This study innovatively uses local government regulations related to manufacturing to quantitatively identify industrial policies. The degree of influence and functional mechanism of China's industrial policies on the green competitiveness of the manufacturing industry are empirically examined using the provincial and regional panel data. Additionally, the synergistic complementary effect between industrial policy power and market forces and the fiscal decentralization's role in influencing industrial policies are investigated. The results reveal that the promulgation and implementation of industrial policies have significantly promoted the green competitiveness of the manufacturing industry. Regarding functional mechanisms, environmental governance has played a positive role in promoting the green competitiveness of the manufacturing industry supported by industrial policies, resource allocation, and innovation incentives. Meanwhile, industrial policies on green competitiveness in manufacturing depend on marketization and fiscal decentralization in local governments. The above findings demonstrate that the local governments in China, a developing economy, can play the role of development-oriented governments. Based on conforming to market deepening and system optimization, they can formulate and implement industrial policies in a rational manner and achieve green development and upgrade the manufacturing industry.