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Product Innovations and Informal Market Competition in Sub-Saharan Africa: Firm-level Evidence

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Type: Conference Paper
Author: Avenyo, Elvis
Conference: Informality and Development: A Conference in Honor of Elinor Ostrom
Location: Indiana University, Bloomington, IN
Conf. Date: October 22-23
Date: 2016
URI: http://hdl.handle.net/10535/10159
Sector: Social Organization
Region:
Subject(s): informality
markets
Abstract: "The competitive interactions between formal and informal firms in product markets continue to grow in developing countries. Firm level evidence however reveals the product market competitive behavior of informal firms as ‘unhealthy’ and one of the top three (3) obstacles formal businesses face in sub-Saharan Africa. With scant empirical evidence available, this paper fills the gap in the literature by investigating the relationship between informal product market competition and sales from innovative products introduced by formal firms using pooled data from the World Bank’s Enterprise Survey and the newly available Innovation Follow-up Surveys for five (5) sub-Saharan African countries. Our results show a robust 'Schumpeterian effect' (monotonically negative effect) of informal firm competition on the market performance of product innovations introduced by formal firms. Results from sectorial, ownership type and size of firm analyses also show similar 'Schumpeterian effects'. However, extension to industry-level informal competition indicates an 'escape-competition effect' of informal competitive activities on the performance of product innovations. We also found through indirect mechanisms that firms with larger market share tend to have 'escape - competition effects'. We argue that, informal competition matters for the introduction and performance of product innovations but only for formal firms that lack strategic collaborative ‘footholds’ in the informal sector."

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