This Paper examines the importance of competition in the growth and development of firms. We make use of the large-scale natural experiment of the shift from an economic system without competition to a market economy to shed light on the factors that influence innovation by firms and their subsequent growth. Our data come from a survey of nearly 4,000 firms in 24 transition countries. These data have three main advantages. First, while in a market economy firms face widely divergent needs and opportunities for innovation, virtually every firm that emerged from central planning was maladapted to the new environment, and needed to innovate at least modestly in order to survive. Second, we measure directly the degree of competition perceived by each firm in its principal market rather than attempting to infer this from market data collected by statistical agencies; and we collect data directly on various measures of innovative activity. Third, the fact that transition countries inherited market structures from a regime in which selection and incentive effects of competition were not operational and were then subjected to a dramatic shock to competition mitigates some of the endogeneity problems associated with measures of competition in market economies. We find evidence of the importance of a minimum of rivalry in both innovation and growth: the presence of at least a few competitors is effective both directly and through improving the efficiency with which the rents from market power in product markets are utilised to undertake innovation. There is also some less clear-cut evidence that the presence of a few rivals is more conducive to performance than the presence of many competitors.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
4343.
Find related papers by JEL classification: L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Boundaries of Public and Private Enterprise; Privatization; Contracting Out O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development P00 - Economic Systems - - General - - - General
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