This article argues that insufficient state capacity was the primary cause of late industrialisation in Southeast Europe. The study highlights the divergent legacies of the Habsburg and Ottoman Empires in state capacity, showing how the Habsburg bureaucracy provided critical development prerequisites such as public schooling and railway infrastructure, which fostered regional industrialisation. Applying causal inference methods to a novel granular dataset from the 1931 census in Yugoslavia shows that 84% of the regional disparities in industrial labour force shares was related to the Habsburg rule and 62% was directly driven by improved state capacity captured by public servant density. Further analysis reveals that human capital and infrastructure transmitted the state capacity effect.