The Relationship between Foreign

Competition and Innovation Activities

Based on Quantile Regression

SU YI, LIN ZHOU-ZHOU and WANG CHEN-GANG

This article uses quantile regression to shed light on the complex relationship between foreign competition
and innovation activities. Quantile regression is more powerful than classical linear regression since
quantile regression can produce estimates for all conditional quantiles of the distribution of the innova-
tion activities variable, whereas classical linear regression only estimates the conditional mean effects.
The empirical evidence shows that the effect of foreign competition on make innovation activities is
different across the conditional quantiles of the distribution of innovation activities, something classical
linear regression would leave unidentified. This finding suggests that estimating the quantile effect of
innovation activities variable can well be more insightful than effect. Additionally, this article finds a
U-shaped relationship between foreign competition and make innovation activities.

Acknowledgements: The authors would like to thank Krishna V. V. (Editor in Chief) and two anonymous
reviewers for their constructive comments and suggestions to improve the article on an earlier version of
the article. This work was supported by the National Natural Science Foundation of China (71403066);
the State Key Program of National Social Science of China (14AGL004); the Fund of Ministry of
Education of China (20122304120021); China Postdoctoral Science Foundation (2013T60351); the
Special Foundation of Central Universities Basic Research Fee (HEUCF170903); Heilongjiang Province
Postdoctoral start fund (LBH-Q13050); the Scientific and Technological Projects of Heilongjiang
Province (GZ11D203); and Project of Education Department of Heilongjiang Province (12534028).

Su Yi (corresponding author), Academy of Economics and Management, Harbin Engineering

University, 150001, PR China; School of Management, University of Bradford, BD9 4JL, UK. E-mail:
suyi@[Link]
Lin Zhou-Zhou, Academy of Economics and Management, Harbin Engineering University, 150001,
China.
Wang Chen-Gang, School of Management, University of Bradford, BD9 4JL, UK.

Science, Technology & Society 22:2 (2017): 165–181

SAGE Publications Los Angeles/London/New Delhi/Singapore/Washington DC/Melbourne
DOI: 10.1177/0971721817702267
 166   Su Yi, Lin Zhou-Zhou and Wang Chen-Gang

Introduction

Competition has been recognised as a major driving force behind the success of
organisations (Alderson, 1965; Li & Vanhaverbeke, 2009; Yuchtman & Seashore,
1967). Academics and managers have become increasingly aware of the impor-
tance of competitive advantage (Li & Vanhaverbeke, 2009; Nelson, 1991). The
sustainability of a competitive advantage is no longer a matter of better efficiency
of existing businesses (Li & Vanhaverbeke, 2009), but rather depends on the
innovation capabilities of the organisations (Nelson, 1991). Prior research pays
attention on understanding implications and outcomes of innovation capabilities
(Bogliacino & Pianta, 2012; Cassiman & Veugelers, 2006; Guan & Chen, 2009;
Li & Wu, 2010; McKelvey, Zaring, & Ljungberg, 2014; Pérez-Luño & Cambra,
2013; Prajogo & Ahmed, 2006; Ringler et al., 2014; Roberts & Amit, 2003; Suárez,
2014). Specifically, increasing research interest has been devoted to the relation-
ship between competition and innovation, due to the globalisation of markets and
the shortening of technology life cycles (Li & Vanhaverbeke, 2009). Research on
innovation (R&D departments) found conflicting results on the influence of com-
petition pressure (Amabile & Gryskiewicz, 1987; Amabile, Conti, Coon, Lazenby,
& Herron, 1996). As individuals are more creative in a competitive setting than in
a non-competitive setting (Shalley & Oldham, 1997), there is a positive effect on
competition with other organisations (Amabile, 1996). A competition can challenge
individuals and help them to improve their performance (Shalley & Oldham, 1997).
This perception of challenge is expected to lead to a high degree of creativity and
innovativeness (Amabile, 1996; Amabile et al., 1996; Tierney & Farmer, 2002).
However, Amabile (1996) assumes a negative effect of competition within an
organisation (Amabile, 1996).
Economists and strategic management researchers have long been interested in
the relationship between competition and innovation (Aghion, Bloom, Blundell,
Griffith, & Howitt, 5 Amendola, Gaffard, & Musso, 2000; Greenhalgh & Rogers,
2006; Greis, Dibner, & Bean, 1995; Howitt, Griffith, Aghion, Blundell, & Bloom,
2005; Li & Vanhaverbeke, 2009; Smith & Sharif, 2007; Tang, 2006). Innovation
is described as the act or process of innovating; something newly introduced, a
new method, custom, device or change in the way of doing thing. (Webster’s New
World Dictionary, 1982, Second College Edition.) Despite the progress made in the
innovation research domain, the relationship between competition and innovation
is still a subject of intense debate (Clement, 2003). Thus, alternative measures of
competition are needed to better understand the effect of competition on innova-
tion (Tang, 2006). There are different types of innovation, such as ‘make and buy’
(Liu, Hodgkinson, & Chuang, 2014). The ‘make innovation’ activities refer to
enterprises that rely on all their internal resources to develop new products, patents,
technology and various other elements. The ‘buy innovation’ activities refer to
the enterprises which use money to acquire new technology through outsourcing
externally, including domestic and foreign technology transfer (Bin, 2008). There
are a few studies that examine how competition affects make and buy innovation
activities. For instance, Liu (2014), using panel data from China, examined the

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 The Relationship between Foreign Competition  167

relationship between foreign competition and buy and make activities. Building on
this research, we focus on the relationship between foreign competition and make
innovation activities in the USA. The foreign competition means the competition
effect from a foreign firm, which can be measured by the log of the proportion
of the import goods to the total production value (Kejžar, 2016; Liu et al., 2014;
Wang, Lee, & Hsu, 2014).
The remainder of the article is organised as follows. In the second section, the rela-
tionship between competition and innovation is discussed. The third section presents
the quantile regression model and data issues. In the fourth section, the results of the
quantile regression analysis are presented. Finalsection draws the main conclusion.

The Relationship between Foreign Competition and Make Innovation Activities

Innovation is one of the most important ways for firms to achieve competitive
advantages (Barney, 1991). Competition may shape the form of innovation activi-
ties (Sakakibara & Porter, 2001; Veugelers, 1997; Veugelers & Cassiman, 1999).
A number of studies have highlighted that market structure (product market
competition) affects innovation (Jacobides & Winter, 2012; Jung & Lee, 2010;
Malerba, 2002, 2005). Technological innovations can be used as either a defensive
or an offensive strategy to sustain a firm’s competitive advantage (BurgeSmani &
Wheelwright, 2004).
Some researchers predict a monotonic relationship between competition and
innovation. On the one hand, some predict that as a negative relationship. Innovation
should decline with competition, as more competition reduces the monopoly rents
that reward entry by new successful innovators (Caballero & Jaffe, 1993; Dasgupta
& Stiglitz, 1980). Interestingly, empirical work has shown a positive correlation
between competition and innovation (Blundell, Griffith, & Van Reenen, 1999;
Geroski, 1994; Nickell, 1996). The relationship would be negative if firms are
value-maximising and positive if they are governed by managers who mainly care
about the firm remaining in business (Aghion, Dewatripont, & Rey, 1999).
Other researchers argue that the relationship between competition and innova-
tion is not a monotonic one. Li (2009) find a U-shaped relationship. That means
as competition increases from a low to a moderate level, the likelihood of innova-
tion decreases (Li & Vanhaverbeke, 2009). However, the likelihood of innovation
increases when foreign competition continues to increase from a moderate to a high
level. Conversely, Aghion (2005) found that there is an inverted U-shape relation-
ship between competition and innovation (Scherer & Ross, 1990).
The relationship between competition and innovation is not unambiguous (Li &
Vanhaverbeke, 2009). In the order to obtain objective conclusions, it is necessary
to approach competition and innovation by specifying the competition context
and the type of innovation activities in order to be judged relative and meaning-
ful (Baldwin & Scott, 2013; Tang, 2006). Both competition and innovation have
many dimensions, and different innovation activities are associated with different
types of competitive pressure. Following Liu (2014), we focus on the relationship
between foreign competition and make innovation activities. The main purpose of

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 168   Su Yi, Lin Zhou-Zhou and Wang Chen-Gang

this study is to investigate how foreign competition may influence the likelihood
in generating make innovation activities of a firm.
Innovation is a process of discovery, learning and application of new technolo-
gies and techniques from many sources. That is the process of turning knowledge
into economic activity (Tang, 2006). According to an anti-competition explanation
(Roberts, 1999), under foreign competition in their domestic market (Caves, 1996;
Chung, 2001), firms may explore novel technological opportunities and bring about
innovations (Cohen & Levinthal, 1990).
In the Schumpeterian model, innovation incentives depend upon post-innovation
rents per se (pre-innovation rents were equal to zero), and competition may reduce
innovation incentives (Aghion et al., 2002). The large firms with substantial
monopoly market power have resources and incentives to innovate (Weinberg,
1992), because they seek profitability that arises from monopoly power (Grossman
& Helpman, 1991). The profit from monopoly power will be reinvested in R&D,
which leads to more innovations (Greenhalgh & Rogers, 2006). Some studies argue
that a less competitive environment was conducive to innovation (Grossman &
Helpman, 1991; Ranis & Fei, 1961).
The Schumpeterian model has been extended by allowing incumbent firms
to innovate in an alternative approach. In the new model, innovation incentives
depend upon the difference between post-innovation and pre-innovation rents
(pre-innovation rents were not equal to zero). Therefore, more competition may
end up fostering innovations and encourage R&D investments aimed at ‘escaping
competition’, as it may reduce a firm’s pre-innovation rents by more than it reduces
its post-innovation rents (Aghion, Harris, Howitt, & Vickers, 2001; Aghion, Harris,
& Vickers, 1997). A perfectly competitive market is more likely to foster innova-
tion than a monopoly market (Arrow, 1962; Blundell et al., 1999), in the sense
that the innovator can license the innovation at full market value (Arrow, 1962).
This has been supported by some empirical studies (Arrow, 1962; Blundell et al.,
1999), which have found a positive linear effect of competition on innovation
(Von Hayek, 2005). However, some results offer stronger support for Schumpeter
than for Arrow on the relationship between market structure and the incentives to
innovate (Greenhalgh & Rogers, 2006).
The relationship between foreign competition and make innovation activi-
ties may be non-monotonic, specifically, a U-shaped relationship. This means
as foreign competition increases at a low level, the likelihood of make inno-
vation activities decreases. An increase in foreign competition decreases make
innovation activities when the level of innovation activities is relatively low, but
increases it when the innovation activities level is relatively high.

Data and Methodology

Quantile Regression Model

To fit regression curves to other parts of the distribution of the response variable
is especially problematic for regression models with heterogeneous variances.

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 The Relationship between Foreign Competition  169

Therefore, most regression analyses to date provide an incomplete picture of the

relationships between variables (Mosteller & Tukey, 1977). In contrast, quantile
regression estimates the conditional quantiles of a response variable in a liner model
(Cade & Noon, 2003), providing a complete view of the possible relationships
between a response variable and explanatory variables (Hallock & Koenker, 2001;
Koenker & Bassett, 1978). The regression quantile extends the concepts of quantiles,
order statistics and rankings of the linear model (Gutenbrunner, Jurečková, Koenker,
& Portnoy, 1993; Koenker & Machado, 1999). Statistical theory and computational
routines for estimating and making inferences on regression quantiles are most
suited for a linear model (Cade & Noon, 2003; Gutenbrunner et al., 1993; Koenker,
1994; Koenker & Machado, 1999), but are also available for parametric non-linear
(Koenker & Park, 1996; Welsh, Carroll, & Ruppert, 1994) and non-parametric,
non-linear smoothers (Koenker, 1994; Yu & Jones, 1998).
Quantile regression has been widely applied in different literature streams,
such as elasticity of demand work (Goel & Ram, 2004; Manning, Blumberg, &
Moulton, 1995; Yoo, Simonit, Kinzig, & Perrings, 2014), educational economics
(Arias, Hallock, & Sosa-Escudero, 2001; Eide & Showalter, 1998), economic
growth studies (Andrade, Duarte, & Simões, 2014; Barreto & Hughes, 2004),
wage analysis (Buchinsky, 1994; Garcia, Hernández, & Lopez-Nicolas, 2001; J.A.
Machado & Mata, 2001; Nielsen & Rosholm, 2001), labour economics (Ribeiro,
2001), population economics (Abrevaya, 2002), portfolio investment research
(Bassett & Chen, 2001) and ecological science (Cade, Terrell, & Schroeder, 1999;
Knight & Ackerly, 2002).
Formally, following Koenker and Bassett (1978), a conditional quantile function
can be expressed as follows (Ramdani & van Witteloostuijn, 2010):

Q i ( y i x i) = a (i) + xli b (i) with i ! (0, 1)(1)

In this function, yi is the response variable of observation i, xi is the vector of

covariates representing individual observation i, θ represents the θth quantile, where
quantile refers to a point taken along the cumulative distribution, and subscript
i = 1,2, . . ., n reflects an index for individual observations. Q i ( y i x i) denotes the
θth conditional quantile of yi given xi. By way of comparison, recall that the OLS
regression function is expressed as E ( y x) = n y x = a + xli b, which is the classi-
cal linear function that estimates the conditional mean n y x, namely, the average
value of y for a given value of x (Cade et al., 1999; Koenker & Machado, 1999).
The optimisation problem of the conditional quantile function is as follows:

min
| i y i - xli b (i) + | (i) (1 - i) y i - xli b (i) F(2)
b ! R K <i ! #i: y i $ xilb (i)- i ! #i: y i $ xilb -

In this function, R indicates the dimensions of the independent variables (K ). The

optimisation problem of this function is to search for the θth quantile regression
estimators (β (θ)) that minimise the absolute value of a weighted sum of the residu-
als between observed values (yi) and fitted values (xli b). We assign a weight of

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 170   Su Yi, Lin Zhou-Zhou and Wang Chen-Gang

θ to the points lying below the quantile regression line (the first term in Equation 2),
and a weight of 1–θ to the points located above the quantile regression line (the
second term in Equation 2). Furthermore, the estimated covariance matrix R t is
estimated through
i (1 - i) 1
| t (i) = n (X l X) -1(3)
b ff (i) (0) 2
In this function, ff (i) (0) is the probability density of the error term f (i) evaluated
at the θth quantile of the error distribution (Hao & Naiman, 2007). An estimated
standard error for coefficient estimator ( bt (i)) can be obtained by taking the square
root of the corresponding diagonal element of covariance matrix R t.
Note that the estimation of quantile regression coefficients is based on the
weighted sum of the residuals for the whole sample, and not just on the portion of
the sample at that quantile. Therefore, we never lose degrees of freedom, which
is especially important when the number of observations in the sample is not very
large. The optimisation problem of the quantile regression function can be solved
by linear programming methods (Hao & Naiman, 2007), since the problem is based
on order statistics without having an explicit form (Buchinsky, 1994). Additionally,
note also that quantile regression classifies the sample into low-up to high-level
groups (quantiles) of the dependent variable (y), which is different from simple
categorisation. In quantile regression, the grouping of the dependent variable (y)
is conditional on the independent variable (x); in sample categorisation, grouping
of the dependent variable is just to sort out the value of this dependent variable
(Elsayed, 2007).
Although Stata does not provide any specific command to perform a quantile
regression-based heteroscedasticity test, a quantile regression-based heteroscedas-
ticity test suggested by Machado and Santos Silva (2000) can be implemented by
using qreg2 to solve this problem. Their test statistic can be easily computed as
n times the R2 of the auxiliary regression of t x (u i (x)) on a constant and on appro-
priate functions of x. The test can be performed by comparing the test statistic with
the critical value from the | 2(J - 1) distribution, where J is the number of parameters
in the auxiliary regression (Machado & Santos Silva, 2000).
The Machado–Santos Silva (MSS) test is simple enough to be routinely per-
formed after quantile regression, thereby providing the researcher with informa-
tion not only about the kind of covariance matrix that is more appropriate but also
about the relevance of estimating multiple quantiles (Machado & Parente, 2005).

Data and Measures

Dependent Variables

There is a large body of literature on measuring innovation activities. The most

commonly used measures at the firm level are research and development spending,
patenting activity, innovation counts and total factor productivity (Klette, 1999;

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 The Relationship between Foreign Competition  171

Klette & Griliches, 1996). Following Liu (2014), we divide innovation into make
and buy innovations (Liu et al., 2014). The make innovation activities are linked
to offering new or significantly improved products (Dasgupta & Stiglitz, 1980),
whereas others acquire new technology through outsourcing externally (Bin, 2008).
We focus on the make innovation activities, which can be measured by the log
of the expenditure on new product and technology development (Li & Wu, 2010;
Liu & Buck, 2007).

Explanatory Variables

The prior literature measured competition using different proxies, such as Herfindahl
index (Becker & Dietz, 2004), the ratio of product market size against the number
of competitors (Ang, 2008) and the ratio of market share against the number of
competitors (Wu & Pangarkar, 2010). However, we focus on the foreign competi-
tion, which can be measured by the log of the proportion of the import goods to the
total production value. Confronted with increasing foreign competition, domestic
firms might respond to such competition differently when conducting innovation
activities (Liu et al., 2014).

Control Variables

In line with prior studies, we include a number of other control variables, which
could have influenced innovation activities. First, we included firm size, because
large firms simply have more resources (Ballot, Fakhfakh, Galia, & Salter, 2015), and
they are more likely to be more effective in innovation than small firms (Wu, 2012).
Small companies may be more likely to explore new technological areas by inno-
vating in less-crowded areas (Almeida & Kogut, 1997). Since firm size has been
shown to influence firms’ innovation activities, it is important to control for this
variable (Li & Vanhaverbeke, 2009). Following Ballot et al. (2015), we measure
firm size using log of the number of employees. Second, we included SIC1 category
of firms with the SIC code. Previous studies found that firms in different industries
vary dramatic in their innovation activities (Colombo, Piva, & Rossi-Lamastra,
2014). In neck-and-neck industries, competition is particularly intense and it is
also in those industries that the ‘escape competition’ effect pointed out above is
strongest (Aghion et al., 2002). Third, following Wu (2012), we controlled for
firm age as aged firms would enjoy some advantages of launching new products
(Wu, 2012). Fourth, following Li (2009), we controlled for time, considering the
timeframe from 1994 to 2004.

Empirical Results

All data used in this study were provided by the World Management Survey2. The
final sample size, after removing cases with missing values, comprises 211 com-
panies out of the total 290 companies in the USA that met the criteria. Summary
statistics and sample sizes are presented in Table 1.

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 172   Su Yi, Lin Zhou-Zhou and Wang Chen-Gang

Table 1
Descriptive Statistics

Variable Obs Mean Std. Dev Min. Max.

Make innovation activities 1993 3.6181 1.5923 –1.7720 7.7200
Foreign competition 1993 –1.5994 0.5749 –3.9094 –0.3844
Firm size 1993 6.7760 1.3822 3.0910 10.5427
SIC category 1993 349.0251 40.4636 203 399
Firm age 1993 45.9252 37.6219 4 204
Time 1993 1999.272 3.0821 1994 2004
Source: World Management Survey ([Link]

Table 1 provides the relevant descriptive statistics for our variables. Three
variables (make innovation activities, foreign competition and firm size) with the
exception of dummy variables are transformed into natural logarithms.
The main results are presented in Table 2, reporting the OLS and quantile regres-
sion outcomes. Both the OLS and robust OLS regression show evidence to support
the escape competition effect, which means, on average, the foreign competition
is positively associated with make innovation activities (0.5194***, p < 0.01).
In terms of control variables, the variable of firm size is significant indicating
that firm size has a positive impact on make innovation activities (0.8387***, p <
0.01). The variable of firm age is significant and negatively influences the make
innovation activities (–0.0046***, p < 0.01).
Machado–Santos Silva test results show the following. First, the quantile of 0.25
and 0.50 is significant at the level of 0.1. Second, the quantile of 0.75 and 0.90 is
significant at the level of 0.001. This means the error terms are heteroscedastic,
and we can reject the null hypothesis ‘the variance of the error term is constant
(homoscedastic)’.
The other results in Table 2 are from the quantile regression for θ = 0.1, θ = 0.25,
θ = 0.50, θ = 0.75, θ = 0.90. We find that foreign competition has a significantly
positive association with make innovation activities, except at θ = 0.1(–0.3593,
p = 0.3410 > 0.1). Test shows that the coefficient of foreign competition is not equal
at θ = 0.1, θ = 0.25, θ = 0.50, θ = 0.75, θ = 0.90 (F (4,1964) = 2.87**, p < 0.05).
The quantile regression results show that the effects of foreign competition differ
across the quantiles in the conditional distribution of make innovation activities.
To reveal this, the effects for all quantiles are visualized in Figure 1.
We are particularly interested in how the effect of a foreign competition mecha-
nism varies with the quantiles. Note that we only report the findings for the foreign
competition variable and not for the control variables. We plot the coefficients of
foreign competition variables along the vertical axis and the quantiles along the
horizontal axis. The line in the middle of the shaded area reflects the coefficient
estimates of the quantile regression in different quantiles. The broken line in each
figure provides the standard OLS estimate of the conditional mean effect. The
shaded grey area depicts a 90 per cent point-wise confidence band for the quantile
regression estimates.

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 Table 2
OLS and Quantile Regression Results

OLS Regression Quantile Regression

OLS Robust OLS Q0.10 Q0.25 Q0.5 (median) Q0.75 Q0.90
Explanatory Variables
Foreign Competition 0.5194*** 0.5194*** –0.3593 0.6829*** 0.8141*** 0.6787*** 0.6509***
(0.0946) (0.9856) (0.1399) (0.1424) (0.1290) (0.1092) (0.0944)
Control Variables
Firm size 0.8387*** 0.8387*** 0.9006*** 0.8428*** 0.8563*** 0.8574*** 0.8446***
(0.0211) (0.0213) (0.0312) (0.0318) (0.0288) (0.0243) (0.0211)
Firm age –0.0046*** –0.0046*** –0.0016 –0.0046*** –0.0045*** –0.0050*** –0.0083***
(0.0008) (0.0008) (0.0012) (0.0012) (0.0011) (0.0010) (0.0008)
SIC category Included Included Included Included Included Included Included
Time Included Included Included Included Included Included Included
Constant –2.5630*** –2.5630*** –5.8723*** –2.7258*** –2.4182** –2.7181* 0.1519
(0.6141) (0.7304) (0.9037) (0.9199) (0.8328) (0.7052) (0.6097)
R2 0.5128 0.5128 0.3143 0.3064 0.3196 0.3533 0.4191
Machado–Santos Silva Test for Heteroscedasticity
Prob > chi-square 0.295 0.090 0.086 0.000 0.000
Source: Calculated from the data in Table 1 based on the quantile regression model.
Notes: *, ** and *** represent significance at the 10%, 5% and 1% levels, respectively.
 174   Su Yi, Lin Zhou-Zhou and Wang Chen-Gang

Figure 1
Estimates for Foreign Competition

Source: Drawn from quantile regression model.

Figure 1 shows that the foreign competition has the largest positive effect
around θ = s0.50, being smaller in all quantiles above and below 0.50. Almost all
coefficients of the quantile regression are higher than the estimate from the OLS
regression, except at θ = 0.10. This effect is significantly positive, but it is not
significant in the quantile lower than 0.20. Here, the quantile regression analysis
reveals that the effect of the foreign competition is different across quantiles indeed.
In a standard OLS regression, this cannot be revealed as only a single estimate is
produced, which is conditional on the mean. There results of quantile regression
imply that the foreign competition is an effective factor for firms’ innovation in the
quantiles θ = 0.25 and above, but not in the quantiles lower than θ = 0.20(–0.3593,
p = 0.3410 > 0.1). In terms of control variables, the variable of firm size is sig-
nificant and has a positive effect on make innovation activities across quantiles
(θ = 0.1, θ = 0.25, θ = 0.50, θ = 0.75, θ = 0.90). The effect of the firm size variable
on innovation is negative and significant across quantiles, except the quantile at θ
= 0.1(–0.0016, p = 0.2690 > 0.1).

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 The Relationship between Foreign Competition  175

Discussion and Conclusion

Using data of the US firms, we examine the impact of foreign competition on make
innovation activities by applying the quantile regression method. This study differs
from prior work that analyses the relationship between foreign competition and
make innovation activities through mean regression (Aghion et al., 2001; Aghion
et al., 2002; Correa, 2012; Greenhalgh & Rogers, 2006; Howitt et al., 2005; Li &
Vanhaverbeke, 2009; Liu et al., 2014; Roberts, 1999; Tang, 2006). In contrast, the
quantile regression method generates different estimates at conditional quantiles
(Ramdani & van Witteloostuijn, 2010). This implies that we can explore the impact
of foreign competition on make innovation activities at different levels of innova-
tion activities (0.10, 0.25, 0.50, 0.75 and 0.90). We believe that investigating the
effects of foreign competition on make innovation activities at different levels of
innovation activities provides a better understanding of the conditionality of this
effect, since the empirical literature, to date, does not differentiate these effects
across differently innovation activities firms.
Therefore, our study contributes to advance the knowledge on innovation.
This study extends prior empirical literature on the effects of foreign competition
on make innovation activities. The findings offer valuable empirical evidence
on what determines the intensity of make activities. Hence, the findings help to
provide new insights into the extent to which foreign competition influences the
pattern of innovation activities. Our application of quantile regression revealed
that instead of negative (Caballero & Jaffe, 1993; Dasgupta & Stiglitz, 1980),
positive (Blundell et al., 1999; Correa, 2012; Geroski, 1994; Nickell, 1996) or
inverted-U (Aghion et al., 2002; Howitt et al., 2005), there is a U-shaped relation-
ship between foreign competition and make innovation activities. This means that,
as foreign competition increases at a low level, the likelihood of make innovation
activities decreases (–0.3593). Our findings are consistent with previous research
which found a U-shaped relationship between competition and innovation (Li &
Vanhaverbeke, 2009). However, it should be noted that the likelihood of make
innovation activities increases when foreign competition continues to increase
from a moderate to a high level (0.6829, 0.8141, 0.6787 and 0.6509). This set of
findings suggests that the impact of foreign competition is conditioned non-linearly
by initial innovation activities.
The reason why foreign competition is negatively associated with make innova-
tion activities at a low innovation activities level is that make innovation activities
may be too slow to pre-empt competitive threats (Liu et al., 2014). Firms at a low
innovation activities level do not need good development by innovation, but a
chance to survive. As firm innovation spending increases, the foreign competition
is significantly positive above 0.25 quantiles, reaching its highest point at 0.50
(0.8141***). As firm moves into a top rank, the impact effect will turn back to
0.6787*** and 0.6509***, at θ = 0.75, θ = 0.90, respectively.
The findings in this study have implications for our theoretical understanding.
Specifically, the impact of foreign competition depends on the level of firm innova-
tion activities and underscores Contingency Theory (Liu et al., 2014). Contingency

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 176   Su Yi, Lin Zhou-Zhou and Wang Chen-Gang

theory suggests that all firms’ practices, such as make innovation activities, are
contingent on the firm’s environment (Drazin & Van de Ven, 1985). The key concept
in a contingent proposition is fit, and the fit is between environmental contingencies
and internal configurations, which leads to a greater understanding of this relation-
ship (Donaldson, 2001; Sirmon, Hitt, & Ireland, 2007). Contingency theory has
been used in the area of business strategy (Aragon-Correa & Sharma, 2003; Hofer,
1975; Priem & Butler, 2001), quality management (Das, Handfield, Calantone, &
Ghosh, 2000), and organisational change (Battilana & Casciaro, 2012). Our find-
ings suggest that the impact of foreign competition is conditional on the level of
initial firm innovation activities and the firm’s environment.
This study has also important policy implications. First, the findings from our
research help policymakers understand the conditions under which different types of
innovation activities occur. Increasing foreign competition will bring new competi-
tive pressures for domestic enterprises but may also represent opportunities. The
government can implement a policy on promoting foreign direct investments and
imports of foreign technology from other countries (Guo, 2008; Liu et al., 2011).
The governments of developed economies can design appropriate policy to create
an innovation-enhancing enterprise environment to respond to an intensified foreign
competition. Second, our findings imply that it may be crucial for the governments
of developed economies to adopt a combined technological development strategy,
which encourages indigenous firms to obtain international technology to catch up
with technological leaders, under the competitive pressure.
Liu (2014) found that foreign competition is negatively associated with make
activities in China. We find that, in the USA, only at 0.1 quantile, foreign compe-
tition has a negative association with make innovation activities. Besides, there
is a significantly positive association. In China, the foreign competition plays an
important role in the technological upgrading of Chinese enterprises (Guo, 2008;
Liu and Buck, 2007), and make activities may be too slow to pre-empt foreign
competition. It is more rational for enterprises make buy activities to upgrade
technology in the face of competitive threats. Hence, make activities are feasible
when industries face less foreign competition in China. However, with the continu-
ous improvement of Chinese enterprise innovation ability, the innovation activities
of Chinese enterprises may also change. This means that once Chinese enterprise
innovation ability comes into the developed area, we should note that the relation-
ship between foreign competition and innovation activities will venture to the
opposite side. The government should pay special attention to the guidance and
adjustment of macro-policies. At the same time, China’s negative correlation shows
that the development of China’s enterprise innovation capability has not reached
the developed level. We need to constantly improve the institutional arrangements
to strengthen the protection of intellectual property rights.
There are some limitations to this study. The study is limited in the context of a
single country. Future research could be extended to other countries, especially in
some developing countries, and compare how firms in different countries undertake

Science, Technology & Society 22:2 (2017): 165–181

 The Relationship between Foreign Competition  177

different innovation activities. This study demonstrates that quantile regression

can provide additional insight into the understanding of the relationship between
foreign competition and make innovation activities. We believe that there is a
research opportunity to apply quantile regression widely in the innovation research.

Notes

1. Standard Industrial Classification (SIC) codes are four-digit numerical codes assigned by the U.S.
government to business establishments to identify the primary business of the establishment. The
classification was developed to facilitate the collection, presentation and analysis of data; and to
promote uniformity and comparability in the presentation of statistical data collected by various
agencies of the federal government, state agencies and private organizations. The classification
covers all economic activities.
2. [Link]

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