Abstract: With the intensification of economic globalization and market competition, companies will unite upstream companies to establish a closely-connected supply chain. To ensure the stability of the supply chain and improve the quality of their products, many large enterprises will directly invest in upgrading suppliers' production equipment or technology to improve product quality or reduce production costs. When manufacturers directly invest in upgrading suppliers' technology, there may exist technology spillover effects, which will bring benefits to other horizontally competing manufacturers. We use the Stackelberg model and complete and perfect information dynamic game to study the strategy of manufacturers' investing in upgrading supplier technology, and the interaction between potential competitors entering the market and manufacturers upgrading supplier's technology. The results show that:(1) If a manufacturer directly invests in upgrading its supplier's technology, when unit production cost is small, external companies will be hindered from entering the market, regardless of whether there is a technology spillover effect; (2) If there exists technology spillover effect, upgrading supplier's technology will increase the profits of other enterprises. If there is no technology spillover effect, the manufacturer's direct investment in upgrading the supplier's technology will reduce the profits of other manufacturers, even reduce the equilibrium output of other companies to zero, and hinder potential competitors from entering the market.

Key words: supplier's technology upgrading, technology spillover effect, multi-agent game, Stackelberg model