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This paper investigates the impact of manufacturing capacity utilization on industrial development in Nigeria during the period of 1976 – 2005. Manufacturing capacity utilization, value added and employment generation were regressed on index of industrial productivity (which served as the proxy for industrial development) using the co-integration and error correction mechanism as analytical tools. The time series properties of the variables were investigated by conducting a unit root test and further to the co-integration analysis. The econometric evidence confirms that there is a long run positive relationship between Manufacturing capacity utilization, value added and index of industrial productivity in Nigeria. It was recommended based on this relationship that as a result of the low capacity utilization experienced in Nigeria, the government should rectify the infrastructural inadequacies by revamping the nation’s deteriorated infrastructural facilities and encourage local sourcing of raw materials and the provision of intermediate products to improve the manufacturing value added and generate mass employment in Nigeria