No one is saying Chinese people can't innovate. The real question is whether Chinese people can innovate while inside China. (I wonder what percentage of current captains of industry in China studied abroad?) Why? Because innovation is essentially disrupting and rebelling against the status quo. ie breaking rules, disobedience, opposition to the norm
When you demand that your people bow and obey, and imprison people like A1 WW, this goes against promoting and nurturing innovation
https://steveblank.com/2012/11/06/entrepreneurs-as-dissident...
https://medium.com/@they_made_that/innovations-secret-ingred...
http://www.salon.com/2014/10/22/never_before_published_isaac...
When your culture is very antagonistic towards people who don't like the status quo and forces them to carefully think about what they say and write, the culture itself becomes a big obstacle to innovation. When you run garbage likethe Great Firewall that limits the sharing of information, that's another strike against innovation. (Of course one way to mitigate the effects of authoritarian rule is by being really favorable towards immigration from places with the opposite culture.)
I guess Shenzen is a place that's figuratively where "the mountains are high and the emperor is far away". I wonder how long before that changes?