Abstract: Innovation is an important way for companies to gain and maintain core competitive advantages. However, at present, the overall R&D level of China′s manufacturing industry is relatively low, and the independent R&D capability is relatively weak, which restricts the high-quality development of the manufacturing industry. In this context, enhancing the R&D level of local manufacturers plays an important role in improving the international competitiveness of China′s manufacturing industry and promoting the upgrading of industrial structure. There are many factors influencing the innovation ability of local manufacturers. Existing literatures mostly focus on the impact of foreign manufacturers on China′s manufacturing innovation after the reform and opening up. They believe that foreign manufacturers have brought advanced technology. The industry has produced a technology spillover effect that has boosted the level of manufacturing innovation. However, foreign manufacturers tend to have relatively mature technology and business models compared to local manufacturers and their products are higher quality, which makes local manufacturers in a competitive disadvantage. Competitive disadvantages may have a negative impact on the innovation of Chinese manufacturers. In addition, in the field of circulation, with the merger and development of large retail organizations such as Carrefour, Wal-Mart, and Tesco, the concentration of the retail market continues to increase. While these large retailers continue to meet the changing needs of consumers, they have mastered a large number of consumer resources, formed a huge brand and channel advantages, enhanced their position in the supply chain, and enhanced the buyer power relative to local manufacturers. Buyer power may also be an important factor in the decline in the level of R&D by local manufacturers. In summary, Chinese local manufacturers stay in a comparative competitive disadvantage position when facing the multinational companies with mature technology and business models; while large retail organizations with brand and channel advantages, enhance their comparative advantages with Chinese local manufacturers. The horizontal competitive disadvantage and vertical buyer power together worsen the market environment of Chinese local manufacturers. This paper studies local manufacturers′ innovation from the perspective of industrial organization theory, examines the impact of the competitive relationship between foreign manufacturers and local manufacturers on the level of innovation of local manufacturers, and explores strategies to promote local manufacturers to improve their innovation level. Specifically, this paper constructs a vertical relationship model composed of a foreign manufacturer and a local manufacturer in the upstream and a retailer in the downstream, and studies a fur-stage game model. In the first stage of the game, foreign manufacturer and local manufacturer decide their optical R&D input; in the second stage of the game, the foreign manufacturer negotiates with downstream retailer to determine trade contract; in the third stage of the game, the downstream retailer set up trade contract for the local manufacturer, and the local manufacturer either accepts it or leave it; in the fourth stage of the game, the foreign manufacturer competes with local manufacturer for retail price competition. By solving the game model, this paper discusses the optimal R&D decision of local manufacturer when foreign manufacturer has horizontal competition with local manufacturer and large buyer has buyer power relative to local manufacturer. The study shows that the horizontal competitive disadvantage and vertical buyer power are important reason for the weak innovation of local enterprises. With the increases of the horizontal competition disadvantage of the local manufacturer, the level of R&D of the local manufacturer declines with the increase of buyer power of the downstream retailer, the R&D level of the local manufacturer also declines. Based on this conclusion, the paper proposes a coping strategy for local manufacturer which is vertical cooperation between the local manufacturer and the large retailer. By constructing a cooperative R&D decision-making model under three cost-sharing forms, the optimal cooperative R&D model choice for local manufacturers′ cooperative R&D is studied. The study found that when the buyer′s power is small, the optimal cooperative R&D strategy is to determine the R&D cost sharing ratio according to the profit increment; when the buyer′s power is large, the optimal cooperative R&D strategy is to determine the R&D cost sharing ratio according to the local manufacturer′s own profit maximization decision.

Key words: competitive disadvantage, buyer power, R&D, vertical cooperative R&D, R&D cost sharing