What kind of innovative competences are credibly developed by private entrepreneurs in China’s transition economy? On the basis of original empirical fieldwork in 45 software enterprises in Hangzhou, Zhejiang Province, we propose a working theory of innovative competence development in an emerging private sector. Combining resource-based and institutional perspectives we argue that Chinese private enterprises in Hangzhou were able to develop unique innovative competences to overcome resource constraints and manage technical - and market risks while respecting the location and sector-specific constraints. The findings suggest that private software enterprises in Hangzhou developed five innovative competences: organizational integration, financial commitment, external knowledge transformation, reputation development and strategic flexibility. The analysis further allows to propose three implications: 1) These five competences form a ‘configuration’ or coherent set of competences in this particular institutional setting; 2) Technological – and institutional regimes shape the potential range of innovative competences firms credibly develop depending on the available resources of the firm; 3) Innovative competences can be functional equivalents of institutions in the absence of well-developed, mature formal institutions
