Informal competition and product innovation decisions of new ventures and incumbents across developing and transitioning countries

Abstract

While existing research has found that informal competition positively impacts product innovation by formal firms in developing and transitioning countries, there is a lack of understanding of how this decision to innovate varies between incumbents and new ventures. Through replication and extension of the work by McCann and Bahl (2017), the article primarily tries to address this significant gap by analyzing the differential impact of informal competition on product innovation decisions of incumbents and new ventures. Using data from the latest round of the World Bank Enterprise Surveys, 2019–2020, conducted across multiple transitioning and developing countries and logistic regression as the method of analysis, this study finds that (a) informal competition positively impacts the likelihood of product innovation by formal firms, confirming the results of McCann and Bahl (2017) and (b) new ventures are less likely to engage in product innovation than incumbents when competing with informal firms. The article contributes to the literature by trying to empirically resolve the friction between Attention-Based View of the firm and liability of newness. This paper argues that when facing informal competition, new ventures are less likely to respond through innovation compared to incumbents due to competing resource requirements that limit their attention towards competition from informal firms.