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China has taken its place among the worlds largest economies. Despite itsadmirable economic boom, China still lags behind developed countries in innovationproductivity and business competitiveness. This research paper presents an empiricalexamination of the determinants of Chinas national innovation capability during thepast two decades with a novel framework and comparable data utilized by Furman,Porter, and Stem for 17 0ECD countries. We find that while a great deal of variationis due to differences in the level of total R&D spending devoted to innovation andGDP per capita as Chinas knowledge stock, an important role is played bydifferences in R&D productivity in the private sector. Our findings suggest thatChinas prosperity from FDI comes with a cost of deteriorating its innovationcapability and that the foundations of national innovation capacity are not completelylaid. Chinas national innovation capacity depends on foreign firms setting upresearch facilities in the country. Further, we supplement these aggregate findingswith industry-level and firm-level case studies. Finally, we find that the Chinesegovernment already addressed these issues, especially that of Chinas over-reliance onforeign technologies, in the National Medium & Long-term Science and TechnologyDevelopment Plan (2006-2020), Judging from what China has accomplished so far,we are optimistic about Chinas national innovation capability. Key words;