Competition and innovation in developing countries

Abstract

Using the Climate Investment Survey from the World Bank, we find a negative relationship between competition and innovation in developing countries. This result supports the idea of Schumpeter (1942) that competition can harm innovation. We deal with endogeneity issues using as instrument the interaction between industry turnover and entry regulation in the U.S. The basic idea is that entry regulations have a more pronounced and negative effect on competition in those industries with more natural entry. For this, we find that relevant competition is at the country-level rather than at country-industry level. Finally, we find no evidence of heterogeneity on this relationship across firms and industries.