Rebalancing Competition Policy to Stimulate Innovation and Sustain Growth

Abstract

Innovation is fundamental to sustainable economic development because input resources are finite. When an economy faces constraints such as land and labour, innovation fuels continued growth through new technologies that utilises the limited resources more productively. Competition contributes to this process by providing a platform for new technologies to replace old ones, but excessive competition may also dampen the incentives to innovate. Unlike economics literature which typically examines how market structure affects innovation, this paper explores how innovation affects the market structure. We observe that, as innovative businesses are scalable, markets are becoming more concentrated from a static point of view. However, as disruptive innovation takes place in the broader ecosystem of separate but related markets, product life cycles shorten, and these concentrated markets become more competitive from a dynamic point of view. We also find that innovative products often do not conform to existing regulations. In order to unleash the full potential of innovation as a driving force for sustained economic growth, we recommend a rebalancing of competition law and policy towards stronger enforcement against lateral anti-competitive activities versus horizontal and vertical ones. We also recommend more emphasis on dynamic competition analysis versus static ones in regulatory decision-making.