This article recommends strategies to develop China's software industry, based on our analysis of the recent technology transfer to Chinese software firms from Japan. Li and Gao (2003) recommended that the Chinese software industry focus on its domestic software service market. However, since the end of the 1990s, Chinese software firms have obtained a significant amount of technology contract work from Japan, including coding, testing, and design. Chinese firms have been increasing their design skills through this joint software development with Japan. As a result, offshore software development from Japan has helped Chinese software firms acquire advanced technology. We conclude that the Chinese software industry should focus on both its domestic software service market and the export of software services.