Competing with MNEs: developing manufacturing capabilities or innovation capabilities

A challenge facing local firms in China is the selection of effective technology strategies to compete against MNEs in the era of globalization. The existing literature suggests two alternatives, developing strong manufacturing capabilities or developing innovation capabilities, but provides no clear answer to the question of how to select one strategy or the other. This paper explores this issue by introducing two concepts: “barriers to appropriability” and “opportunities for improvement.” We develop four propositions to specify the boundary conditions for local firms to choose their technology strategies and analyze two local firms’ technology strategies to illustrate two of the propositions. We find that development of strong manufacturing capabilities will not necessarily be an effective strategy for local firms competing against MNEs. If there are opportunities for improvement, it might be possible for local firms to compete against MNEs by developing innovation capabilities and core technologies.