Chinese economic growth over the past two decades Was driven by low-cost labormanufacturing and imitative products．To maintain economic growth,the Chinesegovernment is encouraging private sector companies to take the lead in transformingChina into an innovation-driven society．This research uses external and internalapproaches to evaluate the innovation capability ofChinese private sector firms in thehigh-tech industry．This research finds that unlike other highly-innovativeeconomies such as the U．S．，Germany,and Japan,firm market value is an unreliablemeans ofevaluating the innovation capability of Chinese firms．This study tests amarket value regression model using four financial variables．The results reveal nosignificant correlation between corporate development expenditures and market valuebut do show correlation of market value with risk and sales growth．Chineseinnovation capability currently requires a more in-depth,internal analysis ofindividual firms in order to comprehensively evaluate innovation capability．A casestudy analysis of one representative Chinese private sector firm finds that it excels inseveral innovation parameters．Using a standard technical innovation audit thisresearch compares Chinese private sector innovation to world-class best practices andChinese state-owned enterprises．The findings indicate that Chinese companiesakeady show advanced innovation capabilities despite certain weaknesses．