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This paper proposes a new institutional perspective to explain not only the diversity of local business systems in China but also how this diversity results from the integration of major institutional forces. We model the emergence of China's business systems as a co-evolutionary process unfolding along a business–government and a micro–macro-level dimension structured by intergovernmental institutional competition, business to business and business to government networking and public-private corporate governance. We find that: (i) China's emerging business system is the result of local institutional competition at the micro level that reduces the need for national (macro) institutions and impacts on the local implementation of national (including supranational) policies; (ii) the interaction between government and business is structured through networks which operate according to an economic rationale while drawing on cultural norms and traditions; and (iii) local businesses interact with local governments to recombine productive factors and reorganise firms and industries in line with local institutions. We conclude that the astonishing adaptability of Chinese businesses as well as the risk of corruption and lack of formal control at local government level are elements of locally differentiated business systems which are held together by an overarching institutional architecture.