Author Information:

Kou Zonglai, Professor at the School of Economics

Sun Rui, Ph.D. Candidate at the School of Economics

Abstract:

In light of the real-world scenario of chip supply disruptions, this paper examines the impact of technology supply disruptions on incentives for independent innovation within the "manufacturer-retailer" vertical structure framework. Technology supply disruption implies that technologically advanced upstream foreign manufacturers cannot provide intermediate goods to a downstream retailer. The analysis reveals that, before technology supply disruption, a significant reason why technologically lagging local manufacturers lacked incentives for independent innovation is due to the concept of "monetary externality" of innovation. Although their technological catching-up can benefit downstream firms by reducing the bargaining power of foreign manufacturers, these local manufacturers themselves cannot profit from winning the downstream market. After a technology supply disruption, the disrupted downstream retailers can only purchase intermediate goods from local manufacturers, and this "binding effect" partially internalizes the monetary externality of local manufacturers. As a result, it enhances their incentives for independent innovation. However, at the same time, technology supply disruption also increases the incentives and capabilities of foreign manufacturers to implement talent containment strategies to prevent local manufacturers from catching up technologically. To address foreign manufacturers' "talent containment" strategies, substantial and sustained innovation policy support for local manufacturers is required, such as through government procurement.

Keywords:

Technology supply disruption, independent innovation, monetary externality, innovation policy

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