Does Competition Enhance or Hinder Innovation? Evidence from Philippine Small and Medium-Sized Enterprises

Tristan A. Canare, Ateneo de Manila University
Jamil Paolo Francisco, Asian Institute of Management


Competition has two possible contrasting effects on firm innovation. On one hand; it can force businesses to innovate to become more competitive. On the other; competition can shrink a firm’s market share; revenues and profit; making it difficult to implement costly innovations. Applying logistic regression on data from a survey of 480 small and medium-sized enterprises (SMEs) in the Philippines; this paper found evidence that there is a generally positive relationship between competition and innovation. The magnitude of the relationship; however; depends on the type of innovation. The form of innovation most strongly associated with competition is improvement in the production process; followed by improvement in marketing. It is most weakly associated with introduction of a product new to the market and with improvement of an existing product. There is also some evidence that the magnitude of the competition-innovation relationship varies across sectors and across firms of different sizes.