How Does Market Competition Affect Firm Innovation Incentives in Emerging Countries?

How Does Market Competition Affect Firm Innovation Incentives in Emerging Countries?

Maria Pluvia Zuniga Lara

Jose Miguel Benavente

Inter-American Development Bank

Abstract

The role of market competition on firm innovation remains a controversial question, especially in the context of developing countries. This paper presents new empirical evidence about the causal impact of competition on firm innovation, and the effectiveness of competition law enforcement in promoting market competition for Chile and Colombia. Using instrumental-variable estimation, our results show that competition increases firm propensity to invest in innovation in the two countries but this relationship manifests in different ways.  While this relationship is linear in Chilean firms, an inversed-U shaped relation prevails in Colombian enterprises. These findings are robust to including past innovation engagement, sector import competition and business dynamics. In addition, first stage estimations show that sectors where a competition policy sanction was issued saw their level of competition improve after intervention.  Combined, our findings stress the importance of pro-competition regulations for the promotion of competition and firm innovation.