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In China’s long-term economic strategy (i.e., the China 2025 program), going beyond being “the world’s factory” and achieving qualitative economic and social growth within the framework of a “modern society” and “ecological civilization” is key. Innovation plays a crucial role and includes a renewed role for Chinese small and medium-sized enterprises (SMEs). Open innovation (OI) marks an important new concept and is considered to be an integral part of the economic restructuring process that must take place (i.e., industrial parks). To meet these challenges, some SMEs, as part of an industrial upgrading process, have adopted a new strategic orientation embedded in the government’s transition toward a more balanced and greener growth strategy. In light of this, this paper attempts to answer the following questions: Why do Chinese SMEs, in the context of industrial upgrading, adopt a business incubator strategy to survive and prosper? And what is the role of open innovation (OI) in this transformation process? The in-depth study of an open innovation approach taken by an LED-maker in the context of industrial upgrading in Southeast China shows that business incubation strategies have brought several social and economic opportunities to local SMEs and have become the “hallmark” of successful industrial upgrading. Open innovation has played a crucial role in the transformation of the LED-maker’s business model. With regard to industrial upgrading, some SMEs aggressively redesign their business model and their environment, leveraging their capabilities and improving their position within the ecosystem to prosper and survive.