Competing to be innovative: Foreign competition and imitative innovation of emerging economy firms

We examine the effect of increased competitive pressures within and outside the home market on the innovation of local firms. We argue that the relationship between exposure to foreign competition in domestic and international markets and firm innovation is better captured by imitative innovation than by radical innovation. We hypothesize that exposure to foreign competition inside and outside the home country is positively associated with local firms’ imitative innovation. Further, we argue that this relationship is contingent on institutional factors, including the role of the government, the legal system, and natural resource endowment. Using a dataset of 949 firm-year observations in the Middle East and North Africa (MENA) region, we find empirical support for the positive impact of competitive pressure on imitative innovation.