State Sponsored Monopolies Limit Innovation
June 2, 2000
Over 50 years ago, Joseph Schumpeter stated that monopolies are good for innovation, since they capture most of the benefits from any research and development project they might pursue. However, evidence around the globe suggests the opposite is true. A recent study argues that poor nations could become rich by adopting superior technology or work practices, but that they are prevented from doing so by dominant monopolistic firms.
The study found that:
- A monopoly-controlled economy operates at half its productive capacity, regardless of the technological level.
- A monopoly will only implement a superior technological change if the new technology is seven times as efficient.
- For a new firm to enter a monopoly-dominated industry, it would require assets greater than 40 percent of an industry's value.
The study points out that many developing nations explicitly protect monopolies or implicitly sanction them. This is usually done through restrictive trade policies or state regulation. The study also notes that previously developing nations such as Taiwan and South Korea had spectacular economies and little resistance to innovation.
Source: "Technology, Monopoly, and Wealth," Economic Intuition, Spring 2000. Based on: Stephen L. Parente and Edward C. Prescott, "Monopoly Rights: A Barrier To Riches," American Economic Review, December 1999.
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