Innovation and competition under weak institutions: An empirical analysis of Russian firms

Abstract

This study examines the relationship between competition and innovation of Russian firms. We mainly explore (i) the role of competition in stimulating or suppressing product and process innovation and (ii) if the relationship is affected by institutional conditions, such as court fairness, corruption, and informal competition. The results show that innovation, particularly process innovation, has an inverted U-shaped relationship with competition but that product innovation is negatively associated with competition. Further, the negative relationship with product innovation is observed only among firms confronting problems in institutional conditions. The results imply that, whereas the promotion of competition can both encourage and discourage innovation, depending on the initial competition level, an improvement in institutional conditions can mitigate the negative effect of competition on innovation.