Competing against ‘invisibles’: The effect of competition from informal firms on the R&D investment of formal firms

Competition from informal firms is an important issue that face most formal firms in developing countries. It usually leads to market share losses in formal firms and weakens their self-financing capacity. Recently, a stream of literature has developed concerning its impact on the outcomes and strategic choices of formal firms. This paper contributes to this literature by investigating the effect of the competitive pressure from the informal sector (CPIS) on the research and development (R&D) investment of formal firms using firm-level data from Côte d'Ivoire. It emerges that the CPIS incites formal firms to engage more in R&D when it constitutes a problem, but not a severe one, for them in conducting their activities, which implies a positive effect. However, this effect is lost when the problem is severe. We conclude by discussing policy implications