The main research question is whether the local market concentration, in a selected number of transition
economies, influences the R&D and innovation activity of foreign affiliates operating on those markets.
We use discriminant function analysis to investigate differences in the innovation activity of foreign
affiliates operating in concentrated markets, compared to firms operating in non-concentrated markets. The
database consists of the results of a questionnaire administeres to a representative sample of foreign
affiliates in each of the five transition economies. We find that foreign affiliates in more concentrated
markets, when compared to foreign affiliates in less concentrated markets, export more to their own
foreign investor network, do more basic and applied research, use more of the existing technology already
incorporated in the products of their own foreign investor network, do less process innovation, and acquire
less knowledge from abroad. The main policy implication of these results is that concentration stimulates
intra-network knowledge diffusion (with a risk of transfer pricing), while competition stimulates
knowledge creation (at least as far as process innovation is concerned) and knowledge absorbtion from
outside the affiliates’ own network.