Revisiting the innovation-competition nexus: Evidence from worldwide manufacturing and service industries

This paper investigates the relationship between competition and innovation using a worldwide dataset of manufacturing and service industries. The sample comprises the world's top corporate R&D spenders listed in the EU 2017 industrial R&D Scoreboard, and the analysis covers the years spanning 2007 to 2016. We use an industry-year indicator, the inverse of the Lerner Index, to measure the competition level prevailing between these large R&D companies. R&D expenditures are used as a proxy for innovation. The model is estimated using two-stage least squares to control for the potential endogeneity of the competition indicator. Our contributions are three-fold. Firstly, we examine the innovation-competition nexus at the worldwide level, thus extending the geographical coverage of previous studies. Secondly, we analyze the relationship separately for manufacturing and service industries, characterized by different technological and knowledge-based regimes. Finally, we distinguish between incumbents and new entrants in the worldwide market. Our findings confirm the existence of an inverted-U shaped relationship between competition and innovation and show that this relationship differs between manufacturing and service industries. The results also reveal that the effect of competition on innovation varies between incumbents and new entrants. Our paper contributes to the existing literature by providing novel empirical evidence on the innovation-competition nexus based on a global sample and addressing previous studies' limitations.