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China has experienced remarkable development in its economic growth over the last two decades. To sustain its economic ascent, a paradigm shift from manufacturing to service economy is considered to be important. In such a kind of change, Chinese software industry has achieved conspicuous development since the middle of the 1990s. With the background of rapid growth in economy and the diffusion of PC and internet, Chinese software industry has strengthened its domestic industry development and its export-oriented outsourcing service simultaneously. China is trying to be the frontier in the post-information times by service innovation. In this process, institutional framework has been playing some key roles. This paper tried to analyze institutional structure governing the potential of software development in China as a case study; thereby institutional factors influencing the service innovation were identified.