The Influence of Competition from Informal Firms on New Product Development

The effect of competition on New Product Development (NPD) is well known and widely researched. What is not as commonly known, is whether all competition comes from registered firms that operate as legally recognized entities? Probably not. There also exists, a set of firms that do not register themselves with the government authorities due to high administrative and procedural costs. Defined as informal firms, they are more prevalent in developing countries than in developed countries. Since informal firms compete in the same space as formal firms, it is important to understand their effect on NPD strategy of formal firms.

One way for formal firms to differentiate themselves from informal firms is to engage in greater NPD. Our study tests data from over 9000 firms located in Eastern Europe and Central Asia. Our findings show that formal firms that identify informal firms as a greater obstacle are more likely to engage in NPD. However, the strength of this direct relationship is dependent upon competitive and institutional factors. The relationship weakens when competition from other formal firms is high, when alternate responses such as corruption are available and when managers are more optimistic about the regulatory environment.

McCann, B. T., & Bahl, M. (2017).  The influence of competition from informal firms on new product development. Strategic Management Journal, 38(7), 1518-1535.