Abstract

China has now moved considerably away from being an imitative latecomer to technology toward to being an innovation-driven economy. The key lessons from China’s experience are that (1) there is synergy between External Knowledge and Indigenous Innovation because the process of learning the tacit knowledge required in using the foreign technology fully is made easier by strong in-house R&D capability; (2) the open innovation approach is very important because it allows multiple driving forces—the state, the private sector and MNEs—with each playing a changing role over time; and (3) the commencement of foreign technology transfer and investment in indigenous innovation should go hand in hand. Without the numerous well-funded programs to build up the innovation infrastructure to increase the absorptive capacity of Chinese firms, foreign technology would have remained static technology embedded in imported machines and would not have strengthened indigenous technological capability. However, China could still end up in the middle-income trap, unless it undertakes a series of critical reforms in its innovation regime in order to keep moving up growth trajectories that are increasingly skill-intensive and technology-intensive.