• William Laraque, Managing Director at US-International Trade Services


• 14.12.2015 11:15 am
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Contrary to the conventional view of an American and by extension global economy bubbling with innovative small companies, the reality is quite different. Intellectual property, network effects, natural monopolies, expensive R&D, fleets of lawyers to litigate against potential rivals, and armies of lobbyists have created formidable barriers to new entrants to the U.S. and global economy. 

These are major reasons why the rate at which new businesses have formed in the U.S. has slowed markedly in recent years. 

Between 1978 and 2011, as the new giants gained control, that rate was halved, according to a Brookings Institution study released in May, 2014.

In industrial society, the old monopolists and oligopolists controlled production. Now they control networks. Whether it is Amazon's shopping platform or Alibaba's shopping exchange, huge profits come from owning a standard platform. The real power and profits lie with the owners of the platform rather than with the inventors who make use of it. As this power and these profits increase, the inventors who depend on it have less and less bargaining leverage to negotiate good  prices for their contributions. Since it costs almost nothing to sell more units, these new monopolies can keep out (or buy out) potential competitors and gain almost complete control along with the profits and the legal and the political control this leverage brings.

A handful of giant corporations are reaping the rewards of such network effects. The larger their networks, the more powerful and effective they become. Consumers may be satisfied with the result but they will never know what innovations have been squelched or stymied, how much more they are paying than they would otherwise and the degree to which the rules are being changed to the advantage of the owners of the standard platform.

The words in the last paragraphs are not all mine. They mostly belong to Robert Reich who included them in his new book Saving Capitalism. 

Fintech is replete with naïf innovators who are convinced that open platforms and the "free market" provide the opportunity to forever change the way that finance in general and trade finance in particular is done. Reality is quite different and only by changing the current regime of political economy can we forever alter Fintech. The good news is that the prize is engaging in the huge trade flows of the global economy and not one, not Amazon, Apple, E-Bay, Alibaba, Google, Microsoft, Yahoo, etc., has created the platform/portal which will facilitate what the McKinsey Global Institute estimates will be $85 trillion in global trade flows in goods, services and FDI by 2025. I gave you a peak under the kimono with my previous post on Excelsior.