Intensity of competition and firm innovative behavior

Using a novel firm-reported measure of the intensity of competition and two distinct forms of innovation (product and process) from the European Commission Flash Eurobarometer 433 dataset, this paper comprehensively identifies the impact of competitive pressure on firm innovation for four broad sectors of the economy. A logit model by innovation type is used to estimate the impact of the intensity of competition on the firm's decision to innovate. Firm reported intensity of competition is found to have a positive impact on product innovation. Significant heterogeneities exist in the impact of minor and major degrees of competition across innovation types and sectors supporting Arrow's (1962) perspective on this relationship.