Is there an inverted-U relationship between competition and innovation in Brazil?

Using models that properly consider the non-linearity generated by the discontinuity of the dependent variable and the potential unobserved heterogeneity across firms, we investigate, for a sample of Brazilian companies, whether the relationship between innovation and competition is inverted U-shaped. Unlike most of the literature, we avoid using only investment in R&D as a measure of innovation, since firms in developing countries are less intensive in R&D (and other more sophisticated innovation activities) when compared with their developed counterparts. We confirm the inverted U-shaped pattern and find that, when compared with other innovation activities, the peak of the inverted-U curve is located relatively more to the left for spending in tangible assets. This validates previous evidence that competition affects innovative activities differently. Moreover, the relationship between competition and innovation turns monotonic and positive when we use a less granular sector classification, suggesting that the estimated relationship between both variables is sensitive to the aggregation level used to calculate the competition indicators.