Exploring the contribution of micro firms to innovation: does competition matter?

With a special focus on firms with fewer than 10 employees, we examine how small businesses participate in innovation and how perceived competition affects their innovative behavior. Statistics from a large sample of European micro-, small-, and medium-sized enterprises document a relevant share of innovative firms, including micro ones. We empirically explore the relationship between competition and the likelihood of being innovative, the degree of complexity of the innovation strategy, and its frequency. Estimates provide evidence of an inverted-U-shaped relationship, whereby innovation initially increases with competition and then it slightly declines. The results hold for all firms, regardless of their size, but the negative effect seems to be more marked for smaller firms. Competition shows a stronger relationship with technical and external innovation. By including micro firms, this paper contributes to the understanding of innovative patterns and activities in firms of all size.