Abstract

Firms in Eastern Europe and Central Asia that feel their competitors pressure them to innovate are more likely to innovate than firms do not. But price competition also reduces rents—and therefore the resources that firms have to invest. This paper assesses how competition policy affects these two different aspects of competition and how each affect innovation. It finds that enforcing competition law and cutting tariffs increases pressure to innovate and price competition. Because these affect innovation in opposite directions, it is not clear what competition policy’s net impact will be. The empirical results in this paper suggest that stricter competition laws increase the likelihood that firms will introduce new products but decrease the likelihood that they will introduce new production processes. In contrast, lower tariffs modestly reduce new product and new process development.

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