Both Taiwan and China have regarded software industry as an essential industry and made efforts to promote its development. Recently, many Taiwan's software firms have entered into China to set up their branches or establishments. A cross-Strait software production network is likely to develop even if Taiwanese software industry has not yet strongly developed in the global market. This paper posits that the interactions of Taiwan-China software firms are driven by the development of global production networks. This can explain why Taiwan's software firms are agglomerating in Taipei to enjoy the benefits of clustering while they are undertaking their outward investments. The study also finds that the state-industry relations have influenced the development of cross-Strait production networks. Due to the special relationships between Taiwan and China, a crisis has emerged between the state and industry in taking different directions in responding to the development of production networks. This has caused a negative influence on the operations of production networks and confined the development of Taiwan's software industry.