How does firms' perceived competition affect technological innovation in Luxembourg?

This paper revisits the competition-innovation relationship using an unbalanced panel of enterprise data stemming from four waves of the Luxembourgish innovation survey for the period 2002-2010. We estimate by full-information maximum likelihood a nonlinear dynamic simultaneous-equations model with pseudo-fixed effects using four measures of perceived competition and three indicators of innovation and find that firms whose main market is characterised by rapid obsolescence of products are more likely to spend on innovation and to introduce product or process innovations. We also find that these firms also often consider their main market to be characterised by rapidly-changing technologies where higher competition also implies higher innovation.