Economist (2108): Competition Theory—The Forgotten Theory of Incomplete Competition

Abstract

Economic integration and globalization are mega-trends of the world economy. Economic decision-making is devolving downwards to sub-national units. At the same time, some part of this power has also moved upwards to multiregional organizations, e.g. the EU, due to integration. Knowledge intensive regions, e.g. Silicon Valley or New York in the U.S., are winners of the global agglomeration economies. They are often the hosts of MNC headquarters. The growth of MNCs in number has been remarkable, from 7,000 in 1969 to 100,000 in 2014 (UNCTAD). In the 1960s, MNCs were perceived as big and bad. Today, MNCs are a part of their host nations export capacity and technology assets. Their economies of scale depend on the size of capacity and speed (or intensity) with which it is utilized. Ricardo’s comparative advantage is the key concept in international trade. Since the 1990s, when the WTO was established, the industrialized countries oriented towards Smith’s absolute advantage. An indicator of that is the rapid adoption of Porter’s cluster concept (Coleman, 1980), which refers to that fact that the home country of the cluster tries to domesticate the cluster elements by a hidden mercantilism (Porter, 1990). Schumpeter (1934) distinguished innovation as the main function of entrepreneurship. Schumpeter (1939) referred to the fundamental problem of economic change. In the face of a keen competition, entrepreneurs are obliged to innovative, which is a source of economic growth. Schumpeter gave economists food for thought with the concept of creative destruction (1942). Schumpeter was well aware of the monopolistic power of big firms. He predicted the transition from the competitive capitalism to the trustified capitalism. Schumpeter himself believed that the free market capitalism is the best economic system. John Galbraight completed Schumpeter’s prediction of corporatism. He launched as a parallel concept to trustified capitalism. He believed that large firms have the countervailing power (Galbraight, 1956) that describes a certain level of collusion between large firms and the government. Schumpeter and Galbraith were both worried about the fact that the so-called static economic efficiency was a barrier to innovate. MNCs that operate globally in all markets (goods, services, financing, IPRs, etc.) dominate the international trade of commodities. There are rational reasons for that. The main reason is the large economies of scale available in global markets. Another reason is the evolution of institutions that protect intellectual properties in global context. NMCs have invested in countries like China, owing to impressive economic growth rates. Today, the paradox is