Market competition and innovation dynamics: insights from Croatian firms

This study examines the relationship between market competition and innovation activity in Croatian firms, measured by R&D intensity. Using firm-level panel data from 2015 to 2023, the analysis includes all firms with positive R&D expenditures and employs the Lerner index to assess market competition. A fixed-effects model reveals an inverted U-shaped relationship between market competition and R&D innovation intensity. At low competition, rising competition encourages firms to innovate, differentiate, and grow through R&D. However, excessive competition can hinder innovation by shrinking profit margins and limiting resources for risky projects. The findings also show that sectoral characteristics, firm size, labour costs, and firm age significantly influence innovation behaviour. These results offer new empirical evidence from a small, open, and under-researched transition economy. Policy implications highlight the importance of several factors: competition, firms’ capacity to benefit from investment, and targeted measures to promote innovation that support Croatia’s long-term economic competitiveness.