"If you can't beat them, acquire them." This has become the mantra favored of late by multinational high-tech companies in China as they face fierce competition from Chinese players. Our research into 1,000 Chinese high-tech companies shows them to be growing three times as fast as the multinationals, on average. So what are foreign companies doing wrong?

By sticking too rigidly to product specifications for developed markets and to high prices, multinationals in many sectors have squeezed themselves into the thin, high-end market in China. To succeed in the Chinese high-tech market, these companies would do better to focus on the faster-growing midrange segment, where products cost an average of 20 to 30 percent less than their high-end counterparts.

Take electrical equipment, a $60 billion industry comprising sectors such as automation and power generation. While multinationals focused almost exclusively on the high end of the market, midrange Chinese players—led by emerging contenders such as Chint, a maker of low-voltage electronics, and Shanghai Electric, a maker of power generation products—have expanded their share of the overall market to 65 percent, from 55 percent, over the past five years. This segment is growing almost twice as fast as the market for electrical...