Role of market structure in firm-level innovation: an extended CDM model for a developing economy

Despite the substantial number of empirical and theoretical studies, the relationship between competition and innovation remains unclear. This paper shed lights on this multifaceted relationship from a new angle based on a detailed firm-level dataset of private manufacturing Pakistani firms, a survey first time conducted by the World Bank for the Pakistan economy. We used a refined version of the CDM model to examine the impacts of industry-level competition on firm-level innovation and productivity relationship. Our econometric estimates show that a firm belonging to the oligopolistic industry is more likely to take the decision of engaging in innovational activities, however, allocates fewer funds to R&D as compared to a competitive firm. The elasticity of product and process innovation output in terms of R&D intensity is higher in the oligopolistic industry. Correspondingly, product innovation outcome has a stronger influence on firm productivity in the case of a competitive sector. The findings have practical implications for policymakers in the area of market structure and firm-level innovation.