192
AFRICA
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S SILK ROAD
:
CHINA AND INDIA
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S
NEW ECONOMIC FRONTIERindustries. This is the case found in many developing economies and economies in transition.
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Surprisingly, there is only a limited literature focusing on the topic of domestic competition in Sub-Saharan African countries.
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Domestic competition propels international integration of domestic firms in two ways. First, it increases firm productivity, as the natural market mechanism forces out inefficient firms from the market while inviting new efficient firms to enter (
allocative efficiency). An increase in productivity generates an improvement in the international
competitive position of firms, hence improving their overall export performance.
Second, a competitive domestic market structure facilitates international integration of firms by inducing imports and competition through foreign entries. Import competition and foreign entries through direct investment could then encourage domestic firms to innovate and thus improve their efficiency (
dynamic efficiency).
This section discusses the role of competition in promoting international integration at the country level, looking at the following dimensions (i)
foreign
import competition, (ii) market entry and exit, (iii) foreign direct investment, (iv) vertical
dimension of competition, and (v) transaction with the state. The section then quantitatively shows how competition improves firms productivity and international integration.
FIGURE 4.4
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