How the Innovation-competition Link is Shaped by Technology Distance in High Barrier Catch-up Economy

Abstract: The paper studies the effects of competition on innovation in various technology groups of mature Russian manufacturing firms. The purpose of the research is to establish whether more intense competition is good or bad for innovation, and to learn how the response to competition varies between technology leaders, followers and laggards. We use the 2014 survey data, which includes 1920 firms from 19 two-digit sectors and size groups between 10 and 10,000 employees. We find that product innovation effort increases with competition at a modest level of competitive pressure, especially if foreign entry and import are considered. However, this result is mostly driven by technologically weak plants, which innovate less than leaders and followers at a low level of competition, but are encouraged to innovate more by a modest increase of competitive pressure, when theoretically predicted optimal behavior would be to refrain from innovation. When competition is strong, plants in all technology groups give up the innovation race. Competition is less influential in explaining process (as opposed to product) innovation, and our estimations demonstrate a clear inverted U-shaped link: laggards and leaders are more likely to upgrade process technologies when weak competition increases slightly, and are less likely to do so when strong competition becomes stronger.