Innovation is important because it helps businesses become more productive. But businesses need the right amount of competition to encourage new ideas. Innovation is fundamental to productivity growth. This note shows a strong association between increased competitive pressure and a higher likelihood of innovation.

The note shows that Australian businesses with more competitors are more likely to:

• develop new products
• improve how they work
• introduce new management practices
• try new ways of marketing.

Using survey data and a new measure of local competition, it finds that innovation increases as businesses move from having no competitors to having more competition.

Key points

• The largest increase occurs when competition rises from low to moderate levels. Businesses with five or more competitors are around 10% to 15% more likely to innovate than businesses with no competitors.
• A large share of Australian firms face limited competition – around two in five operate with fewer than five competitors, and one in seven report no effective competition.
• The results suggest substantial scope for competition‑enhancing policies to support innovation, as innovation remains positively associated with competition until competitive pressure becomes very intense.