Product market competition is more intense in leading developing countries like Brazil, India, Korea, Malaysia and Mexico than in developed countries. That is the surprising conclusion of new research by Jack Glen and Professors Kevin Lee and Ajit Singh, published in the November 2003 issue of the Economic Journal.
Their analysis of corporate profitability and the dynamics of competition in emerging markets reveals that both the short- and long-term persistence of profitability of firms are lower than those observed for advanced countries, indicating that competition is more intense.
This is a counter-intuitive finding as emerging markets are conventionally regarded as lacking in competition, with many structural factors inhibiting competition, including government-created barriers to entry and exit, small and segmented markets, and a lack of adequate transport infrastructure.
Notwithstanding these arguments about developing country competition deficits, the researchers contend that while their results – which they establish by using ''state-of-the-art'' time series analyses – may be unexpected, they are economically fully plausible. The essential point is that just as there are structural factors against competition in emerging countries, there are many similar pro-competition factors.
In particular, there are the sunk costs of entry, which are far lower in emerging markets than in advanced countries. Another pro-competition factor is the faster rate of growth of emerging countries relative to advanced countries,
which leads to bigger markets, more new entry and greater competition. The researchers also suggest that governments are not always anti-competition, but may themselves organise ''contests'' (non-market competition) for the dispensation of assistance to firms.
The authors refer to studies of mobility and turnover of firms to suggest that entry and exit of firms in many emerging markets is larger that in advanced countries. For example, turnover (the average of entry and exit) rates in Chile, Korea and Taiwan are considerably higher than those observed for the United States and Canada.
The researchers emphasise that it is an empirical question whether procompetition or anti-competition factors are more powerful in a particular country. They suggest however that the balance between pro- and anticompetition
forces is greatly influenced by government policies. The second main focus of their research is the persistence of two components of profitability – namely the profit margin (the ratio of profits to sale) and capital productivity (the output/capital ratio).
This exercise, which has not been carried out before for either developed or developing countries, is significant not only in its own right. It also bears on the Chicago School view of the competition process, which suggests that a corporation''s high profitability is likely to be due to its greater efficiency rather than to its market power.
The authors find that there is greater persistence of capital productivity (which may be regarded as an indicator of efficiency) than of profit margins (which may roughly be regarded as an indicator of monopoly power). This evidence is also compatible under equally plausible assumptions with the view indicating a slow speed of adjustment of low productivity firms to reach higher levels and the best practice technology.
''Corporate Profitability and the Dynamics of Competition in Emerging Markets: A Time Series Analysis'' by Jack Glen, Kevin Lee and Ajit Singh is published in the November 2003 issue of the Economic Journal. Glen is at the International Finance Corporation; Lee is Professor of Economics at the University of Leicester; Singh is Professor of Economics at the University of Cambridge.