Competition and innovation: does the distance to the technology frontier matter?

This paper provides new evidence on the relationship between innovation, competition and distance to the technology frontier, using enterprise surveys from 40 developing and transition countries. Different from previous empirical studies, the distance to frontier is measured by a firm's technology level relative to its main competitor. This self-reported comparison allows to capture a crucial determinant of a firm's business strategy and its response to competition. The findings from the empirical analysis are as follows. Firstly, firms with more advanced technology compared to their main competitors have more product innovations. Secondly, there is evidence that innovation and competition are more positively correlated at low levels of competition than at high levels. With some measures of competition, the correlation is highest at intermediate levels of competition, which suggests an inverted-U relationship. Thirdly, in certain specifications, competition is most positively correlated with product innovation when a firm is more advanced than its main competitor. In other cases, this correlation is strongest for firms that are at the same technology level as their competitors. However, the differences in the correlations between more and less advanced firms are not always significant.