This paper analyses the relationship between past innovation output, competition, and future innovation input in a dynamic econometric setting. Vives (2008) serves as a conceptual guide for this paper. We distinguish two dimensions of competition that correspond to the concepts of product substitutability and entry barriers due to fixed costs. Product substitutability was proxied by the firms’ assessment of the easiness of the substitutability of their products, entry barriers due to fix costs by the firms’ assessment of how quickly products become technologically obsolete (slow product obsolescence is positively related to high fixed costs). The theoretical expectation is that (1) the degree of product  substitutability is positively correlated with process innovation effort and negatively correlated with product innovation effort; (2) the extent of fixed costs is positively correlated with process innovation effort and negatively correlated with product innovation effort. Based on firm-level panel data for Germany and Switzerland we obtain consistent results for both countries. Innovation output in t-1 as measured by the sales share of innovative products is positively related to the degree of product obsolescence in t, and negatively to the degree of substitutability in t in both countries. Further, we find that rapid product obsolescence provides positive incentives for higher – primarily product-oriented – R&D investments in t+1, while high substitutability exerts negative incentives for future R&D investment.