Enhancing Product Market Payoff in Small and Medium Internet-Based

Firms: A Survey-Based Analysis of Innovation and Competition Factors

Nabil Mohammad Abu Bakar

1 a

, Mahady Hasan

1 b

and M. Rokonuzzaman

Department of Computer Science and Engineering, Independent University Bangladesh, Dhaka, Bangladesh

North South University, Dhaka, Bangladesh

Keywords:

Innovation, Competition, Sustainable Development, Policy Recommendation, Business Process.

Abstract:

This paper aims to explore the relationship between innovation and competition and identify the conditions

that affect the industry’s innovation and welfare. The authors analyze various factors, including the proper-

ties of product market payoffs, to determine whether competition increases or decreases industry innovation.

The ultimate goal of this study is to provide policy recommendations that support innovation and competi-

tion.To achieve this objective, the authors conducted a survey to collect responses from industry professionals

and identify the challenges that hinder innovation and competition. They examined several models and case

studies,to understand how competition drives innovation. Despite the challenges, leading business consultants

found that increased competition leads to higher productivity in various industries, including manufacturing

and services.The study’s ﬁndings reveal that the recommended policy effectively overcomes the challenges

related to innovation and competition sustainability. These ﬁndings have practical implications for regulatory

organizations, highlighting the importance of adopting these policies to ensure innovation and competition for

small and medium-sized internet-based ﬁrms.This paper presents a thorough examination of the correlation be-

tween innovation and competition, outlines the key elements that foster both innovation and competition, and

suggests policy measures to bolster innovation and competition while improving product market outcomes.

1 INTRODUCTION

Competition is a key driver of innovation in any in-

dustry. It affects innovation through two primary

channels (Li and Nguyen, 2017; Reinganum, 1985).

The ﬁrst channel is related to the reduction in the

number of ﬁrms performing R&D(research and devel-

opment), which, holding product market proﬁts equal,

can lead to a decrease in the pace of innovation in

the industry. The second channel is associated with

the direct effect of competition on the product mar-

ket payoffs, and thus, the proﬁt gap that exists be-

tween the market leader and its followers. As a re-

sult, competition in the product market can affect the

incentives for ﬁrms to innovate. The speciﬁcs of the

product market game determine whether a lessening

of competition in the product market will increase

or decrease the proﬁt gap between leaders and fol-

lowers (Shimomura and Thisse, 2012; Bresnahan and

Reiss, 1991).

https://orcid.org/0000-0002-0818-150X

https://orcid.org/0000-0002-9037-0181

The impact of competition on innovation has been

a subject of considerable interest in the economic lit-

erature. While some studies suggest that competition

stimulates innovation by incentivizing ﬁrms to invest

in R&D and preventing monopolies from stiﬂing in-

novation, others argue that intense competition may

hinder innovation by discouraging ﬁrms from taking

risks and investing in R&D (Grifﬁth and Van Reenen,

2021). Industries with less competition tend to inno-

vate less, while ﬁrms with high market shares have

greater incentives to innovate preemptively (Bloom

et al., 2002). Nonetheless, some studies show a weak

positive relationship between R&D intensity and con-

centration, indicating that fewer ﬁrms can proﬁtably

participate in markets with high ﬁxed costs resulting

from R&D competition (Sutton, 2007). Despite this,

competition remains a crucial factor in R&D, as ﬁrms

invest in R&D to gain a competitive advantage in the

market (Marshall and Parra, 2019).

There is no clear consensus on the relationship

between competition, R&D investment, and innova-

tion. While some research indicates that competi-

tion encourages innovation, other studies suggest the

154

Bakar, N., Hasan, M. and Rokonuzzaman, M.

Enhancing Product Market Payoff in Small and Medium Internet-Based Firms: A Survey-Based Analysis of Innovation and Competition Factors.

DOI: 10.5220/0012096600003552

In Proceedings of the 20th International Conference on Smart Business Technologies (ICSBT 2023), pages 154-161

ISBN: 978-989-758-667-5; ISSN: 2184-772X

 2023 by SCITEPRESS – Science and Technology Publications, Lda. Under CC license (CC BY-NC-ND 4.0)

opposite. Further research is needed to comprehend

the complexities of this relationship and its implica-

tions for both ﬁrms and policymakers (Bessen and

Maskin, 2009). Leading business consultants such as

Michael Porter (Porter, 2011) and a team from McK-

insey Global Institute (Manyika et al., 2010) have in-

dependently discovered that increased product mar-

ket competition among ﬁrms within a nation leads

to higher productivity for companies in that country.

Nevertheless, cross-industry studies are challenging

because isolating the effect of competition is difﬁ-

cult. Therefore, the connection between innovation

and competition should be approached with caution.

However, it is evident that a measurable relationship

exists between innovation and R&D, as evidenced

by documented co-integration (Hanel and St-Pierre,

2018).

Innovation and competition have become the most

challenging activities faced by organizations in to-

day’s business environment, yet they often lack regu-

latory support. According to our survey, 62.5 percent

of companies are facing challenges related to regula-

tory policies, while 43.56 percent are struggling with

market competition. To gain a deeper understanding

of these challenges, we conducted an online survey

with 11 small and medium internet based ﬁrms , with

participation from key roles such as Project Manager,

CTO, Product Owner, Business Developer, Legal Ad-

visor, and CEO. The survey utilized questionnaires

speciﬁcally designed to map out the areas of innova-

tion and competition, as well as their relationship to

product market payoffs.

The key questions for this research are given be-

low,

Q1. What measures can be taken to foster partnership

and enhance cooperation among business research

and development?

Q2. Which regulations are in place to ensure a fair

and competitive environment, with minimal barriers

to entry for new players, such as the implementation

of net neutrality for internet-based ﬁrms?

The main objective of this paper is to conduct a

comprehensive analysis of the relationship between

competition and innovation, while identifying the key

drivers that foster both. Additionally, this study pro-

poses policy recommendations that can be imple-

mented to promote innovation and competition. To

achieve these goals, we conducted a review of exist-

ing research papers, followed by a survey of 11 small

internet base ﬁrms to identify gaps in the existing lit-

erature. Our survey revealed that many companies

face similar regulatory challenges, and while some

have partially overcome these challenges, others are

unable to compete in the market due to their status as

start-ups. To address these issues, we propose a policy

guideline that considers the product market payoff, ul-

timately aiming to maximize innovation and compe-

tition. This paper presents an in-depth examination of

the correlation between competition and innovation,

highlighting the key drivers that foster innovation and

competition. Furthermore, it puts forward sugges-

tions for policies to bolster innovation and competi-

tion. Finally, the study concludes with a concise sum-

mary.

2 RESEARCH BACKGROUND

Blundell, Grifﬁth, Van Reenen (Blundell et al., 2002)

found evidence that less competitive industries inno-

vate less, which is consistent with the second princi-

ple, while ﬁrms with a high market share have greater

incentives to preemptively innovate, which is consis-

tent with the fourth principle.

Peter Howitt (Howitt, 2007) argues that competi-

tion policy should not be relaxed in hopes of boosting

innovation, as more competition actually strengthens

the incentive to innovate.However, some studies have

observed a weak positive relationship between R&D

intensity and concentration, which can be explained

by fewer ﬁrms being able to proﬁtably ﬁt in markets

with high ﬁxed costs resulting from R&D competi-

tion (Sutton, 1999).

In a study by Lin and Wu (Lin and Wu, 2021),

they examine the impact of competition on ﬁrm inno-

vation and ﬁnd evidence of a non-linear relationship.

Their ﬁndings suggest that moderate levels of compe-

tition can stimulate innovation, while excessive com-

petition may have a negative effect.In a deterministic-

R&D model, Dasgupta and Stiglitz (Dasgupta and

Stiglitz, 1980) study the role of product market com-

petition in a scenario in which symmetric ﬁrms com-

pete like Cournot and in developing process innova-

tions. Under an isoelastic demand assumption, the au-

thors show that an increase in the number of ﬁrms de-

creases each ﬁrm’s investments, but increases aggre-

gate investment. Reinganum (Reinganum, 1985) in-

corporates dynamics by studying a sequence of patent

races where ﬁrms compete through a ladder of inno-

vations. She ﬁnds results analogous to DS in a con-

text where product market payoffs are unaffected by

the number of competitors.

Aghion et al. (Aghion et al., 2001; Howitt, 2005)

and other follow-up papers have examined the im-

pact of product market competition on innovation de-

cisions in duopolistic markets. In these models, the

duopolists compete in prices, and competition is cap-

tured by the degree of substitution between the prod-

Enhancing Product Market Payoff in Small and Medium Internet-Based Firms: A Survey-Based Analysis of Innovation and Competition

Factors

155

ucts sold by the ﬁrms. The authors observe that in-

novation is driven by the ”escape competition” effect,

i.e., the difference between the payoffs before and af-

ter the introduction of an innovation. When there are

substantial gains to be enjoyed by ”escaping,” innova-

tion is more likely to occur.

According to several studies, there is evidence of

an ”inverted U” relationship between market compe-

tition and innovation. Speciﬁcally, industries with

oligopolistic market structures, where there are only

a few dominant ﬁrms, have been found to exhibit

greater levels of innovation compared to industries

with either highly competitive or monopolistic struc-

tures (Baumol, 2002a; Sutton, 1991).

For instance, Baumol (Baumol, 2002b) argues

that oligopolistic industries incentivize ﬁrms to inno-

vate due to the presence of strong competitive pres-

sures and the need to differentiate their products from

those of their rivals. In contrast, monopolistic in-

dustries may lack the same competitive pressures,

while highly competitive markets may lead to a ”race

to the bottom” in terms of innovation as ﬁrms fo-

cus on cost-cutting rather than product differentia-

tion (Sutton, 1991).According to a study (Zitzewitz,

2003), in the tobacco industries of the United States

and United Kingdom, periods of greater competition

were associated with more rapid technological inno-

vation, despite both industries having been monopo-

lies in different decades. However, such case studies

are not entirely conclusive, as cross-industry compar-

isons face challenges in isolating the effect of compe-

tition (Howitt, 2004).Despite the challenges, greater

product market competition among ﬁrms within a na-

tion leads to higher productivity for ﬁrms in that coun-

try across a range of industries, including manufactur-

ing and services (Syverson, 2004).

Moreover, some researchers have suggested that a

strengthening of competition policy is likely to have

a positive overall effect on innovation, which con-

tradicts Schumpeterian theories (Howitt, 2005). In

general, it seems that the relationship between mar-

ket competition and innovation is complex and varies

across industries and circumstances.The level of com-

petition in a market can signiﬁcantly impact ﬁrms’ in-

centives to invest in R&D. This is because ﬁrms invest

in R&D to gain a product market advantage, which

is inﬂuenced by the level of competition and the re-

sulting product market payoffs (Marshall and Parra,

2019).

Several studies have found a positive and signif-

icant effect of business, public, and higher educa-

tion R&D on innovation (Cabral, 2000; Gavil et al.,

2002). Business R&D, in particular, is seen as neces-

sary for the development of new and innovative prod-

ucts and services (Wei et al., 2001).However, one po-

tential drawback of competition is the possibility of

excessive R&D expenditures in a patent race (Mar-

shall and Parra, 2019). This means that ﬁrms may

engage in costly R&D efforts solely to obtain patents

and block their competitors, rather than to develop

innovative products that beneﬁt consumers.The main

focus of our article is to analyze the current policies

and processes, and identify the crucial areas of in-

novation and competition that can assist small and

medium-sized software companies in increasing their

proﬁtability in the product market. The primary ob-

jective of our survey is to propose policy recommen-

dations that can ensure the sustainability of innova-

tion in small and medium-sized internet-based ﬁrms.

3 RESEARCH DESIGN AND

METHODOLOGY

The main purpose of this study is to investigate

the relationship between innovation and competition

among internet-based ﬁrms and provide policy rec-

ommendations for developing countries to support

their business continuity. In order to achieve this goal,

we are focusing on key research questions Q1 and Q2,

as mentioned in the introduction. To analyze the cur-

rent scenarios of small internet based organizations,

we reviewed previous research conducted, to explored

the relationship between productivity, economic pol-

icy, and endogenous growth, and suggested certain

policies for improvement (Howitt, 2004). Addition-

ally, researchers have analyzed related components of

innovation and competition, and facilitated them by

sharing common understanding (Howitt, 2004).

To address the challenges faced by internet-based

ﬁrms in Bangladesh, we conducted a survey with 11

ﬁrms, including CEOs, CTOs, product owners, legal

advisors, and business developers. The ﬁrms were

classiﬁed based on metrics such as age, size, project

or service-based, number of employees, and location.

After analyzing the data, the author identiﬁed the

challenges they face and proposed policy recommen-

dations that consider budget limitations, resources,

innovation timelines, and maximize product market

payoff. Our goal is to provide a clear understand-

ing of the major challenges faced by internet-based

ﬁrms and propose policy recommendations to over-

come those challenges.

To evaluate the existing challenges, we collected

data through both online and ofﬂine surveys. To eval-

uate the data, we followed two methods: Analyzing

Factors and Reliability Analysis. Factor analysis is

used to assess observable variables such as perfor-

ICSBT 2023 - 20th International Conference on Smart Business Technologies

156

mance in speciﬁc areas. It is also useful for summariz-

ing a large amount of observations into a smaller num-

ber of factors. At the early stage of the survey, the au-

thor set the following 3-point scale for each question:

1-No, 2-Partial, 3-Yes. Then the author calculated the

average value of each factor area to assess those orga-

nizations and be able to understand the gaps.

After collecting the data, we followed Reliabil-

ity Analysis. Basically, reliability analysis refers to

the consistency of measurement. This method can be

used to evaluate the survey questionnaire. The mean,

median, and mode are three ways of calculating the

average. The author can use the scale for each ques-

tion to assess responses from surveys, and each re-

spondent represents their activities, whether they in-

volve innovation or completion.

4 FINDINGS

4.1 Characteristics of Firms Towards

the Topic

In the conducted research, 11 small and medium-

sized internet-based companies were evaluated based

on multiple criteria, including work experience, com-

pany size, location, and job positions. The survey

gathered data from participants with varying levels

of work experience, with 50% having 5-10 years of

experience, 45% having 2-5 years of experience, and

5% having less than one year of experience. The ma-

jority of respondents identiﬁed as project managers

(25%), CEOs (25%), CTOs (20%), business devel-

opers (10%), legal advisors (10%), and product own-

ers (10%). Table 1 provide valuable insights into the

characteristics of the surveyed companies and their

respective workforces.

4.2 Trend Followed by Company

We have received 24 responses from these 11 compa-

nies across different roles for a set of 23 questions

focused on various factor areas. Our research was

based on nine factor areas, as discussed in previous

studies (Marshall and Parra, 2019; Carayannis and

Campbell, 2009; Carayannis and Rakhmatullin, 2014;

Foundation, 2012; Baker, 2007; Merges and Nelson,

2007).

The aim of this study was to understand the trends

of small internet-based companies. To achieve this

goal, a survey was conducted and the average value

of each question was calculated based on the factor

area. Table 2 shows the percentage of factor areas

Table 1: Survey proﬁle characteristics.

Title Measure

Total Number of company 11

Respondent Experience 50% 5-10 years

45% 2-5 years

5% 0-1 year

Product Types 100% internet

based

Product market place Bangladesh

Respondent Location Bangladesh

Respondent Role project managers

25%, CEO 25%,

CTOs 20%,

business devel-

opers 10%, legal

advisors 10%,

product owners

10%

Company Size 20-70 employees

and reﬂects the trends in internet-based ﬁrms. The

authors analyzed the average value of each factor area

to determine the challenges faced by internet-based

ﬁrms in terms of innovation and competition. This

analysis helped the authors to understand the trends

and reasons behind the ﬂuctuation in product market

payoff.

Table 2: Percentage of following Factor Area.

Factor no. Factors Responses

F1 Competition

among rivals

43.5

F2 less incentive to

invest in R&D

62.5

F3 Antitrust inter-

vention

18.75

F4 First movers gain 32.5

F5 Companies pre-

venting new

entrants

37.5

F6 Regulatory, mon-

etary, tax policy.

62.5

F7 Procurement,

workforce, mar-

ket access

43.75

F8 Potential proﬁt 70

F9 Pre-innovation

competition.

4.3 Reliability Analysis

Reliability analysis is a method used to assess the

properties of measurement scales and the items that

Enhancing Product Market Payoff in Small and Medium Internet-Based Firms: A Survey-Based Analysis of Innovation and Competition

Factors

157

make up those scales (Gemino et al., 2021). In our

study, we used reliability analysis to determine if our

questionnaire was related to the nine factor areas of

innovation and competition. The questionnaire con-

sisted of 23 questions in total.

To measure the reliability of the questionnaire, we

employed Cronbach Alpha method, which is a coef-

ﬁcient of reliability that assesses internal consistency

based on the average inter-item correlation. In Ta-

ble 3, the number of items refers to the 23 survey

questionnaires. According to the general rule, the ac-

ceptable level of reliability alpha is in the range of

0.6-1.0 (Gemino et al., 2021). Our study obtained

a Cronbach Alpha value of 0.943, which indicates a

strong level of internal consistency and a satisfactory

level of reliability for the survey questionnaire.

Table 3: Unwavering quality insights.

Cronbach Alpha Cronbachalpha

Based on Stan-

dardized Things

Item No

0.943 0.940 23

5 SURVEY RESULT ANALYSIS

5.1 Factors that Effect Innovation

Public policies, such as regulatory, monetary and

tax policy, procurements, standards, human capital

of the workforce, and market access, play a crucial

role in creating an environment that fosters innova-

tion (Foundation, 2012). These policies can have a

signiﬁcant impact on the innovative capabilities of

ﬁrms and their ability to compete in the market.

The potential proﬁt from innovation is another im-

portant factor that inﬂuences a ﬁrm’s innovation ef-

forts. The size of the expected reward to innova-

tion depends on several factors, including the size of

the innovation, the size of the market, and the extent

to which innovating eliminates the innovator’s proﬁt

from its pre-innovation technology (Baker, 2007). A

larger potential proﬁt from innovation can provide a

stronger incentive for a ﬁrm to invest in research and

development.

However, a ﬁrm facing less pre-innovation compe-

tition, and therefore having a more steeply downward

sloping demand curve, may have a greater legacy ﬂow

of economic proﬁts. As a result, the ﬁrm may have

an incentive to protect its proﬁts by slowing down its

innovative efforts (Merges and Nelson, 2007). This

highlights the importance of competition in encour-

aging ﬁrms to innovate and invest in research and de-

velopment.

5.2 Insights from Survey Analysis

Based on the pivot chart 1 created from the table 2, it

can be seen that the most challenging factor that small

internet-based companies face is ”Potential proﬁt”

(70%). This is followed by ”Less incentive to in-

vest in R&D” (62.5%) and ”Regulatory, monetary,

tax policy” (62.5%). Other factors such as ”Compe-

tition among rivals” (43.5%), ”Companies preventing

new entrants” (37.5%), and ”Procurement, workforce,

market access” (43.75%) also play a role in the chal-

lenges faced by these companies. However, factors

such as ”Antitrust intervention” (18.75%) and ”Pre-

innovation competition (25%) appear to be less sig-

niﬁcant compared to the other factors. Overall, this

pivot chart provides a visual representation of the key

factors that affect small internet-based companies and

can be used to inform further analysis and decision-

making.

Figure 1: Key factors affecting small internet-based compa-

nies.

5.3 Regression Graph

The results of the regression analysis suggest that cer-

tain factors, speciﬁcally F2, F8, and F6, located above

the linear regression line (outliers), got the highest

priority from companies. These ﬁndings reveal areas

where companies facing difﬁculties and can serve as a

guide for policy recommendations with the aim of en-

hancing the product market payoff. See the following

ﬁgure 2.

6 POLICY RECOMMENDATION

Based on analysis of the data, the authors suggest pol-

icy recommendations that take into account factors

such as innovation, competition, budget constraints,

and available resources, with the ultimate goal of

maximizing product market returns. These policies

ICSBT 2023 - 20th International Conference on Smart Business Technologies

158

Figure 2: Linear regression.

recommended to address the particular obstacles to

innovation and competition encountered by internet-

based companies.

6.1 Antimonopoly and Merger

Based on our survey and analysis, it appears that small

and medium internet base ﬁrms are facing signiﬁ-

cant competition from large corporations. To address

this issue and promote innovation, the authors recom-

mend implementing anti-monopoly and merger poli-

cies (Baker, 2007; Gemino et al., 2021).

a. Reversal of previous mergers that have reduced

competition: Reversing previous mergers that have

resulted in reduced competition can be an effective

way to restore competition and promote innovation.

This can be done by breaking up the merged compa-

nies or requiring them to divest some of their assets.

b. Laws and regulations geared towards prevent-

ing dominant companies from preventing new en-

trants: Laws and regulations that prevent dominant

companies from using their market power to prevent

new entrants can help to promote competition and in-

novation. This can include measures such as prohibit-

ing exclusive dealing, tying arrangements, and preda-

tory pricing.

c. Disallowing shareholders’ horizontal share-

holdings: Disallowing shareholders’ horizontal share-

holdings can prevent them from acquiring signiﬁcant

stakes in multiple companies in the same industry.

This can help to prevent the formation of interlock-

ing ownership structures that can reduce competition.

d. No shareholder should be able to buy more than

5 percent of competitors in the same industry: Lim-

iting the amount of shares that a shareholder can ac-

quire in competitors in the same industry can help to

prevent the concentration of ownership and promote

competition.

e. Speeding up antitrust trials rapidly to ensure

laws are enforced: Speeding up antitrust trials can

help to ensure that laws are enforced in a timely man-

ner and can prevent companies from engaging in an-

ticompetitive practices for extended periods.

f. Eliminating frequent appeals: Eliminating fre-

quent appeals can help to reduce the time and cost of

antitrust trials, which can help to promote competi-

tion and innovation. However, it is important to en-

sure that there are sufﬁcient safeguards to protect the

rights of defendants.

6.2 Regulation

Our ﬁndings suggest that small ﬁrms are particularly

concerned about market payoff. Implementing the

proposed regulations can help to ensure fair compe-

tition in the market, which can result in better product

market payoff for all ﬁrms, including small ones.

a. level playing ﬁeld where new entrants face low

barriers to entry, such as passing net neutrality for

internet-based companies (Vandal, 2017).b.Creating

rules that reduce switching costs and customer lock-

in, which promote competition by eliminating barri-

ers to entry (Brynjolfsson et al., 2013).

6.3 Patents and Copyright

Encouraging competition once patents expire, such

as faster approval of generics and the importation of

generics from developed countries to under developed

countries, which can promote innovation and serve

the public interest.

7 CONCLUSION

The primary objective of this study is to enhance the

product market payoff of small and medium internet-

based ﬁrms through the lens of innovation and com-

petition. To achieve this goal, the authors conducted

a survey to map out the areas of innovation and com-

petition factors, along with policy recommendations.

Our research focuses on innovation and compe-

tition, with speciﬁc factor areas outlined in Table 1.

Using various research methodologies, the authors

evaluated the existing practices and policies of these

ﬁrms, and related them to standard policies and pro-

cesses to offer suggestions for improving competi-

tion and product market payoff. The authors received

24 responses from 11 internet-based ﬁrms, which en-

abled us to identify their gaps and activities regarding

innovation and competition. Through result analysis,

the authors elaborated on the factors that impact inno-

vation and competition in internet-based products. Fi-

nally, authors proposed policy recommendations that

consider budget limitations, resources, and ultimately

maximize product market payoff.

Enhancing Product Market Payoff in Small and Medium Internet-Based Firms: A Survey-Based Analysis of Innovation and Competition

Factors

159

Future research in this ﬁeld should prioritize iden-

tifying and addressing the factor areas that have the

greatest impact and optimizing any gaps. To gain a

better understanding of the reasons behind ﬂuctua-

tions in speciﬁc factors, researchers should analyze

trends in greater detail. In addition, conducting fur-

ther surveys to validate product market payoffs and

performing more comparative evaluations with the

company’s internal processes would be advantageous.

Implementing standard policies and existing policies

in parallel is critical to ensure a continuous improve-

ment process. In order to improve speciﬁc factors,

it is essential to conduct a comprehensive analysis of

that area and identify all possible related tasks. Such

an approach would have a signiﬁcant impact on en-

hancing competition and promoting innovation.

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