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R&D Competition between Two Kinds of Corporations with Asymmetric Financing Ability

Compared with multinational corporations, Chinese domestic corporations are faced with stronger financing constraints. This may weaken their capacities in engaging in R&D competitions. We build a dynamic game model to formalize this situation. Our results show that there is a R&D competition strategy for the multinational corporations, by which they engage in more aggressive product market competition by initiating a price war in the first period. This will decrease the domestic corporations' profit in the first period, make their financial signal worse, and therefore impose stronger financial constraints on the domestic corporations in the second period. This strategy can enlarge the advantage of the multinational corporations relative to the domestic corporations in R&D, and thus increase the probability that the multinational corporations monopolize the product market.