Does competition improve economic performance? The conventional argument is that competition drives enterprises to better adapt to their environment and improve their productivity. But the relationship between competition and economic performance has long been controversial.
The positive relation between competition and economic growth is not overwhelming at all either theoretically or empirically. Especially, when the same question is applied for a small open developing country, the relationship between competition and economic performance involves much more complex trade-offs. In this paper, we attempt to examine the relationship between competition and economic performance in the context of Korea’s development process and to draw competition policy implications for Korea and other developing countries.
Was domestic product market competition a major factor in Korea’s economic performance in the last forty years? Korea’s real GDP grew at an average annual rate of more than 7% between 1963 and 2002. However, Korea nurtured large business groups instead of pursuing less concentrated competitive markets, especially through the 1960s and 1970s. Markets in Korea are still dominated by chaebol affiliated companies with highly concentrated structures.
Domestic product competition measured by concentration indicators does not seem to account for much of Korea’s economic performance in the last forty years. It is not certain that other market competition factors such as entry and exit or corporate governance factors such as financial pressure and the role of major shareholders were significant contributing factors in Korea’s economic performance, either. However, there are clues indicating that international competition in export markets and rivalry among chaebols in R&D initiatives have been positive factors in explaining Korea’s economic performance.
Developing countries often take an interventionist approach by encompassing import protection, export promotion, public enterprises, entry licensing and other regulatory controls rather than promoting domestic competition. However, our experience in Korea shows that those seemingly anti-competitive measures may be mostly effective in the early stages of development in the presence of other market pressures such as foreign competition and rivalry among domestic firms.