Competitive Advantage and Competition Policy in Developing Countries

Competitive Advantage and Competition Policy in Developing Countries

The CRC Series on Competition, Regulation and Development

Edited by Paul Cook, Raul Fabella and Cassey Lee

The book discusses competition from different theoretical perspectives and examines the implications these viewpoints have for policy. The contributors assess competitiveness in domestic markets and the impact of foreign competition. They also review the experiences of a range of countries in developing competition policy and examine both the strengths and weaknesses of these policies.

Chapter 6: Guanxi and Taipans: Market Power and the East Asian Model of Competition

Raul Fabella

Subjects: development studies, development economics, law and development, economics and finance, competition policy, development economics, public sector economics, law - academic, law and development


Raul Fabella INTRODUCTION Solutions to idiosyncratic and non-standard obstacles to production and exchange are par for the course for a special set of players known as entrepreneurs. These hurdles may be technological, organizational and financial or risk-related. In frontier or underdeveloped areas, the common missing ingredient is the absence or the severe inadequacy of formal or stateprovided contract enforcement and property rights protection (North, 1990; Barzel, 2002). Ex-post opportunism makes for a prohibitive transaction cost that results in highly fragmented or even missing markets. Not only is the state remiss in contract enforcement, it may itself serve as a vehicle for expropriatory tendencies among the political elite. For an entrepreneur to thrive, it must solve these twin weak governance problems. The guanxi system, also known as relational contracting, solves the contract enforcement and ex-post opportunism problem by limiting exchanges among players who are also members of a group or community that is subject to an existing, informal but effective, system of sanctions. Guanxibased contracts face lower opportunism risk and transactions cost than, and thus can drive out, those contracts dependent only on absent or weak state-provided or third-party enforcement (TPE). In North’s (1990) phraseology, guanxi is a second-party enforcement mechanism (SPE), drawing its power from community sanction. Williamson (1983) called this genre of effort private ordering in the absence of adequate public ordering. Because political power may be lodged outside this group or community, the guanxi entrepreneur, if successful, also faces considerable expropriation risk. The wielders of political...

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