The paper exploits a comparative panel survey of manufacturing firms in Ghana, Kenya, and Tanzania to investigate the relationship between product market competition and innovation. We find evidence that the relationship between product market competition and innovation is non-linear and displays an inverted U shape which is robust over several different specifications. More specifically our results demonstrate that when competition is low to begin with, an increase in competition has a negative effect on innovation as predicted by the Schumpeterian effect. In contrast, we find that an increase in competition when the level of competition is already high results in faster innovation activity as predicted by the escape competition effect. The interaction of these two opposing effects explains the observed non-linear relationship between competition and innovation. Implications for practice and future research are also discussed.