Does Competition Spur Innovation in Developing Countries?

Abstract

Using the Climate Investment Survey from the World Bank, we analyze the effect of competition on technological innovation in developing countries. We deal with endogeneity of competition by using the interaction between industry turnover and entry regulation as an instrument. The basic idea for this instrument is that entry regulations have a negative and more pronounced effect on competition in those industries with more natural turnover. Our results indicate a negative impact of competition on several measures of innovation outputs and inputs, which are robust across industries and using alternative measures of competition.