Competition, R&D and innovation in Chilean firms

Abstract

PurposeThe purpose of this paper is to analyze the effect of competition on both innovation inputs and outputs in Chilean firms. More specifically, the authors investigate whether there is an inverted-U relationship at different stages of the innovation process.Design/methodology/approachThe sample covers 1,347 firms that responded to both the 4th Chilean Longitudinal Enterprise Survey and the 10th Chilean Innovation Survey. The CDM model (Crépon et al., 1998) is applied to correct for selectivity bias and endogeneity. Competition is proxied by measures of market concentration. The robustness of the results is checked using four alternative indicators.FindingsThe results strongly suggest that competition and both R&D and innovation intensities are linked by an inverted U-shaped curve. The estimated effects of competition on innovation output and labor productivity are rather ambiguous. Thus, market structure would be influencing the firms’ incentives to innovate, but not necessarily their innovation performance.Research limitations/implicationsThe model is based on cross-sectional data, hampering the possibility to control for unobserved heterogeneity. Competitive pressures from potential entrants and foreign markets are not captured in the analysis.Practical implicationsModerate levels of competition would be the optimal market structure in terms of promoting more business R&D and innovation spending.Originality/valueA previously unutilized data set covering the whole economy is used. Estimations are executed at three different stages of the innovation process. Two types of innovation input and four types of innovation output are taken into account.