With this said, our hypothesis is that, as the more likely vulnerable firms, it is the young enterprises whose proclivity for successful innovation will be most sensitive to the competitiveness of their business environments. The entry barrier factor discussed above leaves us with ambiguous expectations about the impact of the business environment on innovation by the less vulnerable mature firms. And we have no foundation for a prediction on the impact of the number of active rivals (given our controls) on the proclivity of an enterprise of any age to innovate.

# **_2.2 Competition, innovation and inclusive growth_**

The enterprise output growth that arises from innovation and high TFP is inclusive if it provides employment and consumption opportunities for large segments of the population, rather than having the opportunities to participate in the growth process and its benefits less widely shared.<sup>14</sup> In the empirical analyses reported in this paper, innovation is defined as inclusive if it raises employment for less skilled workers, rather than just for higher-skilled workers, professionals and executives. The interpretation of formal low-skilled jobs as a gateway to inclusiveness is premised on the maintained hypothesis that low-wage jobs are a stepping stone for the integration of jobless people into employment, and possibly even to better-paid work in the future, rather than a poverty trap that leads to a re-exit to unemployment and a no-pay lowpay cycle. That low-wage jobs are indeed a means for employment integration of the unemployed over time, and are on average good for an individual‘s or household‘s economic progress has been receiving increased empirical support.<sup>15</sup> Economic theory provides some insight into the role that competition plays in the distinction between impacts of innovation that are inclusive in this sense, versus impacts of innovation that are positive for aggregate social welfare without additional benefits of providing uplift for those in greatest need. In a market environment where enterprise expansion is stultified and repressed by the absence or distortions of needed business inputs, by limitations on access to pertinent output market opportunities, or by regulatory limitations on business flexibility and returns, a firm can profit from lower costs or higher value products, but not nearly as much as it could in a more competitive business environment. Without the practical ability to expand, a firm that has attained lower costs or higher value products through innovation and heightened TFP can gain by maintaining output and (quality-adjusted) price and adapting its production technology to its cost-saving or value-enhancing opportunities. The result is likely more and

> 14 The approach taken in this paper falls within the ambit of inclusive growth analysis as it explicitly analyzes growth through firm-level data and the overall statistical distribution of innovation, TFP and employment growth outcomes rather than only economy-wide aggregates and the statistical mean of outcome variables. It also explicitly explores whether growth has the potential to raise the living standards of broad segments of the population and the reasons why this is so. See Ianchovichina and Lundstrom (2009) for a variety of definitions for inclusive or more shared growth.

> 15 For an overview of the conceptual and empirical literature, the econometric challenges, and supportive evidence, see among others Gruen, Mahringer and Rhein (2011) and Knabe and Plum (2010) _._

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