In general terms, institutions are formed to reduce uncertainty in human exchange, providing actors with ready-made anchors of sense or premises to decisions (Loasby, 1999, p. 46). Douglass North (1993) focuses the institutional aspects of the economic past, concluding that institutions which protected property rights and which lowered transaction costs are the decisive factors in the history of economic growth. In North’s thinking, the state can never be treated as an exogenous actor in development policy, since the state have the mandate to set of property rights and enforce competitive market conditions.
Relying on the fact that markets have been broken down into regional clusters all over the world, Michael Porter (1990) proposed that home-base “diamonds” of regional clusters are the basis for “permanent” competitive advantages of nations. In the 1990s when globalization was formalized by the WTO treaty, industrialized countries started to reformulate their policy programs to create regional clusters that have generally been interpreted as “industrial forests”. Paul Krugman (1994, 1998, 1999), a Nobel-prize winner, has continuously been worried about governmental interventions on competition, propagating for openness of markets as the best allocation mechanism.
The winners of 21th century are also active to incorporate the theory and praxis of institutions and economics in order to create the most favourable environments globally for FDI by multinationals. . Referring to Smith (1876), we expect that multinationals are on their move towards cost efficiency. Because of uncertainty (see Knight, 1921), the prevailing contingency of global economics during the first decades of the 21th century, multinationals may further limit their business scopes and core competences (Reve, 1990). According to the principles of system dynamics by Jay Forester (see Roberts, 1978), this is the “must”.
The increasing complexity of global business environment can be managed by streamlining business processes (Williamson, 1991). Ricardo’s idea of comparative advantage underlies international trade theories. In the 1990s, when the WTO was established, industrial countries and, later, emerging economies started to orientate towards Smith’s absolute advantage, bringing the economies of scale back to the endogenous models of international trade (Abdelal and Tedlow, 2003).
The turbulence of global markets can collapse densely populated states. A historical case is the Soviet Union that was divided into nations in the late 1980s. Referring to Japan, Kenichi Ohmae (1995), a well-known writer, collapses of populous countries like China, India or Nigeria is already going on so that regions near coastline are well developed and global when landlocked regions are economically and socially marginalized. The global winners of new economic geography (Krugman (1991) are what Ohmae (1995) called “region states”, regions with sound socio-cultural structures and efficient infrastructures that are the main targets of foreign direct investments (FDI) by multinationals.
Where a the place for "small people"? The polarization of human population will continue. As Kenneth Arrow (1962), a Nobel-prize winner, found, information is an experience good and so is knowledge. Without being a member of some of knowledge-creating societies (Nonaka and Takeuchi, 1995) no one of us cannot be a winner. How can we create stimulating and rewarding communities for billions of children and young adults in our world?
According to Paul Romer (1989, 1990), through sharing a common cognition of global markets, clusteried multinational corporates with stong market positions maintain rigidities that prevent investments in truly radical innovations. This tends to invalidate the existing pools of talent, information, suppliers, and infrastructure. The global demand for innovative products in knowledge-based industries is high and growing rapidly.
A major challenge is the integration of digital technology and creativity. We are in the midst of transition from industrial society to information society. Because of this transition, prevailing business assumption will be challenged. Knowledge is replacing labor and capital as the key value driver. Markets are expanding from regional to global. Intelligent networks and virtual spaces are superseding the need for continuous material investments and bits are becoming more powerful than atoms. The challenge of creativity is immense. User-centric interactive services are smart. Applications of New Economy engage people’s brains and hands. What is the new, global culture is an open question.