Abstract Even though the rapid development of informal sector promotes economic growth through bringing many job opportunities and meeting diverse consumer demand, it indeed gives a significant impact on operation of Chinese manufacturing.Based on the data of World Bank Business Environment and Enterprise Performance Survey, this paper analyzes the effect of the competition from informal sectors on the innovation activities of manufacturing enterprises. The results indicate that the competition from informal sectors plays a significantly positive role in increasing the tendency and intensity of R&D investment; meanwhile, there shows a significantly positive relationship between the competition from informal sectors and the product innovation activities, but has no significant relationship with process innovation activities. On the contrary,innovation activities of hightech enterprises may not affected by informal sectors. The above conclusions remain valid after controlling for endogeneity with instrument variables.To deal with the competition from informal sectors, manufacturing enterprises increase the investment in R&D to promote the updating the products by imitation innovation and micro innovation, so that they can be distinguished from the informal sectors in the product market.
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