IZA Discussion Paper No. 3299
Competition is supposed to spur innovation. But the authors of this study found that the opposite is true for domestic firms in emerging economies. They examined 27 “transition” economies across eastern Europe and central Asia to understand how globalization — foreign direct investment, trade, and increased competition with firms operating in their home countries — affects markets and the likelihood that incumbents will develop new products and technologies. The authors looked at data from the 2002 and 2005 Business Environment and Enterprise Performance Survey.
Perhaps the most counterintuitive finding was that competition from foreign firms has a negative effect on product innovation, particularly for domestic firms that don’t have access to a multinational supply chain or other resources available in a pro-business environment. Firms in local rather than national markets were least likely to innovate. Larger firms were found to innovate more than smaller ones; state-owned firms were 50 percent less likely to innovate than their private counterparts, especially in the area of new product development. Firms with more college graduates were universally more innovative, whereas the presence of highly skilled workers had a mixed effect on innovation. Lastly, firms with higher capacity utilization (those that sell nearly everything they make) have lower innovation rates than their less efficient counterparts.
In emerging economies, globalization can be counterproductive for innovation. However, easy access to supplies and a business-friendly environment seem to foster innovation.