Abstract: In recent years, the Chinese government has introduced foreign new energy vehicle (NEV) enterprises to establish manufacturing plants in Shanghai, generating spillovers that reduce domestic NEV enterprises’ production and innovation costs. Accordingly, it is important to identify the market conditions under which production-cost and innovation-cost spillovers stemming from such introductions increase domestic NEV enterprises’ profits and innovation levels. In this paper, we construct a market model comprising a domestic NEV enterprise, a foreign NEV entrant, and a group of consumers, where the emerging-market government considers whether to introduce the foreign NEV entrant to generate technological spillovers that reduce the domestic NEV enterprise’s production and innovation costs. We construct profit-maximization models for the two firms under two policy scenarios: the non-introduction scenario (the government does not introduce the foreign NEV entrant, or the entrant chooses not to enter) and the introduction scenario (the government permits local manufacturing and the foreign NEV entrant enters the market). Then, by solving the models, the two firms’ optimal prices and optimal innovation levels under the non-introduction and introduction scenarios are obtained. We then compare the domestic and foreign firms’ optimal innovation levels and profits across scenarios to assess how the government’s introduction of the foreign entrant affects the domestic NEV enterprise’s optimal innovation and profit. Building on this analysis, we examine how key parameters influence the firms’ optimal prices, innovation levels, market shares, and profits. Finally, numerical experiments examine how the innovation-cost spillover coefficient following the government’s introduction of the foreign entrant affects social welfare. This paper shows several important results through the theoretical analysis. First, when the spillover related to innovation costs is large, the government’s introduction of a foreign entrant raises the domestic NEV enterprise’s optimal innovation level, and this level rises further as the production-cost spillover strengthens. Second, the innovation-cost spillover does not always benefit the domestic NEV enterprise: if the spillover is small or large, introducing the foreign entrant reduces its profit, whereas a moderate spillover increases it. Finally, only when the innovation-cost spillover is at a moderate level does government introduction simultaneously increase the domestic NEV enterprise’s profit and its optimal innovation level.

Key words: New energy vehicle enterprise, Spillover effect, Innovation level, Social welfare