The Role of Institutions in the Relationship Between Informal Competition and New Product Development in Emerging Economies

ABSTRACT Academic Summary Research has argued that informal competition (IC)—the competitive pressure from firms that are unregistered but derive income from the production of legal goods and services—increases formal (i.e., legally registered) firms' engagement in new product development (NPD) in emerging economies. However, other studies have suggested that IC may decrease such engagement. Drawing on an institutional perspective, we argue that the relationship between IC and NPD is contingent on the level of IC and the influence of formal and informal institutions. A multilevel analysis of 29,520 formal firms across 21 emerging economies indicates an inverted U‐shaped relationship between IC and NPD probability. Low to moderate levels of IC increase NPD probability, whereas higher levels reduce it. The findings also reveal that this relationship varies across emerging economies, with significant cross‐level interactions between IC and elements of formal (e.g., regulatory control, availability of finance) and informal institutions (e.g., survival vs. self‐expression and traditional vs. secular‐rational values) shaping NPD probability. Managerial Summary Informal competition can stimulate formal firms' new product development at low to moderate levels, but high levels of IC can discourage it. Because informal firms spur innovation among their formal counterparts, policymakers should not automatically seek to eliminate IC. Instead, they should consider IC as a changing condition and adapt enforcement to its intensity. At low to moderate levels of IC, minimal enforcement may be appropriate as the innovation and consumer benefits associated with IC may outweigh its costs. As IC becomes more intense and begins to undermine formal firms' NPD, policymakers can tighten enforcement while offering informal firms incentives to formalize. For managers, the findings suggest that the strategic response to IC should also depend on its intensity. When IC is low, formal firms may continue to innovate despite financial constraints; managers can therefore pursue low‐risk, affordable products using frugal innovation methods, while policymakers can support these efforts through improved access to finance. Managers are also well‐advised to consider the institutional context. Unlike their counterparts in countries leaning toward survival values (e.g., India), formal firms operating in societies that lean toward self‐expression values (e.g., Uruguay) are more likely to engage in NPD when IC is low; the probability decreases as IC becomes higher.