How does product market competition affect innovation? It is widely be-
lieved that there exist two opposite effects in market; one is Schumpeterian effect
stating that competition attenuates the innovative incentive of laggard firms and
the other is escape-competition effect depicting that competition urges neck-and-
neck firms to innovate. Based on Ahigon’s model (2005), this article applies Tai-
wanese manufacturing industry data from 1997 to 2004 and confirms that there
exists an inverted-U shaped relation between competition and innovation. And
the R&D-size relation is positive in Taiwan which is consistent with Schumpeter’s
hypothesis. Unexpectedly, firm experience has a negative effect on innovation in
Taiwanese electronics industries since the life cycle of their products is relatively
shorter. Hence, younger firms invest more in R&D for the sake of taking the pre-
emptive competitive position. In addition, we show a strong evidence that internal
R&D investments and external technology outsourcing are complementary to each
other in Taiwanese manufacturing firms.

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