How does competitive rivalry influence the extent to which companies innovate? How does competition affect the amounts companies invest in innovation? And what about international competition? Dr. Flavia Roldán and Dr. Carlos Ponce addressed these questions in their study “Innovation and Competitive Intensity: Uruguay 2004–2012,” published in October 2015.
The paper examines the relationship between innovation and competition in Uruguay. The objective was to quantify the impact of competitive intensity on the innovation activities undertaken by private-sector firms.
Ponce and Roldán assessed and classified Uruguay’s various productive sectors according to their level of competitive intensity. They then analyzed the innovative behavior of those involved in these markets: whether or not they invested in innovation activities, how much money they invested, and what results they achieved.
The study found that the greater the competitive rivalry, the more companies innovate and the more likely they are to invest. However, when competitive rivalry is lower, the amount invested by companies is higher. In turn, the greater the international competition, the more companies invest and innovate.
It is important for the country to understand how competition affects innovation, as this can serve as a necessary input for the proper design of public policies.
“As our understanding of this relationship deepens, we can aim to design economic and antitrust policies that promote innovation and productivity,” the article notes.
Innovative companies and their characteristics
To conduct this study, the researchers used data from the Survey of Innovation Activities for the periods 2004–2006, 2007–2009, and 2010–2012, conducted by theNational Agency for Research and Innovation (ANII)and the National Institute of Statistics (INE).
This survey collects information on innovation activity among a sample of Uruguayan companies, covering both investment in innovation and its financing, as well as other economic aspects of these companies.
In turn, market concentration was measured using the Herfindahl Index, which reflects the existing level of economic concentration. This index takes into account the market share held by each participating firm.
Companies were considered innovative if they had engaged in activities such as research and development, the acquisition of equipment or software, or training. In short, these were companies that developed processes to improve their products and adapt them to the needs of the population.
One characteristic that innovative companies often share is that they are 2.5 times larger than those that do not engage in such activities. In addition, companies involved in innovative activities tend to have a higher percentage of skilled employees relative to their total workforce.
In turn, they tend to be more exposed to international competition, “since the percentage of their exports relative to total sales is higher than that of companies that do not engage in innovation.” Finally, innovators have more market experience, as their companies are slightly older than those of non-innovators.
What motivates companies to invest?
The survey used by the researchers measures various innovation activities:
- The decision to invest in innovation activities.
- How much is invested?
- The innovative product: the development of a product, process, management, or organizational innovation; and whether that innovation was new to the local market, the international market, or simply new to the company.
- The results obtained, such as the extent to which sales increased due to innovation, whether production costs were reduced, and so on.
The research question was: To what extent can innovation activity be explained by the level of competitive rivalry?
After analyzing the data and applying various econometric models, the researchers concluded that the greater the competitive rivalry, the more companies innovate and the more likely they are to invest. This is because companies try to “outpace” the competition through innovation.
However, the lower the level of competition, the greater the amount invested by firms, since the returns on innovation are higher when competition is lower.
Finally, the greater the level of international competition, the more firms invest and innovate. This is likely because international competition serves as a strong incentive to innovate, enabling firms to survive while also increasing the likelihood of higher returns in these markets.
Useful Information
Research paper:
Innovation and Competitive Intensity. Uruguay 2004–2012
Authors:
Carlos Ponce: Ph.D. in Economics, University of California, Los Angeles, United States. Ilades, Alberto Hurtado University, Santiago, Chile.
Flavia Roldán: Ph.D. in Economics from Carlos III University of Madrid, researcher in the Economics Department at Universidad ORT Uruguay.
Publication date:
October 2015.