Informal barriers to entry and economic development: A case of Taiwan

This dissertation explains how culture affects the market structure of Taiwan. Culture is defined as a nexus of informal interpersonal relationships which integrates a variety of informal organizations and principles that shape the exercise of power and resource allocation in a specific area. The argument is simple: culture will affect the market structure if the firm-specific incumbency is embedded with a nexus of informal relationships, or culture produces entry barriers to new entrants. "Informal barriers to entry" are defined as the transaction cost advantage that is derived from the use of informal factors. An example will illustrate. The use of political power gives superior access to policy information and scarce resources, and the use of organized crime raises the cost of organizing transactions for potential entrants. Accordingly, if a firm's incumbency advantage is determined by the use of informal factors, then it will retain transaction cost advantage over potential entrants. The use of informal factors is not like a market problem, but a firm-specific incumbency problem; namely, informal barriers to entry are related to the use of informal factors, which is a personalized process because the use of informal factors requires certain "informal interpersonal relationships." The methodological focus of informal barriers to entry is to examine the political economy of incumbency in a context of economic development. Informal barriers to entry will constrain economic growth if the involvement of informal factors in economic activities reduces the efficiency of resource allocation which decreases the entrepreneurial incentive to investment; for instance, the involvement of organized crime and political power causes institutional corruption. I will call this problem "institutional limits to growth." The objective of this dissertation is to develop the economics of informal barriers to entry and to examine institutional limits to growth as a potential problem in Taiwan's economic development.