Week 2b: Questions - Political Economy of Creative Destruction #5
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The question arises from the paper "Connecting to Power: Political Connections, Innovation, and Firm Dynamics", which explores how political connections impact firm dynamics, innovation, and productivity. The authors show that while political connections can reduce regulatory burdens and increase firm growth in the short term, they can also stifle market competition and innovation over time. This is particularly evident in heavily regulated sectors like utilities or pharmaceuticals. How do the static and dynamic effects of political connections in firms, as highlighted in the model, shape the long-term innovation capabilities of industries, particularly in heavily regulated sectors like utilities or pharmaceuticals, and what policy implications arise from this interplay in fostering competitive markets? |
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The paper "Connecting to Power: Political Connections, Innovation, and Firm Dynamics" examines how political connections impact firm growth, competition, and innovation, particularly in heavily regulated industries. Shifting focus to less regulated sectors, an intriguing question arises: How do political connections influence the growth and innovation dynamics of firms in emerging industries, such as technology startups or green energy? Furthermore, do the benefits of reduced barriers or preferential access to resources outweigh potential drawbacks like reduced competition or over-reliance on political networks? |
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Why do modern large firms rely on non-productive strategies to maintain market dominance, undermining the principles of creative destruction? While creative destruction—the cycle of innovation-driven replacement of outdated technologies—has been a cornerstone of economic growth, recent trends reveal that many large firms prioritize strategies like political connections, defensive patenting, and anti-competitive acquisitions over innovation. These practices, aimed at preserving market positions, hinder competition, discourage new entrants, and stifle long-term productivity growth. Factors such as regulatory inefficiencies, entrenched incumbency, and misaligned incentives exacerbate this trend, creating barriers to innovation and economic dynamism. |
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Question for Thursday: Barriers to Creative Destruction: Large Firms and Non-Productive Strategies |
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In the reading entitled Connecting to Power: Political Connections, Innovation, and Firm Dynamics, the authors examine how political affiliations in Italy create significant barriers to productivity and innovation by fostering an environment where politically connected firms prioritize survival and growth over creative destruction and competition. Why do other high-income countries thst also face some levels of political interference in corporations experience fewer struggles with productivity and creative destruction compared to Italy? What aspects of their economic systems, regulatory frameworks, or institutional structures help mitigate the negative effects of political affiliations in business, as described in the reading? |
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The essence of Schumpeterian Growth is that creative destruction will drive growth and firms will be incentivized to do this in an attempt to outdo their competitors. However, as both of these readings suggest, firms are driven to innovate due to increased profits, and there are other non-productive methods of ensuring profits, namely developing political connections or acquiring monopoly power and barring new entry. In order to ensure growth, is it worth outright outlawing some of these practices? For example, would it be helpful to ban politicians from being connected to firms? Is there policies that can alter the incentive schemes for innovation/non-innovation profit practices so that firms are unlikely to engage in this behavior without outlawing it outright? |
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In Barriers to Creative Destruction, anti-competitive acquisitions is listed one of the non-productive strategies that large firms tend to engage in to preserve market share. In addition to creating higher prices for consumers, these acquisitions impede innovation. According to the killer acquisition theory, incumbents strategically buy out competitors when they are just starting up such that the market size-related FTC rules don't apply. Given the incumbents' circumvention of FTC regulations through targeting small, nascent firms, what additional barriers / modifications can policy-makers implement to create more stringent acquisition rules? For example, instead of looking at market share, can policy-makers assess factors like 1) level of overlap between technologies, 2) disruptiveness of target's technology, 3) the incumbent's history of innovative behavior (organic vs inorganic) and 4) overall level of threat target poses to incumbent? If so, how can we quantify these qualitative assessments to create a realistic criteria? |
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Human Capital Mobility Across the Private/Public Sectors While Italy’s case is rather extreme, there are many examples in the U.S. of concurrent private/public sector involvement (see: DOGE) or “revolving door” dynamics such as in the DOJ or FTC. To what extent should there be barriers to mobility across the private and public sectors? What is the magnitude of benefits created by enabling mobility (presumably unlocking a wider talent pool for public service and/or permitting the cross-pollination of ideas)? |
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Patents have been increasing but TFP growth has been stalling. Is the only implication that incumbents use new patents as barriers to entry? A second implication could be that these patents introduce new industries that are still evolving to be efficient; hence, they are less productive and drag down average productivity across all sectors. A third implication could be a TFP decrease in industries that have been more efficient in the past, which outweighs the TFP growth created by well-utilised new patents. |
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Both readings highlight the significant barriers to creative destruction created by entrenched incumbents. "Barriers to Creative Destruction" emphasizes how large firms rely on non-productive strategies like anticompetitive acquisitions and patent hoarding to suppress competition, while "Connecting to Power" explores how political connections are used to avoid regulatory burdens and deter new entrants. These practices collectively hinder innovation and prevent the natural cycle of firm turnover that drives economic growth. These articles made me question whether the presence of Venture Capital firms in the US are overall more helpful or hurtful to the cycle. |
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Question for Thursday in response to "Barriers to Creative Destruction: Large Firms and Non-Productive Strategies" and "Connecting to Power: Political Connections, Innovation, and Firm Dynamics." Both papers explore the pejorative impacts of non-productive strategies employed by large incumbent firms to protect themselves from creative destruction. Strategies like political alliance, non-productive patenting, and "kill acquisitions" allow large incumbent firms to preserve their bottom lines without contributing to the productivity gains that drive real growth. These strategies arise from a disincentive for large incumbents to spend on R&D, but instead to protect existing revenue sources, particularly, or at least demonstrably, in the consumer product goods industry. The process of creative destruction is clearly hampered by the consolidation of capital and political power at the higher end of the firm size distribution. The data collected in Italy pertaining to the political influence of large incumbent firms and correlated election effects on firm size reminded me (and I'm sure others) of the recent U.S. presidential election where we saw many large tech companies either increase in market cap or change in political alliance after the election result. With many tech executives donating to the new leading political party and paying visits to Florida, its obvious that political connection is a popular strategy for securing survival in U.S. markets as well. However, my question is to what extent does political power actually protect large tech companies and how much of the effective firm size increases in market cap that we've seen in tech companies like X and Tesla can be attributed to market expectations of political favors? Do markets overprice political connectedness or do they reasonably expect blatant favoritism for large incumbents that aligned themselves with the majority party? How should we think about rather innovative tech firms (perhaps not as innovative as new entrants) that spend billions on R&D while also wielding the same political persuasion as less innovative consumer product companies for example? |
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Throughout the readings and our discussions in class, we have often seen “number of patents” as a measure of innovation which powers much of the research and models presented so far. Barriers to Creative Destruction: Large Firms and Non-Productive Strategies highlights non-productive patenting as one of the key non-productive strategies large firms utilize to prevent competition, and thus prevent creative destruction. Specifically, the paper states that “the article calculates the patents-to-innovation elasticity by firm size and finds that it declines as a firm’s market share in a product category increases” (Baslandze 12). Does revealing the existence of non-productive patenting violate or discredit previous research models and analysis which utilize number of patents as a measure of innovation, especially given that patenting activity increases among larger firms, thus suggesting that a significant portion of overall patents might actually represent protective patents rather than innovative ones? Can we readjust this metric? |
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We learned about how innovation disrupts outdated technologies, driving growth through creative destruction. While AI has challenged market dynamics, the “Connecting to Power” and the “Barriers to Creative Destruction” texts illustrate that creative destruction is not guaranteed. Many large firms employ non-productive strategies, like leveraging political connections, to protect their market dominance. In Italy, 5% of firms employ politicians. These firms grow in size and revenue, but they experience minimal productivity improvement – providing static benefits over substantial innovation. Similarly, mergers and acquisitions may hinder innovation when venture-backed startups aim for long-term acquisition by incumbents as exit strategies. Does this result in innovation loss through “killer acquisitions,” or is innovation absorbed by larger firms and underrecognized? Is creative destruction truly lost, or is it invisible but still present? If acquiring innovative patents from smaller firms ultimately benefit larger firms, is business dynamism truly suppressed, or are we misjudging the outcomes? |
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The Policy Dilemma: What if Stricter Policies Further Incentivize Political Connections? Both readings for Thursday lay their emphases on the barriers toward creative destruction: whereas “Connecting to Power: Political Connections, Innovation, and Firm Dynamics” focuses specifically on how the common practice of employing local politicians among larger market leaders leads to lower entry, reallocation, growth, and productivity, “Barriers to Creative Destruction: Large Firms and Non-Productive Strategies” examines political connections, non-productive patenting, and anti-competitive acquisitions as three prominent strategies incumbent firms employ that inhibit creative destruction. As suggested at the end of “Barriers to Creative Destruction,” policy improvements are obviously critical in resisting various non-productive strategies including political connections. However, the central dilemma of implementing stricter or more refined policies is that they will provide more incentives for incumbents to strengthen connections with the government so that they could bypass these policies. Creative Destruction faces strong resistance from incumbents because it wants incumbents to lose. And incumbents would always try to find the most cost-efficient way to stay in the market. Creative Destruction goes against incumbents’ incentives. While acknowledging the importance of regulatory, suppressive policies that disincentivize incumbents’ nonproductive behaviors, can we tackle incumbents’ resistance also by offering incumbents enough incentives to participate in creative destruction? What policies/financial systems/market systems could provide such incentives? |
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How does the prevalence of non-productive strategies vary across industries with different regulatory intensities, innovation cycles, and competitive dynamics? For instance, firms in highly regulated sectors such as pharmaceuticals or defense may derive greater benefits from leveraging political connections to influence regulatory standards or expedite permits. In contrast, industries like technology or consumer goods may place a stronger emphasis on anti-competitive acquisitions to stifle emerging competitors and new ideas. Additionally, the choice of anti-competitive strategies may also differ by geography and firm type (multinationals vs. regional ). Given these variations, what tailored policy changes could effectively prevent sector-specific abuses while preserving the incentives for legitimate innovation and growth? |
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Targeted policies can address distortions caused by the kind of politically connected firms in high-regulation sectors that we see in “Connecting to Power: Political Connections, Innovation, and Firm Dynamics", which stifle competition and innovation. Would capping regulatory exemptions tied to political affiliations, enforcing antitrust laws, and mandating disclosures of political connections reduce entry barriers and enhance transparency? Dynamic thresholds for exemptions based on competition and innovation metrics could ensure equitable governance—how might these adapt to industry conditions? Incentives like tax credits for new entrants and sectoral audits to assess political influence could inform reforms. Could penalties for politically reliant firms with low productivity or innovation dismantle entrenched advantages? How can these measures combine to foster dynamic entry and sustained innovation? |
What the Zuck do we do??As we move closer towards Trump's inauguration, it seems that the media has begun to give more attention to the relationships between different tech CEOs and the president-elect (Elon is obvious, more recently there has been Zuck). The few that I've read try to explain the different ways tech leaders are attempting to cozy up with Trump, which Connecting to Power would likely claim is for the benefits of being close to government. However, as the paper distinguishes, there are different ways political relationships can benefit incumbents. One way is by making entry harder (which could reduce welfare), and another by removing red tape or greasing wheels (which might increase welfare by increasing efficiency). While Connecting to Power furthers our understanding on the negative implications of politicians' involvement in incumbents, I'm curious to examine some routes of potential good in these relationships. In the case of Meta and Zuck, a company and CEO betting heavy on the future of AI, being close to Trump might allow them to continue developing AI under less scrutiny, which seems to be in line with Zuck's "move fast and break things" motto, and the e/acc movement of Silicon Valley as a whole. One might also point to Meta's commitment to open source and the intention behind it -- to increase the contributors and testers to these models but also enable others (students, founders, academics) to build on them. In this sense, it seems that the incumbent is actively supporting creative destruction in terms of encouraging new rungs of ladders to be built, as well as a competitive ecosystem of startups for the application of AI. I don't mean to paint Zuck as such an altruistic figure, especially with his past of copying innovative features from startups -- rather show some potential effect of his actions. I'm not sure if this comment contributes anything new to the literature, which seems to have already recognized that political connections can increase welfare. I don't necessarily think that we should outright prevent tech companies or CEOs from creating relationships with politicians; that has to go against at least some American right / value. Maybe the question is how do we punish bad actors (classified as those stifling dynamism and innovation) but still allow some possibility for these relationships to form and create good? |
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The readings on political connections and non-productive strategies highlight how firms use their market dominance to prevent creative destruction by securing regulatory advantages and suppressing competition. Akcigit et al.’s analysis of Italian firms shows that political connections increase firm survival and revenue but suppress innovation, while Baslandze emphasizes how anti-competitive behaviors like non-productive patenting slow growth. How can policymakers distinguish between connections that “grease the wheels” of bureaucracy and those that hinder market dynamism? What empirical measures could be used to assess whether regulatory policies aimed at fostering innovation unintentionally reinforce barriers to creative destruction? |
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Power and Progress: Do Political Connections Drive Growth or Stall Innovation? Why do firms pay substantial wage premiums to politician workers, and how does this practice balance the short-term benefits of reduced regulatory friction with the long-term costs of innovation stagnation? Firms paying more to politician workers isn’t just about smoothing bureaucratic hurdles, but it’s a strategic move tied to deeper trade-offs. According to Schumpeterian, dynamic losses occur when resources are diverted from innovation to rent-seeking activities. These connections might offer immediate advantages by bypassing regulatory burdens, especially in heavily regulated industries, but they come at a cost. Innovation slows as firms shift focus from competing through better ideas to defending their positions. The preemptive motive in creative destruction adds another layer as firms do it to survive, stifling new entrants who lack similar advantages. This dynamic disproportionately favors large, established firms over newcomers, reshaping competitive landscapes. |
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Baslandze (2021) discusses the use of patents to hinder innovation and reduce creative destruction. The paper discusses the findings of Argente et al. (2020) which find a disconnect between patenting and innovation and particularly prevalent amongst firms with higher market shares. In addition to that, the reduction of innovative activities amongst larger firms is associated with an increase in patenting activity. How do these findings impact the reliability of using patents as a proxy for innovation? |
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Baslandze discusses the difficulty in measuring innovation using just patents due to the significance of unproductive patents as a barrier to creative destruction. Specifically, he describes a firm-level study of 35,000 firms in the Consumer Product Goods (CPG) sector that measured productivity of patenting using the number of new products weighed by their respective novelty indices. By analyzing each firm’s product innovation per category and patenting activity per category, the study found that not all innovations are captured by patenting statistics. The “disconnect between patenting and product innovation” grows as firm size increases (page 12). How would you expect other factors, such as firm age and industry, to impact patent productivity? For example, do you think younger firms or older firms would have stronger connections between patenting and product innovation? What industries would you expect these disparities to be most prevalent? |
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Baslandze, in his paper, discusses various anti-competitive strategies employed by large firms that hinder creative destruction and reduce overall economic dynamism. Large firms in Italy, for example, use political connections to gain regulatory advantages and reduce market frictions. These connections help incumbents grow in size without improving productivity or innovation. The study demonstrates that political connections are often non-productive, as they do not lead to innovation but rather act as barriers for new entrants. How pervasive are these anti-competitive measures across different industries and countries? Are there sectors where such practices are more detrimental or, conversely, where they might bring some societal benefits? Do countries with more centralized or decentralized governance show similar patterns of non-productive strategies? |
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In Barriers to Creative Destruction, the concept of creative destruction is displayed as a road where "[creating] losers and winners along the way" is an inevitability(19). In the case of acquisitions, the incumbents decide to target firms to discontinue rival innovation. In the meanwhile, the smaller firms worried about their economic situation over their capacity for creation, deliberately "invest more relative to large firms, hoping to be bought out"(19) |
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Baslandze in “Barriers to Creative Destruction” describes how mergers can be used by the incumbent to squash innovative entrants, both with regard to current competitors and potential new ones. On one hand, as the paper mentions, market consolidation serves as a way to control more of what gets developed and sent to consumers. That is, innovation occurs on the incumbent’s timeline. This can occur both through acquiring larger well-known competitors as well as buying innovative trendy start-ups. With regard to preemptively acquiring an innovative entrant, larger companies (the incumbent) might have stronger development and manufacturing resources. In this sense, acquisition could allow the incumbent to innovate more quickly, which allows for creative destruction. Is it possible to view incumbents as facilitators of creative destruction? Or, does an incumbent’s legacy technology and maintenance of the status quo prevent them from being considered a creative destructor? |
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Baslandze analyzes antitrust not just in welfare effects due to the pricing of goods already in consumer markets, as the legal system typically does, but also dynamic losses or gains due to changes in innovation. While market power can result in increased profits and decreased welfare for consumers (see Alviarez et al (2020)), mergers can lead to greater synergies that drive innovation. This raises the question of how to optimize antitrust law for growth. Baslandze takes Cunningham (2021)'s view: longer term strength of antitrust enforcement would force incumbents to innovate, or at least stop them from blocking challengers from innovating. However, market structure is not merely a choice of policy, but endogenously emerges from preference, technology, policy, and allocations of capital. Is there an argument that new entrants and competitors to markets could be better or more easily be instead facilitated by access to capital or creating public resources? |
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The readings explore how political connections and non-productive strategies, such as anti-competitive acquisitions and non-productive patenting, allow large firms to maintain dominance at the expense of innovation and economic dynamism. In the Italian context, politically connected firms benefit from reduced regulatory frictions but exhibit lower productivity and innovation intensity, which hinders creative destruction. Similarly, broader evidence highlights that such strategies worsen inequality and slow productivity growth across industries and countries. Considering these findings, how can policymakers strike a balance between reducing regulatory burdens (which incentivize political connections) and fostering a competitive environment that encourages innovation and new firm entry? Additionally, how can policy measures, such as patent reforms or stricter anti-trust regulations, mitigate the adverse effects of non-productive strategies while still promoting economic efficiency? |
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Given that the entrance of small companies increase can act as a threat for incumbent firms, and incentivizes them to take non-productive destructions to maintain market power, will AI and its ability to allow creative destruction more easily drive even more non-productive strategies and mass patent filling, or will it help encourage innovation for incumbent firms since it reduces cost of innovation? |
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Both "Connecting to Power: Political Connections, Innovation, and Firm Dynamics" and "Barriers to Creative Destruction: Large Firms and Non-Productive Strategies" highlight how political connections and defensive strategies by incumbents hinder creative destruction. However, in some cases, political ties can facilitate access to resources, streamline regulatory processes, and provide stability in volatile economies. Under what conditions, if any, can political connections be leveraged to enhance rather than stifle innovation? Are there historical examples where such connections have played a productive role in fostering technological progress and market competition? |
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