Product innovation and informal market competition in sub-Saharan Africa

The interaction between formal and informal businesses continues to grow in African countries. Yet, competition from informal enterprises remains one of the top three obstacles formal businesses face in sub-Saharan Africa. This paper investigates the effect of informal competition on the performance of innovative products introduced by formal firms. We combine the World Bank’s Enterprise Survey with the Innovation Follow-up Survey for five sub-Saharan African countries, and construct two indicators of informal competition, one regional (local)-specific and the other one industry-specific. We find that local informal competition has a robust negative effect on product innovation intensity of formal firms, while within industry informal competition enhances innovative sales. However, larger firms are less affected by local informal competition and actually get a boost in innovative sales from informal competition. We argue that local informal competition harms the performance of product innovation, but only for formal firms that lack strategic collaborative ‘footholds’ in the informal economy.