The literature on firm dynamics in different developing countries is notconclusive, however research seems to converge in some areas. What is certainlyclear is that these markets have significant structural differences from eachother and especially from developed countries. Starting from the very first developmentalstage in countries with very low levels of GDP and very high barriers forgrowth we consider the type of competition policy that may be appropriate inrelation to market structure. If it is indeed the case that these economies arecharacterized by overly high levels of entry and of poor quality entry, such asnecessity entrepreneurs, followed by low levels of productivity and sizegrowth, we could conclude that the main goal of any policy should be to promotegrowth of the motivated and somewhat innovative firms and deter low qualityentry to prevent distortions and too intense competition for resources in thepost-entry market. It is possible that agglomeration of the more productivefirms is desirable, which would indicate a very relaxed merger policy or eventhe absence of one at least in markets with many small firms.  Secondly, we should consider the policy on collusion. Since resourceconstraints are so large, the policy on horizontal coordination such as jointmarketing or research joint ventures should not be prohibited.

Hard-corecartels may also be a necessary evil. If competition for resources is extremelyhigh, it may be a better option for some firms to collude and use the higherprofits to push out the less efficient firms from the market and gain betteraccess to resources. It is unlikely that a certain type of competition policycan have a positive effect on firm growth, since by its very nature antitrustimposes prohibitions rather than compels action. It is, however, possible thatthe wrong type of policy may be harmful to growth and market development.Unfortunately, that is a difficult question to answer, since we need examplesof competition policy being implemented in least developed countries andconsidering that they have only recently adopted it and are not enforcing itvery effectively, these market structures exist in the absence of competitionpolicy. If we could conclude that cooperation is desirable competition policycould only prevent it rather than encourage it.  A more difficult scenario is when many small firms and few large onescharacterize a market.

Considering some evidence that large firms are moreproductive, it may be that the existence of an abundance of small firmsprevents resources from being concentrated in the large firms and that largefirms face too much competition not in the sense that its market share is atrisk, but in that resources are not flowing to them. If large entrants areindeed more productive and stagnate because of resource misallocation it may bedetrimental to prohibit them from accessing those resources in “uncompetitive”ways. However, if the larger incumbents are not productive and are using theirmarket power to prevent resources from flowing to small productive firms thenit would be beneficial to stop them from doing so.

 

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