Can Globalisation Result in Less Efficient and More Vulnerable Industries?

Growing economic globalisation (a means of market extension) may increase the economic vulnerability of firms in modern industries, especially those in which firms experience substantial economies of scale. The possibility is explored that globalisation activates competitive pressures that forces firms into a situation where their leverage (fixed costs relative to variable costs, or overhead cost relative to operating costs or capital intensity) rises substantially. Consequently, they become increasingly vulnerable to a sudden adverse change in economic conditions, such as a collapse in the demand for their industry’s product. This is explored for monopolistically competitive markets and also for oligopolistic markets of the type considered and modelled by Sweezy using kinked demand curves. In addition, globalisation is hypothesised to induce firms to become more uniformly efficient. While this has static efficiency advantages, this lack of heterogeneity in productive efficiency of firms can make for economic inefficiency in the adjustment of the industry to altered economic conditions. It is shown that lack of variation in the economic efficiency of firms can impede the speed of market adjustment to new equilibria and may destabilise market equilibria.

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Working or Discussion Paper
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ISSN: 1444-8890 (Other)
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Series Statement:
Economic Theory, Applications and Issues Working Paper

 Record created 2017-04-01, last modified 2017-04-04

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