Competition and Innovation.

Abstract: This paper empirically investigates the relationship between product market competition and innovation in seven European countries for the period 1987-2006. To approximate change in competition level three measures are considered: mark-up level, import penetration and the number of firms on the market. Innovation is measured as R&D intensity. The analysis shows that effect of product market competition on R&D intensity can be described with a non-linear function. Non-linearity signifies that when competition level is low, an increase in competition rises R&D intensity, while with higher degree of competition on the market an upsurge of competition leads to lower R&D intensity