In an interview with the BBC, Nadella said that despite national security concerns, backing out of China would "hurt more" than it solved.
"A lot of AI research happens in the open and the world benefits from knowledge being open," he said.
Quoting Microsoft President Brad Smith, Nadella said: "We know any technology can be a tool or a weapon. The question is, how do you ensure that these weapons don't get created? I think there are multiple mechanisms."
Microsoft Research Asia, the company's fundamental research arm in the Asia Pacific region, was founded in Beijing in November 1998.
The media reported in April alleged that Microsoft has been collaborating with researchers linked to a Chinese military-backed university on AI. The research covered several AI topics, such as face analysis and machine reading.
Microsoft defended the research, saying that it was part of a worldwide effort by its scientists "to work with their international counterparts on cutting-edge technology issues", reported the Financial Times.
According to Nadella, they have control on who gets to use their technology.
"And we do have principles. Beyond how we build it, how people use it is something that we control through Terms of Use. And we are constantly evolving the terms of use," he added.
The International Monetary Fund has said that the trade war between the US and China was triggering a global economic slowdown.
On September 1, the US followed through on plans to impose a 15 per cent tariff on certain Chinese consumer-goods imports including apparel, electronics, footwear and dairy products, that were valued at around $112 billion in 2018.
Those tariffs were in addition to 25 per cent tariffs on $250 billion worth of Chinese imports that began to be imposed on July 2018.
US President Donald Trump's administration said that it would wait until December 15 to impose tariffs, now set at 15 per cent, on certain mass-consumption products imported from China, including smartphones, laptops, video games and toys.
If those tariffs are implemented, virtually all Chinese imports would be subject to punitive taxes.
( With inputs from IANS )