COMPETITION AND INNOVATION RELATIONSHIP: EMPIRICAL TEST ON INDONESIA BANKING INDUSTRY

This study examined inverted-U relationship between competition and innovation on Indonesian banking industry. The pattern was an output of Schumpeterian and escape competition effect. Innovation level was not measured only specific to reflect a product innovation but rather to measure the overall enterprise’s innovation level by using the concept of technology gap ratio. This method measured the utilized technical efficiency of the technology compared to the utilization of all the potential of existing technology. Banks with low technology gap ratio showed a trend of mergers, bankruptcy, or be acquired by others. It showed an increase of the technology gap ratio after implementation of Indonesian Banking Architecture. It also showed a significant relationship between competitions level, because of the increasing competitiveness of individual banks, with innovation level. The relationship was an inverted-U. So increasing competition ini-tially stimulated more innovation, but at one point, increasing competition tends to limit innovating initiatives