Can Chinese IT Firms Develop Innovative Capabilities within Global Knowledge Networks?

China’s opportunities to build innovative capabilities in the IT industry differ from those faced earlier by Japan and East Asian newly industrializing economies (NIEs). China has a unique combination of advantages in a booming market for electronics products and services, the world’s largest pool of low-cost and easily trainable knowledge workers, the emergence of sophisticated lead users and test-bed markets, and policy efforts to strengthen China’s innovation system. As a later latecomer, China can learn from the achievements and mistakes of earlier latecomers.The international environment is also dramatically different. Most important is the expansion of global knowledge networks, which have extended beyond markets for goods and finance into markets for technology and knowledge workers. Taking into account these important differences, this chapter addresses two questions: Does integration into global knowledge networks facilitate the efforts of Chinese IT firms to develop innovative capabilities? If yes, precisely what type of capabilities are they developing?The findings of this chapter can be summarized as follows:• Integration into global knowledge networks exposes Chinese IT firms to leading-edge technology, “best-practice” management, and sources of knowledge. • Knowledge about its own markets and production sites helps Chinese IT firms to exploit these opportunities.• Successful Chinese firms have not attempted to compete head-on with global leaders through radical innovations. Instead, they have focused on incremental and architectural innovations that support technology diversification strategies.• Integration into global networks needs to be supported by a strong domestic innovation system.These findings contradict a pessimistic literature that appraises China’s innovative capabilities as weak. They also contradict fears, sometimes played up for political purposes, that Chinese firms could make radical innovations that would challenge U.S. technology leadership. A central proposition here is that Chinese IT firms make the most progress in areas that escape the attention of both pessimists and proponents of an emerging technology threat.