Abstract: With the intensification of international competition and China's industrial economic downturn, the stress on existence of China's manufacturing enterprises is increasing. Whether China's manufacturing enterprises can change the mode of development and achieve transformation and upgrading is need studying deeply. By establishing a theoretical model under the vertical linked market structure, the fundamental restraints on the transformation and upgrading of manufacturing enterprises downstream of the industrial chain is analyzed, and an in-depth discussion is made on the rational formulation of the R&D policies. This research shows that the fundamental factor restricting the downstream enterprises of the industrial chain to carry out transformation and upgrading is their core technology level. When the core technology level of an enterprise is relatively high, even if the production cost of intermediate products is higher than the cost of imported intermediate products, due to the existence of independent research and development, enterprises will still choose to produce their own core intermediate products for transformation and upgrading. In terms of enterprises' R&D, enterprises with poor final product quality and lower core technology level are less motivated to conduct R&D. In terms of R&D subsidy formulation, it is further found that the location of the final product market would affect the robustness of R&D subsidy policy. When the final product market is located in a third country, the government should not intervene in the R&D of enterprises, and when the final product market is located in home, the government should subsidize the R&D activities of enterprises, and the R&D subsidy policy will promote the transformation and upgrading of firms.

Key words: transformation and upgrading, final product market, intermediates trade, research and development policy