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

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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.