Had car makers been confined to their home market, it would have been difficult or impossible to justify the high research and development costs needed to develop this large variety of cars that cater to so many different preferences. Assume for example that 10% of car buyers want to buy cars with particularly high levels of safety. Had Volvo and Saab been able only to sell in Sweden, where roughly 300,000 cars were sold in 20077 then this would limit the potential market for high safety cars to 30,000 per year. Given the high cost of developing new car models, it would be impossible to justify such investments. But if they’re allowed to sell on the global car market of 55 million in 20078, then the potential market would be 5.5 million. Even assuming that fierce competition from others would only make a 10% global market share of the high safety segment possible, that still leaves them with a market potential of 550,000 or 18 times that if Volvo and Saab could only sell in Sweden.
Moreover, if only Volvo and Saab were allowed to sell in Sweden there wouldn’t be much pressure on them to spend much money in new research as they would figure that most car buyers in the absence of alternatives would be forced to purchase from them anyway.
Globalization thus greatly increases economic efficiency by increasing competitive pressures given any level of use of economies of scale and by allowing increased use of economies of scale given any level of competitive pressures. The increase in economies of scale reduces the cost of production and so enables lower prices and/or better products, while the increased competitive pressures will increase the incentive of producers to hold down prices and improve their products.
These positive effects are greatest and most apparent in small countries like Sweden, but while the effects are smaller in large countries like the United States, they exist there too.
2.3 The Misleading Arguments Against Free Competition