Market concentration and innovation in transnational corporations: Evidence from foreign affiliates in central and eastern Europe

Purpose – The main research question of this contribution is whether local market concentration influences R&D and innovation activities of foreign affiliates of transnational companies.

Methodology/approach – We focus on transition economies and use discriminant function analysis to investigate differences in the innovation activity of foreign affiliates operating in concentrated markets, compared to firms operating in nonconcentrated markets. The database consists of the results of a questionnaire administered to a representative sample of foreign affiliates in a selection of five transition economies.

Findings – We find that foreign affiliates in more concentrated markets, when compared to foreign affiliates in less concentrated markets, export more to their own foreign investor's network, do more basic and applied research, use more of the existing technology already incorporated in the products of their own foreign investor's network, do less process innovation, and acquire less knowledge from abroad.

Research limitations/implications – The results may be specific to transition economies only.

Practical implications – The main implications of these results are that host country market concentration stimulates intranetwork knowledge diffusion (with a risk of transfer pricing), while more intense competition stimulates knowledge creation (at least as far as process innovation is concerned) and knowledge absorption from outside the affiliates' own network. Policy makers should focus their support policies on companies in more competitive sectors, as they are more likely to transfer new technologies.

Originality/value – It contributes to the literature on the relationship between market concentration and innovation, based on a unique survey database of foreign affiliates of transnational corporations operating in Eastern Europe.