How Does Competition by Informal and Formal Firms Affect the Innovation and Productivity Performance in Peru? A CDM Approach

Lourdes Alvarez, Edson Huamaní and Yngrid Coronado

MPRA Paper from University Library of Munich, Germany

Abstract: Innovation is one of the main determinants to stimulate productivity. However, incentives to innovate may be affected by the level of competition. In particular, in developing countries, where informality is highly prevalent, formal firms have to face both types of competition: formal and informal. Previous studies have acknowledged a negative impact from competition (schumpeterian effect) but also, several recent studies have shown that competition could spur innovation (escape-competition effect). Given the importance of informal competition in developing countries, as Peru, where almost three out of four firms are informal and the intensity of investment in R&D+i activities is pretty low, this study aims to evaluate the impact of formal and informal competition, at the industrial level, on the whole innovation process and, expressly, on productivity for Peru. By using a CDM model, this study analyses how the intensity of formal and informal competition affects every stage of the innovation process. The CDM model makes possible to study four interrelated stages of the innovation process: i) the firms’ choice to engage with innovation, ii) the amount of resources invested in R&D+i activities, iii) the effects of R&D+i investments on innovation output, and iv) the impacts of innovation outcome on firms’ productivity. The model is estimated using firm-level data collected by the Peruvian National Innovation Survey 2018 and the National Business Survey 2018. Our main findings indicate that competition, both formal and informal, affects negatively the decision to engage in innovation. However, the relationship changes throughout the remaining stages of the innovation process. Whereas the informal competition affects negatively the whole innovation process (engage in innovation, intensity of R&D+I activities spending, innovation output and firms’ productivity) satisfying the Schumpeterian theory; formal competition seems to affect positively the intensity of R&D+i activities spending and also firms’ productivity, which can be explained as an escape-competition effect within the formal firms. In conclusion, meanwhile it is found that informal competition affects negatively the whole innovation process, formal competition could, instead, encourage formal firms’ willingness to invest more in R&D+i activities, increasing their productivity.

Keywords: Competition; CDM model; informality; innovation; productivity (search for similar items in EconPapers)
JEL-codes: D4 E26 M11 O17 O32 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-bec, nep-com, nep-cse, nep-eff, nep-iue, nep-sbm and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in ECIE 2020 16th European Conference on Innovation and Entrepreneurship Academic Conferences and Publishing International ACPI (2020): pp. 61-68

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