Purpose – The aim of this paper was to attempt to investigate the transformation of traditional Chinese medicine (TCM) industry in Guangdong Province of China by applying a perspective of sectoral system of innovation (SSI). TCM industry in China has experienced an evolution path from low-tech to modern industry. Design/methodology/approach – An analytical framework of sectoral system innovation for explaining the change in TCM industry in Guangdong Province has been conducted. Findings – It shows that during the successful transformation of the TCM industry in Guangdong from low-tech to modern sector, national and provincial institution are acting as main drivers. Knowledge integration is the decision factor of modernization and innovation strategy as an actor that makes the transformation adjust and operate efficiently. Other actors, such as demand and external networks interplay together and led to a gradual organizational, structural and institutional change and modernization of TCM industry. Originality/value – SSI analyses of TCM in China have never been conducted before, this paper also contributes to enrich the experience of low-tech industry transformation and provide references to other low-tech industries around the world. © Emerald Group Publishing Limited.