Incentives to innovate in response to competition: The role of agency costs

•We examine a new firm-level dataset for the Russian manufacturing industry.•We find that managerial ownership is associated with R&D and product innovation.•Managerial ownership increases the stimulating effects of competition on innovation.•Incentive pay reduces the agency problem, but does not change the response to competition.

This paper investigates the role of managerial ownership and incentive payment as potential drivers of innovation decisions by firms and as shifters of the competition-innovation link in the Russian manufacturing industry, where poorly protected property rights and a path-dependent market structure (typical for many transition economies) lead to a variety of outcomes. We use recent survey-based microdata for nearly 2000 non-listed companies in Russia. Our results suggest that managerial ownership, which initially evolved as a means of protecting against and resisting dysfunctional institutions, may stimulate decisions to undertake R&D and risky product innovations. Further, managerial ownership and competition are complementary motivations for R&D and innovation. Incentive payment to hired managers is a positive commitment instrument but has no impact on the competition-innovation link.