444 AMERICAN ECONOMIC ASSOCIATION work of neoclassical economics,for preventing a creasing competitiveness,may improve general firm from merging with another firm or from in- welfare in the rich countries as well-although it creasing its share of the market by growth,there will harm those in the monopoly position. are also international.antitrust reasons for pre- venting a firm of one country from taking over a III.The International"Trickle Down" firm in another country or from acquiring or in- Many economists,in dealing with oligopoly, creasing its share of foreign production.Since this prefer to stress,as Schumpeter did,that the com- point can be easily misunderstood,it is important petition that counts lies in creative destruction to stress that this is not a second-best argument through the introduction of new technology and but a genuine argument on antimonopoly grounds new products.In that case,an oligopolistic for interfering in international markets.A re- market structure,even though it interferes with striction on direct investment or a policy to break static optimum allocation,may be a necessary or up a multinational corporation may be in some at least a contributing factor to dynamic opti- cases the only way of establishing a higher degree mum allocation in a private enterprise system,be- of competition in that industry.National anti- cause it allows innovators to capture some of the trust measures cannot substitute for international benefits of their discoveries and thus provides the antitrust when,for example,one of the major po- incentive for research and development.The rec- tential competitors to a domestic firm is its sister ord of the United States shows that one cer- or parent affiliate within the same multinational tainly cannot fault oligopoly on the grounds that group.In short,when we leave the conditions of it does not produce a very rapid rate of techno- perfect competition we lose the assumption of the logical change and product innovation.(Indeed it invisible hand. is easier to argue that the rate of change is too This argument,it should be noted,provides an high.)One can expect international oligopoly via important rationale for the infant entrepreneur multinational corporation to provide the same argument supporting protection.Temporary pro- kind of dynamic environment for the world econ- tection of a weak firm from a stronger firm can omy as a whole. improve the competitive structure of the industry The question of efficiency therefore hinges on in future periods by maintaining numbers.In the the direction of change rather than the rate of present context,the cost of this protection would change.An analysis of this problem involves an have to be borne by the country that offers it excursion into unexplored terrain since we do not while the benefits would accrue to the world as a now have an adequate theory on how corporations whole.Thus,in reverse of the usual arguments, choose between the available paths of innovation. myopic behavior will lead to too little protection We certainly cannot assume that market forces rather than too much.This presents a particularly compel firms to choose the optimum path.It is acute problem in the case of underdeveloped true that an innovation must,to some extent countries.These countries typically do not sell meet the market test for a corporation to survive. commodities or buy capital or technology in com- However,what is at stake here is not whether the petitive markets where there is an established consumer has some choice but rather whether an price at which they can trade whatever quantity oligopolistically competitive market structure they want.Instead,they frequently face only a provides him with the full range of choices possi- few potential buyers of their raw materials or ble.Oligopolists tend to copy each other,and their manufactured goods and a few potential sel- their predictions as to what the consumer wants lers of a particular technology.The price they re- are often self-fulfilling,since in fact this is all ceive or pay therefore depends on their skill and that the consumer is offered.If we had only large strength in bargaining and not on market condi- numbers of independent decision centers could we tions alone.The less developed the country,the assume that all avenues had been explored. greater its disadvantage in the bargaining process Since we cannot possibly treat this complex because it has fewer organizations that are in any topic in any detail in the present paper,let us way a match for the giant companies with which simply examine one theory of innovation closely it is dealing.Given the oligopolistic front main- associated with the multinational corporation and tained by the firms from developed countries,the the international demonstration effect.The mark- underdeveloped countries need to devote an impor- tant share of their scarce resources to building up Sean Gervasi,"Publicite et Croissance Econo- national enterprises which they can control and mique,"Economie et Humanisme,Nov.-Dec..1964 Opu- use in bargaining with foreign oligopolists.Ironi- Harry Johnson,"The Political Economy of lence,"in The Canadian Quandary (MeGraw-Hill, cally,their stronger bargaining position,by in- 1962).444 AMERICAN ECONOMIC ASSOCIATION work of neoclassical economics, for preventing a firm from merging with another firm or from in￾creasing its share of the market by growth, there are also international, antitrust reasons for pre￾venting a firm of one country from taking over a firm in another country or from acquiring or in￾creasing its share of foreign production. Since this point can be easily misunderstood, it is important to stress that this is not a second-best argument but a genuine argument on antimonopoly grounds for interfering in international markets. A re￾striction on direct investment or a policy to break up a multinational corporation may be in some cases the only way of establishing a higher degree of competition in that industry. National anti￾trust measures cannot substitute for international antitrust when, for example, one of the major po￾tential competitors to a domestic firm is its sister or parent affiliate within the same multinational group. In short, when we leave the conditions of perfect competition we lose the assumption of the invisible hand. This argument, it should be noted, provides an important rationale for the infant entrepreneur argument supporting protection. Temporary pro￾tection of a weak firm from a stronger firm can improve the competitive structure of the industry in future periods by maintaining numbers. In the present context, the cost of this protection would have to be borne by the country that offers it while the benefits would accrue to the world as a whole. Thus, in reverse of the usual arguments, myopic behavior will lead to too little protection rather than too much. This presents a particularly acute problem in the case of underdeveloped countries. These countries typically do not sell commodities or huy capital or technology in com￾petitive markets where there is an established price at which they can trade whatever quantity they want. Instead, they frequently face only a few potential buyers of their raw materials or their manufactured goods and a few potential sel￾lers of a particular technology. The price they re￾ceive or pay therefore depends on their skill and strength in bargaining and not on market condi￾tions alone. The less developed the country, the greater its disadvantage in the bargaining process because it has fewer organizations that are in any way a match for the giant companies with which it is dealing. Given the oligopolistic front main￾tained by the firms from developed countries, the underdeveloped countries need to devote an impor￾tant share of their scarce resources to building up national enterprises which they can control and use in bargaining with foreign oligopolists. Ironi￾cally, their stronger bargaining position, by in￾creasing competitiveness, may improve general welfare in the rich countries as well—although it will harm those in the monopoly position. III. The International "Trickle Down" Many economists, in dealing with oligopoly, prefer to stress, as Schumpeter did, that the com￾petition that counts lies in creative destruction through the introduction of new technology and new products. In that case, an oligopolistic market structure, even though it interferes with static optimum allocation, may be a necessary or at least a contributing factor to dynamic opti￾mum allocation in a private enterprise system, be￾cause it allows innovators to capture some of the benefits of their discoveries and thus provides the incentive for research and development. The rec￾ord of the United States shows that one cer￾tainly cannot fault oligopoly on the grounds that it does not produce a very rapid rate of techno￾logical change and product innovation. (Indeed it is easier to argue that the rate of change is too high.) One can expect international oligopoly via multinational corporation to provide the same kind of dynamic environment for the world econ￾omy as a whole. The question of efficiency therefore hinges on the direction of change rather than the rate of change. An analysis of this problem involves an excursion into unexplored terrain since we do not now have an adequate theory on how corporations choose between the available paths of innovation. We certainly cannot assume that market forces compel firms to choose the optimum path. It is true that an innovation must, to some extent, meet the market test for a corporation to survive. However, what is at stake here is not whether the consumer has some choice hut rather whether an oligopolistically competitive market structure provides him with the full range of choices possi￾ble.* Oligopolists tend to copy each other, and their predictions as to what the consumer wants are often self-fulfilling, since in fact this is all that the consumer is offered. If we had only large numbers of independent decision centers could we assume that all avenues had been explored. Since we cannot possibly treat this complex topic in any detail in the present paper, let us simply examine one theory of innovation closely associated with the multinational corporation and the international demonstration effect. The mark- ' Sean Gervasi, "Publicité et Croissance Econo￾mique," Economie et Humanisme, Nov.-Déc, 1964. Harry Johnson, "The Political Economy of Opu￾lence," in The Canadian Quandary (McGraw-Hill, 1962)