Domestic substitution and supply chain performance: The impact of technology and price subsidies

In the current volatile global market, domestic substitution is increasingly crucial to mitigate reliance on foreign suppliers. However, the quality of domestic components is unstable, and the R&D costs are substantial. Recognizing this quandary, the government has intervened through technology subsidies(TS) or price subsidies(PS) to promote domestic supply chain performance. We formulate the interactions among the domestic supplier’s R&D and pricing strategies, the manufacturer’s domestic substitution, and the government subsidies, analyzing the effects of TS and PS. Our findings reveal that TS exerts dual effects: price increment through quality improvement and decrement owing to subsidy provision. Interestingly, the price increase is more significant for the manufacturer’s product than for the supplier’s component, indicating that upstream R&D endeavors yield greater benefits. Three types of PS – subsidy to the supplier, the manufacturers, and consumers – are identical except for the direct recipients, suggesting that, for the government, it is equivalent to provide PS to any supply chain member. In addition, the feasibility of TS for the government concurrently guarantees that the domestic suppliers will engage in R&D. Regarding subsidy choice, the manufacturer consistently prefers TS, while the choice of the supplier and the government hinges on R&D costs. Numerical experiments indicate that, from the perspective of the government, scenarios favoring PS are significantly limited when TS is feasible, regardless of the budget constraint. For promoting domestic substitution, TS invariably outperforms PS, despite imposing a greater financial burden.