Competition as a Catalyst for Innovation? Assessing SMEs' Attitudes towards Digital Market Regulation and Competition

Hunady, Jan; Pisar, Peter Article Competition as a Catalyst for Innovation? Assessing SMEs' Attitudes towards Digital Market Regulation and Competition ENTRENOVA - ENTerprise REsearch InNOVAtion Provided in Cooperation with: IRENET - Society for Advancing Innovation and Research in Economy, Zagreb Suggested Citation: Hunady, Jan; Pisar, Peter (2025) : Competition as a Catalyst for Innovation? Assessing SMEs' Attitudes towards Digital Market Regulation and Competition, ENTRENOVA - ENTerprise REsearch InNOVAtion, ISSN 2706-4735, IRENET - Society for Advancing Innovation and Research in Economy, Zagreb, Vol. 10, Iss. 1, pp. 399-411, https://doi.org/10.54820/entrenova-2024-0033 This Version is available at: https://hdl.handle.net/10419/317976 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc/4.0/ 399 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Competition as a Catalyst for Innovation? Assessing SMEs’ Attitudes towards Digital Market Regulation and Competition Ján Huňady Faculty of Economics, Matej Bel University in Banska Bystrica, Slovakia Peter Pisár Faculty of Economics, Matej Bel University in Banska Bystrica, Slovakia Abstract Expanding the digital economy represents a major challenge for EU competition policy and regulations. Despite their importance, small and medium-sized enterprises (SMEs) receive minimal attention regarding their perspectives on the issue. Hence, the main aim of the paper is to examine their attitudes towards digital market competition and its regulations. The paper analyses secondary data from the Flash Eurobarometer 510 survey with more than 12,800 observations from EU countries. Moreover, it also identifies potential factors affecting firms’ attitudes based on the logistic regression. Firms’ attitudes seem to be correlated with awareness of the EU competition policies for digital transition. Better-informed firms have more favourable attitudes towards market competition. They are increasingly perceiving competition as a catalyst for innovation. Moreover, they are increasingly reporting significant problems with the lack of competition when applying to digital platforms for customer outreach. Insufficient competition in the digital market appears to be a problem for a significant proportion of SMEs’. We also identified the sectors and countries experiencing the worst problems associated with limited competition in the digital platform market. Smaller firms and those with a long presence on the market are more supportive of the Digital Markets Act as an effective regulation. Keywords: Market Competition, Competition Policy, Innovation, SMEs’ attitudes, Digital platforms, Competition law, digital market regulation. JEL classification: O30, 038, L40 Paper type: Research article Received: 6 May 2024 Accepted: 1 September 2024 DOI: 10.54820/entrenova-2024-0033 Acknowledgments: This work was supported by the Slovak Scientific Grant Agency VEGA, Grant No. VEGA 1/0411/24. This work was supported by the Slovak Research and Development Agency under contract No. APVV-20-0338 "Driving forces of economic growth and survival of firms in the sixth K-wave". 400 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Introduction The rapidly growing importance of the digital economy across industries is currently seen as one of the key economic trends. This economic transformation has consequences for market competition and poses various challenges for effective regulation of these digital markets. The effect of market competition on innovation has been empirically examined by several studies so far. Negassi et al. (2019) used econometric analysis to identify the relationship between competition and innovation. They found significant differences between public and private companies. Inverted U-shape relationships have been found for firms in the public sector but not in the private sector. This is likely due to the overall higher intensity of competition among private firms. Similarly, Polemis & Tzeremes (2019) discover that the higher concentration in the market could enhance innovation capacity to some extent. However, the market situation also negatively affects their technological catch-up ability. Hence, the overall effect of market concentration on innovation appears to have the form of a U-shape curve. On the other hand, Nagessi & Hung (2014) did not find any correlation between the competition index and innovation outputs in the public sector. They argue that product market competition does not stimulate product innovation in this sector. Wang and Wang (2023) also fail to find any effect of competitive pressure on innovation. In this case, they examine the consequences of intense competitive pressure from the informal sector based on a large sample of firms in Eastern Europe and Central Asia. Specific attention needs to be paid to the competition in the digital market. Due to the rapid shift to the digital economy in some sectors, digital platforms have become crucial in establishing contact with customers and suppliers. Hence, the competition and regulation in the digital market could further support or hinder innovation. There are growing initiatives and public policies to maintain fair market competition, which are mainly targeted by digital platform companies (Thatchenkery & Katila, 2023). Consequently, an increasing number of companies have faced substantial fines (Thatchenkery & Katila, 2023). Despite this fact, companies that are trying to digitally transform their businesses are often exposed to pressure from large digital platform enterprises to sign mostly unfavourable contracts (Raskovich et al., 2023). The abuse of market power may have an adverse effect on consumer welfare as well as digital innovation (Raskovich et al., 2023). Regulation of this market therefore appears to be a suitable solution. Especially the competition policy instruments that restrict concentration and enhance competition could be effective. Modifications in regulatory and legal framework conditions have a significant effect on the dynamics of innovations. The negative effect of compliance costs related to new regulations can be more than outweighed by additional incentives to innovate (Blind, 2012). This positive effect of digital market antitrust regulation on digital commitment and digital innovation has been currently shown by Xie & Wu (2024). This is in line with the findings of previous studies (Hunady et al., 2022; Hunady et al., 2024), which found the highest level of digital readiness in countries such as Denmark, Sweden, Finland, and the Netherlands. These countries are also traditionally considered to have the best quality of regulations (Radaelli & De Francesco, 2013). Moreover, Ji et al. (2022) found that suitable government policies can improve digital capabilities. A similar positive effect on innovation has also been attributed to competition pressure in the market (Ji et al., 2022). Many countries have decided to intervene by regulating the digital market. The Digital Markets Act and the Digital Services Act have been adopted in the European Union to pave the way to following rules and regulations (Egorova et. al., 2002). The Digital Market Act (European Union, 2022) represents an essential regulation of the 401 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 business environment in the field of the digital economy in the EU. It predominantly sets regulations for dominant players in digital technology and aims to support sustaining innovation (Larouche & Streel, 2021). The Digital Markets Act (DMA) allows the designation of digital gatekeepers based on their turnover and number of users. It also reduces the extent of national legislation, which further supports the role of the European Single Market (Bergqvist, C., & Choi, Y. S., 2023). The main aim of the paper is to examine small and medium-sized enterprises' (SMEs) attitudes towards digital market competition and its potential regulations. The paper identifies factors affecting their views on the role of competition in innovation and their experiences with a lack of competition when using digital platforms. It examines the characteristics of firms that support the Digital Market Act (DMA) as an effective regulator of digital markets. Significant differences among the industries, countries, and types of firms have been found. There have been several research papers focused on digital market competition and regulation of digital markets from a macroor regulatory perspective. However, there is so far only very limited empirical research examining this problem based on micro-level data. Our paper analyses this problem from the point of view of SMEs. It is crucial to consider their views because they encounter competition and regulatory problems in practice on a day-to-day basis. Secondary data from the Eurobarometer survey has been used to quantitatively assess the attitudes of SMEs’ representatives and factors that potentially affect their views on the problems. This allows us to draw conclusions regarding the role of market competition in innovation and recommendations for digital market regulation. As a result of how the questions were constructed, innovation has been considered as such in general. It can be a digital innovation or any other type of innovative product, service, or process in the company. However, it is likely that when competition is considered a catalyst for innovation in general, it will foster digital innovation as well. Other parts of the research directly address the problem of competition on the market for digital platforms and its perception by SMEs. The final part is focused on SMEs’ attitudes towards regulatory frameworks for the digital market, such as DMA. These four research questions have been developed based on the research aims: 1. RQ: What factors and firms’ characteristics are affecting SMEs’ attitudes towards competition as a catalyst for innovation? 2. RQ: What factors and firms’ characteristics are affecting SMEs’ experiences with a lack of competition when using digital platforms to reach customers? 3. RQ: Do most of the SME's agree with the adoption of the Digital Market Act (DMA) as an effective regulation of the digital market? 4. RQ: What factors and firms’ characteristics are affecting SMEs’ attitudes towards the adoption of the Digital Market Act (DMA) as an effective regulation of the digital market? These four research questions have been examined based on the analysis, which brings novel and unique empirical evidence from microlevel data. The next section provides a literature review related to the role of competition and regulation in innovation and digitalization. We also explain the basic concept of the Digital Market Act. Subsequently, we explain the methodology and data used in the analysis, show the most important results, and summarise the key conclusions and policy implications. 402 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Methodology The primary contribution of this paper is to analyse the factors affecting SMEs attitudes towards competition and regulation in the digital market across all EU countries. As far as we are aware, no other study has examined this problem from firms’ perspectives on such a wide sample of SMEs’. We assume that attitudes towards competition and regulation are based on two groups of factors. Firstly, their attitudes can be based on self-interest when they consider potential costs and benefits related to either stronger market competition or stricter regulation. On the other hand, their attitudes can also be strongly affected by previous experience, knowledge, and risk aversion. In line with both views, it seems likely that attitudes can be different across industries and can be correlated with some firms’ characteristics. In our case, we considered characteristics that can be identified based on the data available in the questionnaire. The empirical analysis is based on data from the Flash Eurobarometer 510 questionnaire relating to May–June 2022. This contains the responses to a series of questions related to SMEs' expectations for an effective competition policy. The questionnaire contains altogether more than 12,000 respondents. However, the unavailable and ambiguous responses to some questions reduce the effective sample to approximately 7,800 respondents. The appropriate regressions were done by restricting the sample to individuals with a full set of responses. The analysis was done using the econometrics package programme STATA. All three dependent variables are related to the responses to a question that asked about SME’s attitudes towards competition and digital market regulation. In the first part, the analysis is focused on the most general question out of three. It deals with SMEs’ attitudes towards competition as a mechanism supporting innovation in general. The second The second question is directly related to their experience with a lack of competition in the digital market. The final question examines their views on the DMA as an effective regulatory tool. The explanatory variables will include those for which either theory or literature suggests an impact on SMEs’ business and decision-making, which could subsequently affect their attitudes towards competition and regulation. They include the firm's age, turnover, and change in turnover in the past two years. The number of employees was not used due to the strong positive correlation with turnover. Moreover, other questions containing answers to different questions have also been used as dependent variables. There is a question about following the updates to the EU competition rules to facilitate green and digital transitions. This was used as a proxy to capture respondents’ awareness of the competition policy and regulation of digital markets. The question related to the power of buyers also captures the competition in the market where the company operates. With strong buyers who are imposing unfair conditions, it is likely that this is a market with high competition on the supply side. The answers to the question asking firms about the importance of different types of improvements to competition have also been used as independent variables. Apart from individual characteristics, we also include countryand industry-dummy variables. The choice of the dependent variables was limited by the availability of micro-level data in the anonymized questionnaire survey. All variables used in the regressions are described in Table 1. 403 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Table 1 Description and coding of variables used in the regressions Variable name Question Coding Dependent variables: Competition encourages innovation For each of the following statements, please tell me whether you totally agree, tend to agree, tend to disagree or totally disagree. Totally agree = 4 Tend to agree = 3 Tend to disagree = 2 Totally disagree =1 Don't know = excluded Lack of competition in digital platforms Have you ever experienced problems caused by a lack of competition when using digital platforms to reach customers? Yes = 1 No = 0 Regulations such as DMA are effective solution (used also as independent variable) Do you agree or disagree with the following statement? “For market sectors with systemic competition problems, regulation that prevents unfair market behaviour from taking place, such as the Digital Markets Act, is an effective solution.” Totally agree = 4 Tend to agree = 3 Tend to disagree = 2 Totally disagree = 1 Don't know = excluded Independent variables: Age How long has your company been in business? Less than 1 year = 1 1-5 years=2; 6-10 y. = 3 More than 10 years =4 Don't know = excluded Total turnover What was your company's total turnover in 2021? Coded based on the value from 1 to 9 Turnover growth Over the past two years, has your company's annual turnover increased, decreased or remained unchanged? Increased= 1 Decreased/ Unchanged = 0 Follow updates Over the last 12 months, have you seen or heard about the ongoing updates to EU competition rules to facilitate the green and digital transitions? Yes, and I follow these updates closely = 1 No=0 Powerful/unfair buyers Thinking about the competition problems, what are the main difficulties you experience? Powerful buyers can impose unfair buying conditions. Yes/Agree =1 No/Disagree = 0 How important do you think the following improvements to competition are?... Remove advantage from non-EU subsidies ... Taking advantages away from competitors who are subsidised by non-EU governments. Very important =4 Fairly important = 3 Not very important =2 Not at all important = 1 Remove advantage from EU subsidies ... Taking advantages away from competitors who are subsidised by EU governments Preventing mergers .... Preventing mergers and acquisitions that reduce competition in a given sector Fighting cartels … Fighting cartels Source: Authors’ work 404 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Logistic regression has been used to examine the dependence between dependent and independent variables. Order logistic regression has been used for models with both multinominal and ordinal dependent variables. As a result of possible endogeneity in the models, we can rather speak of non-causal dependencies or correlations than causal relationships. Even so, we consider our results to be beneficial because there is a lack of empirical studies that would describe similar dependencies. The next section shows some of the most significant results. Results The first part of the analysis is focused on the questions used as dependent variables in regressions. Basic descriptive statistics are shown in the Table 2. Table 2 Descriptive statistics: Competition encourages innovation Competition encourages innovation Proportion Std. error 95% Conf. Interval 1: Totally disagree 0.029 0.0015 0.0264 0.0323 2: Tend to disagree 0.048 0.0019 0.0451 0.0526 3: Tend to agree 0.328 0.0042 0.3203 0.3366 4: Totally agree 0.594 0.0044 0.5851 0.6022 Lack of competition when using digital platforms to reach customers Proportion Std. error 95% Conf. Interval 0: No (no such experience) 0.9336 0.0022 0.9292 0.9378 1: Yes (already experienced) 0.0664 0.0022 .06218 0.0708 Regulations such as DMA are effective solution Proportion Std. error 95% Conf. Interval 1: Totally disagree .0647 .00235 0.0602 0.0695 2: Tend to disagree .1451 .00336 0.1386 0.1518 3: Tend to agree .5358 .00476 0.5265 0.5451 4: Totally agree .2544 .00416 0.2463 0.2626 Source: Authors based on the Flash Eurobarometer 510 data (2022). The proportion of answers is shown in the second column. More than 59% of respondent firms agree with the statement that competition encourages innovation. Hence, we found a very strong positive view of competition as a catalyst for innovation. This is very likely also true in the case of digital innovation. However, there are some significant differences among different types of industries, as can be seen in Figure 1. Interestingly, firms in the energy sector are most often convinced that competition supports innovation. This can be related to the usually low level of competition in this sector due to technical and financial market entry barriers. The information and communication sector and financial services are the other two industries with the highest level of competition. On the other hand, the results show relatively lower agreement with the statement for firms in water supply and waste management, as well as those in transportation, storage, and education. However, the competition has been considered stimulating innovation by the vast majority of SMEs in all 17 industries. 405 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Figure 1 Firms attitudes towards competition as catalyst of innovation (competition encourages innovation) classified by NACE category Source: Authors based on the Flash Eurobarometer 510 data (2022). Approximately 6.6% of respondent firms experience problems related to a lack of competition when using digital platforms. Even though this is a relatively low number at first glance, it is the third highest share out of all seven mentioned areas. The results can be seen in Figure 2. Firms have been asked about their experience with problems caused by a lack of competition in seven different areas (raw materials, transport services, financial services, energy supply, distribution channels, digital platforms, and others). The most serious problems with lack of competition have been reported for raw materials and energy, followed by digital platforms. Hence, the problem seems to be rather significant. Approximately 54.5% of SMEs did not report any evident problems with a lack of competition. Based on the results, most firms also appear to be in favour of regulations such as DMA as an effective solution for markets with systemic competition problems. Altogether, more than 79% of SMEs either tend to agree or fully agree with this statement. 2.273 2.273 34.09 61.36 2.353 3.891 33.08 60.68 3.158 3.158 28.42 65.26 2.027 10.81 37.16 50 3.415 6.352 33.4 56.83 2.92 4.699 32.76 59.62 5.163 6.31 34.99 53.54 3.659 3.659 29.88 62.8 2.57 5.14 28.04 64.25 3.097 2.655 31.42 62.83 3.557 1.976 33.2 61.26 1.78 4.946 31.16 62.12 2.74 4.795 30.59 61.87 1.907 7.084 37.06 53.95 3.088 4.751 36.58 55.58 3.465 3.465 36.63 56.44 3.896 5.751 33.02 57.33 Totally disagree Tend to disagree Tend to agree Totally agree Totally disagree Tend to disagree Tend to agree Totally agree Totally disagree Tend to disagree Tend to agree Totally agree Totally disagree Tend to disagree Tend to agree Totally agree Totally disagree Tend to disagree Tend to agree Totally agree B - Mining and Quarrying C - Manufacturing D - Electricity, gas... E - Water supply, waste... F - Construction G - Wholesale & retail trade... H -Transportation... I - Accommodation... J - ICT K - Finance and insurance L - Real estate M - Professional activities...N - Administrative services... P - Education Q - Human health and social... R - Arts, entertainment... S - Other service activities Percent 406 ENTRENOVA - ENTerprise REsearch InNOVAtion Vol. 10 No. 1 Figure 2 Activities where firms experienced problems caused by lack of competition Source: Authors based on the Flash Eurobarometer 510 data (2022). The second part of the analysis is devoted to the examination of factors potentially influencing or correlated with the stated attitudes of SMEs. These factors have been identified based on logistic regression and order logistic regression. The results are summarised in Table 3. The first column shows the results of regression, with the dependent variable capturing attitudes towards competition as a catalyst for innovation. The results suggest that firms with higher turnover and growing turnover are more in favour of competition as a support for innovation. Hence, bigger and more successful firms tend to see competition as desirable and supportive of innovation. This finding shows that previous experience, knowledge, and other factors could be important. This is also in line with our finding that firms with higher awareness of digital market regulation and those supporting DMA are more in favour of the competition as well. Moreover, SMEs', which tend to support all mentioned tools to further enhance competition (removing EU and non-EU subsidies, preventing mergers and acquisitions, and fighting cartels), also more often agree with the thesis that competition supports innovation. This is fully consistent with our expectations. There can be a potential reverse causality as well. Because of their general positive view of competition, they might be supportive of any kind of measure to further improve competition in the market. SMEs in the following industries (manufacturing, construction, sales, and transport) tend to be reluctant to compete with respect to its positive effect on innovation compared to the reference category (professional, scientific, and technical activities). 12.26 5.549 5.606 9.934 3.75 6.826 1.59 54.49 020 40 60 Percent Raw materials Transport services Financial services Energy supply Distribution channels Digital platforms Other None In which of the following activities you experienced problems caused by lack of competition?