Link Between Informal Competition and Innovations in Formal Firms

This research explores the empirical link between informal competition and innovation within formal enterprises. The central question revolves around whether formal businesses, confronted with heightened competition from the informal sector, demonstrate increased innovation to counteract such competitive dynamics. On one hand, firms influenced by informal competition may present heightened innovativeness as a mechanism for differentiation. Conversely, financial constraints caused by informal competition could hinder innovative activities. Given the conflicting findings in the current literature, it is important to investigate the link between informal competition and innovation using a comprehensive dataset. Utilizing firm-level data sourced from the Enterprise Surveys, including 155 countries and over 190,000 enterprises, this study investigates the connection between informal competition and innovation while controlling for variables such as firm size, industry sector, and the gender composition of managers and owners. Probit regressions constitute the analytical framework. The findings suggest that firms facing informal competition tend to demonstrate heightened levels of innovation, particularly evident in larger manufacturing enterprises. Additionally, enterprises owned by women exhibit a notable inclination for innovation. Interestingly, firms struggling with financial constraints also display a heightened preference towards innovation. The implications extend to policy areas, advocating for targeted public funding and support initiatives tailored towards innovative.