How does market competition affect firm innovation incentives in emerging countries? Evidence from Latin American firms
J. M. Benavente & Pluvia Zuniga
#2021-024
The role of market competition on firm innovation remains a
controversial policy question, especially in the context of developing
countries. This paper presents new empirical evidence about the impact
of market competition on firm innovation engagement in Colombian and
Chilean manufacturing industries. We correct for the endogeneity of
market competition using instruments proxying entry costs and policy
interventions (i.e. competition decisions and entry law reforms), our
results are like those of developed countries. Market competition
increases firm propensity to invest in innovation in manufacturing
enterprises and this relationship is linear in Chilean while in
Colombian industries it takes the form of an inversed-U shape relation.
The impact of competition is decreasing with the level of sector
asymmetry -as preconised in the literature, while the impact of firm
distance to the frontier affects firm innovation engagement differently
in the two countries. In Chile, competition raises innovation incentives
for the third and fourth productivity quartiles while no impact is found
for firms in the first (bottom) two quartiles. In contrast, in Colombia
market competition raises innovation engagement across regardless their
firm productivity position but effects are stronger in the medium range
(second and third quartiles). Our main results are robust to controlling
for past innovation engagement, import competition and business
dynamics.
Keywords: Market Competition, Innovation, Technology Purchasing,
Productivity, Latin American Firms
JEL Classification: O32, D41, O47, D24