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This paper provides empirical evidence on the relationship between market competitive pressure and firms' innovation using panel data of Spanish manufacturing firms for 1990-2006. We depart from standard measures of competition, and construct variables capturing the fundamentals of competitive pressure (product substitutability, market size and entry costs) to test the theoretical predictions of Vives [2008, The Journal of Industrial Economics] for free entry. Our results line up favourably with these predictions. We obtain that greater product substitutability and higher costs of entry lead to more process innovation but less product innovation, whereas market enlargement spurs both product and process innovation.

Exit, Liquidation, Acquisition, Competing-risks hazards model, L1, C41, L60,

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