Page 120 - Global Political Economy_Understanding The International Economic Order

NEW ECONO MIC TH EORIE S
perfect or oligopolistic competition in which markets are dominated
by a few large firms. These new theories depict the economy as basi-
cally oligopolistic because ofincreasing returns to scale, cumulative
processes, or some other market imperfections. They recognize the
existence of powerful actors with some control over market forces.
Indeed, especially in the leading technological sectors, a relatively
small number oflarge firms, such as Siemens, Microsoft, and Matsu-
shita, actually dominate the market.
The new theories have all been strongly influenced by research de-
velopments in the field ofindustrial organization. This research,
which emphasizes the importance ofscale economies and ofimperfect
competition in the organization ofindustrial sectors and the overall
economy, challenges the assumption that all economic processes are
characterized by constant returns and perfect competition. Conven-
tional theory, for example, argues that if a firm doubles the input of
both capital and labor, the output ofthe firm will only double and
will, at some point, produce diminishing returns; this assumption
places limits on an individual firm’s capacity to dominate a market.
If, on the other hand, scale economies and increasing returns to scale
do exist, doubling both inputs would more than double the output
and therefore would increase the firm’s productivity. Consequently,
in an industry characterized by increasing returns, a firm with a head
start can increase its output and decrease its average costs much more
rapidly than competitors just beginning production. Indeed, such a
cost advantage could enable an existing domestic firm to establish a
monopolistic market position; also, the region or nation in which
such oligopolistic firms are located could itselfgrow more rapidly
than other regions and nations. In time, the region/nation with oli-
gopolistic firms could surpass and eventually dominate other regions
or nations. In this way, the new theories have profound implications
for the study of international political economy.

Technological Innovation
The new theories emphasize strongly the importance oftechnological
developments for economic growth, the spatial location of economic
activities, and international competitiveness. Technological innova-
tion has become the primary determinant ofeconomic growth in ad-
vanced economies and also ofinternational competitiveness among
industrialized economies. In fact, these new theories permit one to
consider technology or knowledge as a separate factor of production.
The growth rates ofnational economies, the patterns ofinternational
trade, and the overall structure ofthe international economy have
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