By the end of 2000s, with massive investment in formal R&D, China was generally believed to be getting out from the stage of little in-house R&D, building up quickly more R&D capabilities, and would soon become powerful in its own in-house R&D so as to remain globally competitive with its own technology. Against the backdrop of huge R&D input and significant increase in statistics, this chapter evaluates the quality of R&D investment of firms. It was true that many Chinese local firms had jumped from the OEM stage to the ODM stage, and many private and State-owned firms also undertook heavy R&D investment as well. But these product design and R&D activities seemed to stagnate at a halfway level. The development of innovation capability of Chinese firms through increasing R&D investment was blocked by the weakened formation of “absorptive capacity.” And the lack of such absorptive capacity was not due to the incompleteness of Chinese national innovation system, but the specific institutional setups in the Chinese context: the absence of high-quality external linkages established around Chinese firms and institutionalized trust among firms and other organizations. Chinese policy makers should deepen their perspective on the so-called national innovation system, discover and tackle the real linkage problems which are depressing China’s innovation capacity formation through R&D.