost reduction. The cost reduction of existing varieties in turn leads to ìsurplusî of aggregate capital, which seeks opportunities in next new industries that produce new varieties. The dynamic feedback of ìcapital-push new marketîand ìdemand-pull innovationî moves forward the domestic technology frontier and the consumption frontier in an upward spiral, and in this process the dual-sector economic structure ó the co-existence of domestic technology-mature industries and domestic technology-immature industries ó evolves endogenously. Because of the presence of dynamic externality, the laissez-faire equilibrium is inefficient and the optimal development policy involves two-side interventions: suppressing consumption and enhancing capital accumulation in the early stage of the development while reversing the sign to stimulate consumption in a later stage.