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1. Introduction
Innovation capability is the ability to create new ideas, new product development, or improvements in processes and it is essential to firms’ survival nowadays, especially in emerging markets such as China, which is now faced with a more dynamic and intensively competitive global environment than ever before. Chinese firms were operating within a closed economic environment before the “opening up” in the late 1970s, but it has only been in the late 1990s that Chinese firms have started to recognize the importance of innovation capability. The Chinese government has been emphasizing the development of innovation capability since its ninth five-year plan (from 1996 to 2000), and the 12th five-year plan (from 2010 to 2015) relies on the development of innovation capability to upgrade the economy from an export-driven to a domestic demand-driven economy. According to data from the National Bureau of Statistics, China’s spending on research and development (R&D) has risen from 1.25 percent of GDP in 2004 to 1.75 percent in 2010 and to 2.09 percent in 2014, more impressive if considering the fact that GDP itself increased dramatically during that period. The manufacturing firms, research institutes, and other research resources, including scientists and engineers, are all encouraged to increase R&D expenditure on internal resources and form R&D collaborations with external parties. Motivated by the national plans, Chinese large- and medium-sized enterprises are increasing their R&D expenditure, which accounts for around 60 percent of the overall R&D expenditure in China (Orr, 2011). The Chinese government also provides funding and policy support to Chinese firms developing innovation capabilities through R&D collaborations and using external experts. Although there are strong motivations and obvious achievements, there remain questions on the effectiveness and efficiency of resource allocation, given the large amount of R&D expenditure, and on how Chinese firms could quickly build up innovation capability based on both internal resources and external knowledge sources.
The capability to innovate is among the most important factors that will help a firm to achieve and sustain its competitive advantage (Hult et al., 2004). Prior literature on resource-based view (RBV) has argued that a firm is composed of valuable and inimitable resources that determine its competitive advantage (Barney, 1991; Teece and Al-Aali, 2011). Knowledge-based view (KBV) further argues that...