Abstract
Although Chinese firms only rarely possess strong R&D capabilities and operate in an environment characterized by weak intellectual property rights (IPR) protection, for reasons that are not well understood, China has recently exhibited strong innovation performance. We examine how various factors that are idiosyncratic to the Chinese environment influence how Chinese firms develop radical innovations. We extend prior innovation theory by showing that variations in R&D capabilities, transaction costs and IPR regimes enable Chinese firms to adopt innovation strategies that differ significantly from the strategies adopted by firms in developed countries. We empirically demonstrate that the innovation strategies of Chinese firms rely on exploiting inefficiencies in the institutional environment and the IPR regime to “emulate” the innovation model of firms from developed markets. Our analysis also reveals that the usefulness of internal R&D and open innovation becomes very different depending on technological complexity.