Economic globalization has given rise to global value chains which offer opportunities and pose challenges to the firms located in developing countries. Institutional context and response of local firms are marginalized in mainstream accounts of GVC research. Therefore, this study integrates GVC and Industrial Cluster literature to illuminate the process of economic upgrading. Using 36 in-depth semi-structured interviews, we employ narrative strategy to analyse the data. We find that economic upgrading could neither bring higher rents for most of the firms nor range of product categories expand in Lahore Knitwear cluster. On the other hand, consolidation in the local part of the value chain restricted clustering and increased the expansion costs for firms. The global and local institutional context has shaped the structure of cluster which is resistant to change. The emerging structure has created entry barriers which are not conducive to SMEs and lead to uneven development.