Advantage of the Small But Nimble Player in Question

By Peter Lindfield, published in the Telegraph-Journal 1st June 2012

Any discussion about jobs and prosperity inevitably raises the subject of the government’s role in economic development. The ensuing arguments usually revolve around two main groups of thought. The first group is of the view that markets know best and building profitable companies is achieved in the absence of government interference. Regulations, subsidies and excessive rules tend to introduce market distortions and are to be avoided. Their take on Darwin is that he espouses the view of “survival of the fittest”, so it is inevitable that many companies will perish in the heat of competition. This particular version of laissez faire capitalism has become closely associated in the U.S. with the Republican Party ideologies of the Tea Party but has received a warm reception in some quarters in Canada as well. Creating jobs and generating competitiveness are the product but not the goals of profitable companies. In this world, government has no business picking winners and losers.

The second group holds the view that fragile companies need protection. This group also thinks that job creation and competitiveness intrinsically are government objectives. Their rationale is that capital, entrepreneurship and market know-how are often in short supply and may never develop if they are not carefully nurtured by government. In the right context and under controlled conditions, subjecting local industries to external competition is important. However, this requires that the industries have been sufficiently developed so that they do not succumb to the initial blast of foreign competition. This is particularly important since any local firms are likely to be small with few financial resources compared with the multinationals against which they have to compete.

Ironically, both of these perspectives are founded on theoretical models in which governments design finely-tuned optimal interventions and practical considerations. The theoretical language is remarkably similar although the results differ substantially. Both assume government is susceptible to being held hostage by special interests.

For society that has made investments, there is little value in exposing local firms to greater competition if they are most likely to be eliminated and if alternative sources of employment are not available. It is naive to demand market changes designed to produce a so-called level local playing field when competitors are tilting theirs in their own favor.

But at what point does government protection no longer make sense? Do start-ups, small firms and companies in transition merit the subsidies, incentives, inducements and grants that governments lay on every year? Are taxpayers realizing a good return on their investment when they support private corporations? Are we protecting infant industries when they are in their maturity and should either be standing on their own or falling to creative destruction?

Part of the challenge associated with these questions revolves around the mythology of the smaller but more nimble corporation. Laissez faire capitalists contend that small firms can thrive with the right characteristics of management, innovation, strategy and leadership. The objective is to effectively wield that innovation to grow in scope and scale.

Others hold that government must support start-ups. Recent academic research has thrown a spotlight on the critical importance of size and deep pockets in corporate portfolio development. Large multinationals can in fact move very quickly with new models of organization design. Whether economies of scale really matter depends on the industry type, degree of competition among firms, the length and complexity of the supply chain and the maturity of the market. The competitive advantage of the small but nimble player may no longer exist. The key question today is how long companies should huddle under the umbrella of government protection and what return taxpayers are receiving for this protection.

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Filed under economic development, Innovation strategy, Technology engine

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