Beyond the ‘Global Factory’ model: innovative capabilities for upgrading China’s IT Industry

China is now the largest exporter of IT goods, surpassing the USA, up from a world ranking of tenth in the year 2000. But this ‘global factory’ model now faces new competitive challenges as globalisation transforms markets for technology and knowledge workers. This has forced China’s policy makers and corporate strategists to seek ways to move beyond the ‘global factory’ model. A brief review of China’s ‘global factory’ model highlights its integration into diverse global network arrangements. This paper introduces the concept of ‘Industrial Upgrading’ (IU) that links specialisation with firm-level and industry-level upgrading. This concept is used to discuss what specific innovative capabilities are required to upgrade China’s IT industry. This paper also emphasises that ‘soft’ entrepreneurial, management and system integration capabilities need to complement ‘hard’ R&D. The argument is that ‘technology leadership strategies’ that focus on ‘radical’ innovations are not the only option. ‘Technology diversification’ can serve as a complementary and arguably less costly option.