State-Firm Strategic Coordination and Technological Innovation in the Software Industry in China: A Comparative Study of Shanghai and Shenzhen

Recent theoretical attempts to understand the dynamics of technological innovation have been based predominantly on the theory of localized knowledge spillover which sees technological innovation as the result of inter-firm interactions in the process of industrial clustering. This study introduces a new analytical framework that goes beyond inter-firm knowledge exchange and highlights the significance of the strategies and selectivity of both the state and firms to understand the dynamics of technological innovation in a transitional economy such as China. A comparative study on the strategies and selectivity of central government, local government, and individual firms in both Shanghai and Shenzhen, the two key city-regions in China, has found that difference in the degree of state-firm strategic coordination- or the dynamic process in which firms' innovation-related strategies are coordinated with the 'strategic selectivity' of the central and/or local governments- is a significant factor explaining the regional variation in technological innovation. The Chinese experience demonstrates that the uneven growth of technological innovation has been contingent upon how the state builds a favorable institutional structure and market environment to stimulate, encourage, and support firms' innovative activities and how firms actively respond to the institutional environment created by the state.