Geopolitics and the Dynamic Competition Framework

Geopolitics and the
Dynamic Competition Framework
David J. Teece
Professor in the Graduate School, UC Berkeley
And Executive Chairman, Berkeley Research Group
May 21, 2023
1
U.C. Berkeley Roundtable on Navigating Global Competition Challenges

We Have Entered Cold War 2.0
 1945-2020 was a “vacation from history”
 Technological leadership is core to marketplace success and
geopolitical stability
 Competition and global leadership in tech sector will determine
whether democratic civilizations and nations “survive” as open
societies enabling individual freedom
Copyright David J. Teece 2

What Boards and Management Teams Must Do
 Adapt to, and help shape, the future of global governance
 Diversify operations and supply chains
 Take the long view
 Recognize that deep uncertainty is present
 Recognize that dynamic capabilities matters

What Can Governments Do?
 Promote, not hobble, US technology leadership
 Engineering a convergence between competition policy, technology
policy, and industrial policy
 Advancing a dynamic competition framework is the lynchpin

Dynamic Competition is What Has Always Mattered Most
Implications
1. Innovation drives competition (perhaps more powerfully than competition drives innovation). Over
time, endogeneity is present and powerful.
2. The two-way causation is absent from competition policy frameworks in the EU and the US.
3. Static competition is inferior compared to dynamic competition… innovation is the turbocharger if not
the engine of competition.
4. Competition is a process; entrepreneurs and entrepreneurial and innovative business firms with
dynamic capabilities are key drivers of competition.
“competition from the new commodity, the new technology, the new source
of supply, the new type of organization— competition which commands a
decisive cost or quality advantage and which strikes not at the margins of the
profits and the output of existing firms, but at their foundations and their very
lives.”
Joseph Schumpeter
1942

A Schumpeterian Perspective and Complexity
Economics/Systems Thinking is Required to Understand
Dynamic Competition, Especially in Digital Markets
 A change in one part of a system leads to changes elsewhere.
 Competition is for economic rents… whenever they are in the
system… not market share.
 Ecosystems should be the unit of initial analysis… not irrelevant
“relevant markets.”
 The dynamic competition and dynamic capabilities approach to
economics and business have close affinity with the assumptions
of complexity economics.

The Assumptions of Complexity Economics and the
Dynamic Competition/Capabilities Approaches are Much
the Same:
Assumptions underlying static competition and neoclassical economics:
“Conventional, neoclassical economics assumes perfectly rational agents (firms, consumers,
investors) who face well-defined problems and arrive at optimal behaviour consistent with —
in equilibrium with — the overall outcome caused by this behaviour. This rational,
equilibrium system produces an elegant economics, but is restrictive and often unrealistic.”
Assumptions underlying dynamic competition and complexity economics:
“Complexity economics relaxes these assumptions. It assumes that agents differ, that they
have imperfect information about other agents and must, therefore, try to make sense of
the situation they face.”
Source: Arthur, W.B. Foundations of complexity economics.
Nat Rev Phys 3, 136–145 (2021).
https://doi.org/10.1038/s42254-020-00273-3

Key Assumptions
Feature Neoclassical Economics and Static
Competition
Complexity Economics and Dynamic
Competition
Organisational principle equilibrium disequilibrium
Metaphor Well functioning markets Asset orchestration (jazz)
Managerial challenge Well defined problem associated with profit
maximization
Wicked problem solving required in VUCA
environments
Rationality Hyperrational Bounded rationality
Time horizon Short run Long term
System Closed Open
Method Newtonian mathematics with Walrasian
competitive equilibrium models; hardness
favored over relevance
Computational economics, evolutionary
modelling, statistical analysis, case studies;
relevance favoured over hardness;
enterprises
Evolution of firms and markets Stasis Constantly transforming/evolving
Source of rents (profits) Hicksean, Porterian Ricardian (scarcity) and Schumpeterian
(innovation)
Copyright David J. Teece
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Paul Samuelson Brian Arthur
Jean Tirole Joseph Schumpeter

9
Source: Akerlof, “Sins of Omission in the Practice of
Hardness,” Journal of Economic Literature, 2020. Here
hardness means formal models, not difficulty.
Akerlof’s Insight on Loss of Relevance
Static competition relies on equilibrium models and is analytically
tractable; dynamic competition recognizes that disequilibrium is the norm
and is analytically harder to formalize but allows more relevant/important
issues to be determined.

Spillovers and the High (Social/Public) Returns to R&D are
Another Reason Why We Must Put Dynamic’s First… Not Just
In Industrial Policy But In Competition Policy Too
Selected Industry-Level Estimates of Private and
Social Rates of Return to Investment in R&D
Study Sample (Location,
Size, Time Period)
Within-Industry
Return
Return in Other
Industries
Griliches and
Lichtenberg (1984)
United States
193 industries
1959–78
11% to 31% 50% to 90%
Goto and Suzuki
(1989)
Japan
50 industries
1978–83
26% 80%
Bernstein and Nadiri
(1989)
United States
4 industries
1965–78
7% 9% to 13%
Bernstein (1998) Canada
11 industries
1962–89
12.8% 19% to 145%
Bernstein (1998) United States
11 industries
1962–89
16.4% 28% to 167%
Griffith, Redding, and
Van Reenen (2004)
12 OECD countries
12 industries
1974–90
47% to 67% 57% to 105%
Lucking, Bloom, and Van
Reenen (2019)
United States
1985–2015
14% 58%
Adapted from
Teece, David J.,
“The ‘Tragedy of
the Anticommons’
Fallacy: A Law
and Economics
Analysis of Patent
Thickets and
FRAND
Licensing,”
Berkeley
Technology Law
Journal, Vol. 32,
2017, p. 1519.
10

R&D Intensity for Firms in Global innovation 1000 Study (2018)
Ashish Arora & Sharon Belenzon, American Innovation Under Threat: Restrictive Legislation and Global Competition,
Innovation Frontier Project (November 2021), https://innovationfrontier.org/wp-content/uploads/2022/05/American-
Innovation-Under-Threat-UPDATED-51622.pdf.
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Yearly Granted Patents to FANGAM
KPSS data.
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Favoring Dynamic Competition Requires Adherence to
Principles that Promote Innovation and Change
 “Dynamic first/innovation first” methodological stance required:
 Respect business conduct that aids appropriability and keeps “me too” imitators at bay
 Respect intellectual property rights and confidential data
 Incumbents ought not be required to provide a helping hand to competitors… absent
exceptional circumstances. Policy focus should be on overcoming barriers (external/internal).
 Price services at a full cost if obligations to help competitors are mandated for political
reasons
 Understand that business failures are often due to excessive regulation and the
lack of entrepreneurial (managerial) capabilities
 Recognize that:
 more competitors are not always better, and that “gatekeepers” can play a procompetitive
role
 price-cost margins are not a proxy for market power when intangible assets are present
Industrial policy, technology policy, and competition policy can be harmonized with
the dynamic competition approach

Dynamic Competition Characterizes the Digital Sector
 When digital technologies are deployed:
 Companies with complements and substitutes both compete for available profits, so
competition can come from entities positioned vertically, horizontally, and laterally
 Complementors can quickly morph into competitors… perhaps it’s better to see them as
competitors or at least as potential competitors from the outset?
 Competition for markets is as important, if not more so, than competition within (difficult to
define) markets
 Big Tech firms compete vigorously across traditional market boundaries
 Big Tech’s large integrated databases are an important and necessary but not sufficient
resource for competitive advantage
 Innovation drives competition as much if not more than competition drives innovation
We don’t need a Foogle and a Moogle to compete with Google as much as we need (and
have) broad spectrum competition (e.g., Google v Amazon v Apple v Facebook v Netflix v
Microsoft v Disney v PayPal v Salesforce, etc.)

The Dynamic (Digital) Competition Perspective
Accepts That Management and Organization Matters
 Strong dynamic capabilities helps drive dynamic competition
 Digital players with AI assisted operating models can successfully target
particular market segments with differentiated offerings, thereby disrupting and
challenging others
 “Indirect entry” and competition from complementors
is very powerful
 With dynamic competition, size alone affords little protection:
 Workstation disrupted mainframes
 PC’s disrupted workstations
 Tablets disrupted laptops
 Learning has eclipsed network effects as the foundation of competitive
advantage
Successful new entrants in tech today are generally not “me too” imitators/emulators but firms
that innovate in order to meet previously underserved customer needs.
 Google is disrupting Amazon
 Amazon is disrupting Disney
 Apple will disrupt General Motors and Toyota

Capability Taxonomies
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Quantitative Overview of the Capability Assessment for
the EV Dimension
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Source: Murmann and Vogt.

Static v Dynamic Competition Paradigms: Summary
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STATIC COMPETITION DYNAMIC COMPETITION
PRIMARY FOCUS Efficiency; existing markets Innovation; future markets
MANAGEMENT OBSESSION Competitors Customers/users
FIRM STRATEGY Compete by offering lower prices Compete by offering innovative
products/services
MARKET OUTCOMES Price reductions for familiar product/services Innovation and customer solutions through new
and better products/services
GUIDING PRINCIPLE Equilibrium Disequilibrium
COMPETITIVE ARENA Relevant markets Ecosystems
CONSUMER WELFARE Minor improvements With time, major improvements
KEY ACTIVITIES Implementing best practices Innovation, enterprise formation, learning,
capability building, growth, disruption
LEVEL OF PROFITS Mediocre but steady Strong – with considerable vicissitudes
INTELLECTUAL HERITAGE Neoclassical Economics Austrian economics; capability, complexity,
and evolutionary economics
RESOURCE ALLOCATION
MECHANISMS
Prices Prices; Managerial Asset Orchestration
MANAGERIAL CHALLENGE Well defined problems; profit maximization goal Wicked problem solving required in VUCA
environments; profit seeking goal
RATIONALITY Hyperrationality Bounded rationality
TIME HORIZON Short run Long Term
SYSTEM OF INNOVATION Usually closed Often open
THEORETICAL STRUCTURE Competitive equilibrium models; mathematical rigor favored
over relevance
Computational economics, evolutionary
modelling, statistical analysis, case studies;
relevance favored over rigor;
EVOLUTION OF FIRMS AND
MARKETS
Stasis Constantly transforming/evolving
SOURCE OF RENTS (PROFITS) Hicksian Ricardian (returns to scarcity), Schumpeterian
(returns to innovation) / Knightian (reward for
uncertainty)

Example 1 of Policy Errors Flowing from Static Analysis:
Serious Omissions in the EU’s Analysis of the DMA
 Fails to understand how competition has changed
 Ignores broad spectrum dynamic competition
 Fails to analyze negative efforts of the free riding that the DMA permits/requires
 Promotes free riding on investment in customer acquisition
 Search engine services priced to rivals on a FRAND basis
 Asymmetric regulation flies in the face of basic competition policy principles
 Fails to recognize the DMA will likely curtail investment in R&D and blunt innovation by incumbent
platforms
 Turns platform into “essential services” and advances a quasi public utility type regulation
 Fails to recognize that Europe’s problem is in part due to lack of dynamic capabilities, weak
entrepreneurial proclivities, excessive labor market regulation, and the absence of internal and
external restructuring agents
 Assumes that the DMA will cause more R&D to be done in Europe and that the fruits of R&D funded by
existing tech platforms will continue to be shared

Example 2: FTC Case Against Qualcomm
 The U.S. FTC:
 Saw SEP royalties as a tax
 Did not analyze competitive effects
 Favored open innovation, but sought to kill it
 Completely ignored dynamics of chip markets
 Assumed new technology fell like manna from heaven
 Lower court decision (2019) in FTC favor overturned by ninth circuit
on appeal
The FTCs static framework on show in its full glory
1
1. See Greg Sidak “Monopoly, Innovation, and Due Process: FTC v Qualcomm and the Imperative to Destroy” Criterion Journal of Innovation (Vol 6) 2020

Friends of the Dynamic Competition Initiative Favor, Support
and Require Adherence to a Schumpeterian Perspective
1. Recognise that volatility, deep uncertainty, complexity, and ambiguity (VUCA)
characterizes the global economy
2. Apply of complexity theory, evolutionary economics, and the dynamic
capabilities approach to the study of organizational economics, business
dynamism, and dynamic competition
3. Favor: (a) the future along with a heterodox and interdisciplinary bottom-up
methodological approaches (b) a holistic approach, with recourse to deductive,
inductive, and abductive reasoning, hard and soft modalities of analysis, and
dynamic methods.
4. Reject: (a) ideology and disciplinary insularity as sources of cognitive
understanding; all policy issues require a multidisciplinary systems perspective
(b) hyper-rationality and (short-term) profit maximization assumptions because
they are caricatures of individual and organizational decision making.
5. Require: (a) truth seeking and deep curiosity with respect to innovation
ecosystems (b) disclosure of conflicts of interest (c ) relevance over hardness
when we must choose (d) integration of technology policy, industrial policy, and
competition policy.

Geopolitics and the Dynamic Competition Framework

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