Conference Paper
Competition, Digitalization, and Innovation: Empirical Evidence from Developing and Emerging Economies
No.
ERF32AC_126
Publisher
ERF
Date
May, 2026
Topic
L8. Industry Studies: Services
L2. Firm Objectives, Organization, and Behavior
D2. Production and Organizations
This paper examines the effects of formal and informal competition, as well as adoption of digitalization, on firm-level innovation. Using firm-level data from the World Bank Enterprise Surveys (WBES) covering 160 countries between 2006 and 2024, we estimate extended probit models to address potential endogeneity in the relationship between competition and innovation, applying a set of instrumental variables. The analysis controls for firm heterogeneity by country, region, year, and industry, as well as for firm-specific characteristics and reverse causality. The findings show that digitalization tools are crucial drivers of firm performance across multiple dimensions. Formal competition and informal competition, however, affect innovation differently. Formal competition displays a non-linear relationship with innovation: while moderate competition encourages innovation, intense competition does not. In contrast, informal competition consistently stimulates innovation, likely because it pressures formal firms to adapt and remain competitive. At the regional level, results reveal that formal competition tends to hinder innovation, while informal competition acts as a positive force. Digitalization emerges as a strong and consistent driver of innovation across all regions, particularly in MENA. Based on these results, the paper derives key policy recommendations for innovation strategies, competition policies, and regulatory reforms.
Research Associates
Riham Ahmed Ezzat
Assistant Professor, Economics Department, Faculty of Economics...