Does Competition Enhance or Hinder Innovation? Evidence from Philippine SMEs

Abstract

Competition has two possible contrasting effects on firm innovation. On one hand, competition can force SMEs to innovate to become more competitive. On the other hand, competition can shrink SME’s market share, revenues, and profit, making it difficult to implement financial-capital-intensive innovations. Using data from a survey of 480 SMEs in the Philippines, this paper found evidence that there was a generally positive association between competition and innovation. The magnitude of the relationship, however, depended on the form of innovation. The form of innovation most strongly associated with competition involved improvements in the production process, followed by improvements in marketing. It was most weakly associated with introduction of a product new to the market and with improvements to an existing product. There was also some evidence that the magnitude of competition-innovation relationship varied across sectors and firm size.