Does competition from informal firms impact new product development? Systematic replication and extension of McCann and Bahl (2017)

The strategic consequences of informal rivalry have attracted little systematic academic scrutiny. McCann and Bahl is one of the first studies to examine the link between the threat of informal competition and new product development by formal firms in developing economies. Grounding their logic in attention-based view, McCann and Bahl find a positive association between informal competition and development of new products, which is weakened by the presence of formal firms, prevalence of irregular payments, and optimism about the regulatory environment. Our investigation examines the reproducibility of McCann and Bahl with the same data and its replication in a different time-period and across different country sub-samples. To address potential endogeneity concerns, we conduct instrumental variable regression and control function analysis, using two distinct instrumental variables. Building on the framework of the original investigation, we emphasize the importance of addressing endogeneity across different country samples both theoretically and empirically. Our findings provide novel empirical evidence on the significance of time and space as boundary conditions in understanding the positive externalities of informal competition.