Abstract: Enterprises can choose either the technological innovation aimed at reducing the cost or the technological innovation aimed at improving the quality. It is found by this study that only when the degree of cost-reducing relative to that of quality-improving is large enough or moderate, will the pure strategy Nash equilibrium be found in choosing the techonogical innovation direction by enterprises, in that case one may choose the cost-reducing innovation while the other may adopt the quality-improving innovation. Secondly, only when the degree of cost-reducing relative to that of quality-improving falls into another moderate range, will the pure strategy Nash equilibrium be found in choosing the techonogical innovation direction by enterprises, in that case two of them choose the cost-reducing innovation at the same time. Thirdly, only when the degree of cost-reducing relative to that of quality-improving is small enough, will the pure strategy Nash equilibrium be found in choosing the techonogical innovation direction by enterprises, in that case two of them choose the quality-improving innovation at the same time. Finally, it puts forth some enlightening policy suggestions for upgrading“made in China”to“created in China”based on the model analysis.

Key words: technological innovation; cost-reducing innovation; quality-improving innovation; choice of directions; upgrading