How Does Competition by Informal and Formal Firms Affect the Innovation and Productivity Performance in Peru? A CDM Approach

Innovation is one of the main determinants to stimulate productivity. However, incentives to innovate may be affected by the level of competition. In particular, in developing countries, where informality is highly prevalent, formal firms have to face both types of competition: formal and informal. Previous studies have acknowledged a negative impact from competition (schumpeterian effect) but also, several recent studies have shown that competition could spur innovation (escape-competition effect). Given the importance of informal competition in developing countries, as Peru, where almost three out of four firms are informal and the intensity of investment in RD formal competition seems to affect positively the intensity of R&D+i activities spending and also firms’ productivity, which can be explained as an escape-competition effect within the formal firms. In conclusion, meanwhile it is found that informal competition affects negatively the whole innovation process, formal competition could, instead, encourage formal firms’ willingness to invest more in R&D+i activities, increasing their productivity.