This presentation is based on a paper that provides empirical evidence on the relationship between indicators of competitive pressure  and  innovation  incentives  using  panel  data  of  Spanish  manufacturing  firms  for  the period  1990‐2006.  Instead  of  using  standard  indicators  of  competition,  such  as  market concentration  measures  or  firms’  price  costs   margins,  we  analyze  a  number  of  indicators  of competitive  pressure directly related to the demand and cost  conditions faced by firms.  We consider the likely different incentives faced by firms to undertake product innovation versus process  innovation  efforts,  and  estimate  a  multivariate  probit  model  for  the  probability  of firms to introduce product  innovations, process innovations or both. Our results are consistent with the theoretical predictions of Vives (2008) for free entry. We obtain that product market substitutability,  entry  costs  and  market  size  significantly  affect  the  probability  to  introduce product and process innovations but that the effect of these variables differs among the type of  innovation.  We  also  find  different  effects  of  competitive  pressure  on  innovation  when taking into account the efficiency level of the firm relative to the efficiency distribution within its industry.