Abstract: Market power is an important factor influencing firms’ technological innovation. The samples of different countries have provided rich and diverse empirical evidence. However, one important point has been neglected that market power has different implications in firm and industry level. And market power from both the firm and industry level will influence firms’ R&D innovation behavior. In this paper, market power is firstly separated into the markup power of each firm and market structure representing market competition. Then, the mechanism of markup power and market structure influencing firms’ R&D investment is explained. Based on hierarchical linear model and data of Chinese manufacturing firms, the empirical tests show that lerner index has a significant and negative effect on firms’ R&D investment, indicating that R&D investment will decrease with the increase of markup power. There is no Schumpeterian effect in Chinese manufacturing firms. As to the firms undertaking R&D activities, market structure has an indirect effect on firms’ R&D through lerner index. The reduce of market concentration will weaken the negative effects of lerner index on firms’ R&D and generate an escape-competition effect, which is more apparent in large and middle size firms. The market competition has no effect to stimulate R&D investment in small firms.

Key words:  markup power, industrial structure, Lerner Index, R&D investment, hierarchical linear model