Can Small Firms Innovate Away From Competition?

Abstract In this paper we test whether innovation allows entrepreneurs to navigate their way out of highly competitive markets into calmer waters where competitive pressures are reduced. In doing so, we establish three key findings: first, in line with the Schumpeterian creative destruction theory, our results document a decreasing marginal effect of prior innovation on consecutive perceived competition, an effect that is stronger for small firms operating in more competitive markets; then, we highlight the different synergistic effects generated by the complementarity between tangible and intangible innovation activities in competitive and oligopolistic markets that support the Schumpeterian view; finally, we establish that such synergies have proven crucial in navigating out of the COVID‐19 pandemic.