Abstract
How does product market competition affect innovation? It is widely be- lieved that there exist two opposite effects in market; one is Schumpeterian effect stating that competition attenuates the innovative incentive of laggard firms and the other is escape-competition effect depicting that competition urges neck-and- neck firms to innovate. Based on Ahigon’s model (2005), this article applies Tai- wanese manufacturing industry data from 1997 to 2004 and confirms that there exists an inverted-U shaped relation between competition and innovation. And the R&D-size relation is positive in Taiwan which is consistent with Schumpeter’s hypothesis. Unexpectedly, firm experience has a negative effect on innovation in Taiwanese electronics industries since the life cycle of their products is relatively shorter. Hence, younger firms invest more in R&D for the sake of taking the pre- emptive competitive position. In addition, we show a strong evidence that internal R&D investments and external technology outsourcing are complementary to each other in Taiwanese manufacturing firms.