Abstract
In this paper, we develop a working theory for understanding the effect of the business environment in an emerging economy on innovation. We focus on the private sector in China. We propose that technological – and institutional regimes shape the types of innovative capabilities these firms can develop depending on the available internal resources of the firm. Innovating firms in emerging economies have to deal with two additional challenges for innovation: institutional uncertainty and liability of newness. The former limits the availability and accessibility of external resources, the latter limits the utilisation and transformation of a firm’s internal resources. An understanding of innovative capability in emerging economies like China will further empirical research on innovation and capabilities and the research on sectoral specialisation and technological development.
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