Coping with uncertainty: Institutional capability for innovation in China's catching up economy

The purpose of the paper is to explain how innovating firms mitigate institutional risks in China's catching up economy. We propose that firms may develop an institutional capability that offsets the risks of underinvestment in - and inaccessibility of resources in the institutional context for innovation. By combining insights from the resource-based view and institutional theory, we contribute to the institutional approach to innovation by suggesting that firms can take over certain institutional functions. In our empirical qualitative study of entrepreneurial software ventures in Zhejiang, China, we identify three sources of institutional capability: local knowledge sharing, legitimacy creation and strategic flexibility. We suggest that the presence of these sources enhances the potential of a firm to create an institutional capability for innovation.