In my previous post, I argued that the potential gains from globalization are larger than most people think. Since I only addressed possible benefits, it is perhaps unsurprising that readers were quick to point out many potential downsides. The global recession has recently and directly impacted the lives of many, most obviously in the form of rising unemployment — and the finger of blame is often pointed at globalization. Other alleged harms range from environmental degradation and increasing inequality to the rising prevalence of obesity. These are serious issues that deserve serious examination and so I will be looking at them in future blog posts — and will conclude that many such worries are misplaced or greatly exaggerated, but that some do require appropriate policy responses.
In this post I'll focus on one type of market failure: market concentration. There is often a lot of negative discussion buzzing around globalization and market concentration. As people see their local shops replaced with multinational chains and industrial megamergers make headlines, there is a perception that a small number of powerful competitors are taking over the world. This is one of the most widespread beliefs about globalization — in a survey of business executives I conducted a few years back, 58% agreed that "globalization tends to make industries become more concentrated." And among the general public, another survey reveals concentration to be the leading worry about the market economy in the U.S., Britain and Germany: people worry that large corporations will squeeze out small firms.
Why is this so scary? The concern is that if market power is in the hands of a few multinational companies (MNCs), there would be less competition, allowing the remaining global colossi to raise prices or reduce the quality or variety of products and services on offer, harming consumers. But fortunately, the data indicate no such global trend toward increasing industry concentration.
I have been keeping track of industry concentration data now for more than a decade and have analyzed more than 30 industries. As I describe in World 3.0, the data suggest that, in general, globalization isn't leading to higher levels of global concentration across a range of industries. Take the auto industry, for example. Back in the 1920s, Ford accounted for 50% of global auto production. Fast forward to 2010, and a total of six companies accounted for the same percentage. So why were senior executives at auto companies surprised to learn that global concentration has been decreasing in autos since the heyday of Ford's Model T? It is presumably not unconnected to the fact that they have been bombarded for decades now with bombast about how only a handful of full-line automakers will survive globalization.
Autos are not an isolated example. Between the 1980s and 2000s, I compared concentration in 11 industries. Six of these industries showed increases (carbonated soft drinks, cement, steel, oil production, aluminum smelting and paper/board) while five had decreases (automobiles, cargo airlines, copper, iron ore and passenger airlines). On average across these industries 5-firm concentration ratios, or the market share held by the top five biggest companies, did rise from 35% to 38% between the 1980s to the late 1990s. But the five-firm concentration ratios then declined back to 35% by the late 2000s. This is hardly evidence of an across-the-board trend toward rising concentration.
I later repeated the same type of analysis for 37 categories of consumer products. I found that average 5-firm concentration ratios rose from 32% in the early 2000s to 35% at the end of the decade. This rise of 3% was exactly the same as that in the earlier 11 industry sample, in which case the increase in concentration was later reversed.
And not only is globalization not systematically reducing competitive intensity by increasing concentration, it can actually help correct the problems involved when a small number of competitors take control of a market. When competition is lacking in domestic markets, consumers suffer from high prices, poor quality products, or a lack of variety. This is where foreign competition can lend a helping hand. Whether through trade or foreign direct investment, competition from abroad can provide consumers with immediate relief, as well as spur producers to up their game. Returning to my auto example, the entrance of foreign automakers into the U.S. market forced the U.S. big three to improve their quality, design, and efficiency, to the extent that GM is now the market leader in China.
That last point raised the important distinction between global concentration and national or local concentration. In all but the least distance-sensitive industries, it matters more what products are available in your own local or national market and how much they cost there, than what's on offer globally. Even if there were fewer major automakers globally (which there aren't), it's probably still more relevant to know how many automakers are present in a particular country or region, since it's rather difficult and quite costly to go buy a car on a different continent.
What are the policy implications? One approach to problems of excess market concentration is to break companies up before they get to the stage where they can dominate local or national markets. But what makes opening up to foreign producers so much more appealing than breaking companies up is that it combats market power with competition rather than regulation. This can be less disruptive and it leaves a country with its strongest potential international competitors intact. Thus, with respect to concentration, openness can serve as a substitute for regulation.
So, while there are some other factors to think about regarding globalization and market concentration that I describe in World 3.0, my conclusion is that we don't need to get too worried about globalization increasing market concentration. Instead, we should see if opening up can help us address problems of excess national market concentration. What do you think? Share your comments below, and please watch this space for future posts about globalization and other types of market failure: externalities (focusing on the environment), and the risks associated with informational imperfections. I'll also look at market fears that globalization is supposed, by its detractors, to exacerbate.