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Purpose: This paper aims to investigate whether Kazakh small- and medium-sized enterprises (SMEs) that claim to compete with the informal sector are more likely to invest in innovation than their competitors who do not perceive such pressure. Design/methodology/approach: Logistic regression and classification trees are performed on the Business Environment and Enterprise Performance Survey (2018–2020) to examine whether the degree of informal competition correlates with a firm's propensity to innovate. Findings: The findings show that informal sector competition is a critical factor that shapes the organizational behaviour of Kazakh SMEs. There is a stimulating positive effect of informal competition on both product and process innovation, depending on its perceived intensity. Originality/value: This study challenges conventional thinking that still views informal sector competition as a barrier to innovation and entrepreneurship by assessing whether innovation is compatible with informal entrepreneurial practice. [ABSTRACT FROM AUTHOR]