Small firm innovation under competition: the role of geographic proximity

While innovation is often considered a strategic response to competitive pressures, this may not hold true for small firms. Drawing from the theoretical perspectives of the liability of smallness and the theory of knowledge spillovers, we construct a framework to explore how small firms’ geographic proximity to competitors influences their innovation intensity. Our study also explores the moderating roles of product competitiveness and performance feedback in shaping the above relationship, addressing the unique dynamics of small firms in competitive environments. Using data from a representative sample of small firms from the China Micro and Small Enterprise Survey (CMES), our findings reveal a negative impact of geographic proximity with a competitor on a small firm’s innovation intensity. Furthermore, we observe that this relationship is negatively moderated by product competitiveness and positively moderated by performance feedback. These findings challenge the conventional wisdom that competition drives innovation, revealing that small firms’ innovation responses are highly contingent on their internal capabilities and performance signals. By integrating the liability of smallness with knowledge-spillover arguments, our study provides a more nuanced understanding of when geographic proximity with competitors constrains or facilitates small firms’ innovation and highlights the importance of firms’ competitive positions in shaping their innovation responses.