In this paper, we have used the case of build your dream (BYD) to examine firm innovation in the context of China. From a historical perspective, with its strategic diversification from battery to mobile phone manufacturing to automobile manufacturing, we find that BYD has been innovative in its production method, vertical integration strategy, and design of product for local customers. The effective understanding and leveraging of local contextual factors including supply of labor (especially low cost-highly skilled labor), growing middle class, and local industry environments have played important roles in BYD's innovation in China.