Creative destruction versus protected incumbents: why there is no innovation without competition

If you look at the list of the ten largest companies in the United States in 1970, in 1990, and in 2026, you will notice impressive turnover. Giants that seemed eternal lost ground or disappeared, while companies that did not even exist thirty years ago (or were small garage startups, like Nvidia, Apple, Microsoft, Amazon, Alphabet, and Meta) took over the top of global value creation.

Now do the same exercise looking at many traditional sectors of the Brazilian and Latin American economy. With rare exceptions, the corporate landscape in various industrial and infrastructure segments remains dominated by structures protected for forty or fifty years, operating under high tariff barriers, regulatory reservations, or captive fiscal subsidies.

In its World Development Report 2024 (WDR 2024), prepared under the leadership of Chief Economist Indermit Gill and with a strong theoretical basis in the work on endogenous growth by economists like Philippe Aghion and Peter Howitt, the World Bank points a finger at the central wound of the middle-income trap: without open competition and without "creative destruction," no country can transition to the innovation stage (3i).

1. What Is Schumpeter's Creative Destruction

In 1942, in the book Capitalism, Socialism and Democracy, Austrian economist Joseph Schumpeter explained that economic progress never comes from keeping the same system running in static equilibrium. Progress happens like a perennial storm of Creative Destruction: the steam locomotive destroys the business of horse-drawn stagecoaches; the electric lamp destroys the whale oil and candle industry; streaming and cloud computing replace physical video rental stores and local servers; Artificial Intelligence agents rewrite the traditional software industry.

From a macroeconomic perspective, a country's total productivity rises through two channels:

1. Internal improvement (within-firm): an existing company improves its processes and trains its team.
2. Market reallocation (between-firm): new or highly efficient companies gain market share, attract the best engineers and available capital, while obsolete companies that refuse to modernize shrink or leave the market, releasing capital and labor for more productive uses.

In developed OECD countries, this second channel (reallocation via competition) accounts for 40% to 50% of all productivity growth. In Brazil, this engine remains stuck.

2. When Yesterday's Champions Block Tomorrow's Innovators

Why does the reallocation engine jam in middle-income countries? Economists Daron Acemoglu, Philippe Aghion, and Fabrizio Zilibotti demonstrated in a classic study that the institutions that serve the 1i (Initial Investment) stage become poisonous when the country needs to move on to the 2i (Infusion) and 3i (Innovation) stages.

From the 1950s to the 1970s, protecting large national conglomerates with high import tariffs and subsidized state credit seemed to work because the task was merely to build basic cement, steel, or mechanical assembly plants. The problem is that these protected groups accumulate enormous political and economic power. When the time comes to open the economy to import modern machines, reduce tariffs, and allow new technological entrants to dispute the market, the incumbents use their influence to keep the barriers standing.

The worst possible distortion for a country's talent is then created: the financial return of lobbying in Brasília for a tariff protection or a specific tax benefit ends up being much higher and more guaranteed than the return of investing in engineering, research, and development.

3. Real Proof in Brazil: What Happened When We Opened Payments

Someone might argue that "the Brazilian market is different and does not respond well to competition." We have a recent historical counterexample within Brazil itself that demolished this myth: the fintech and payment methods revolution driven by the pro-competition agenda of the Central Bank starting in the 2010s.

For decades, a small number of large institutions controlled card terminals (acquiring), charged extremely high transfer fees (TED and DOC), required days to settle retail sales, and kept millions of Brazilians unbanked or trapped in expensive bank fee packages.

When the regulator broke the brand monopoly on card machines (2010), created the lean legal figure of Payment Institutions (2013), launched Pix as an open and interoperable public infrastructure (2020), and implemented Open Finance, a classic schumpeterian shock occurred:

• Gigantic digital challengers emerged (such as Nubank, Mercado Pago, PagBank, Stone, Asaas, and dozens of others) that forced the entire market to zero out basic fees and radically improve software experience.
• The traditional incumbent banks themselves, faced with real competition for the first time in decades, responded by hiring thousands of software engineers, migrating systems to the cloud, and modernizing their apps at record speed.

4. The Lesson for the State and for Those Who Lead Companies

The case of payment methods proves that Brazilian business owners and engineers are extraordinarily capable of innovating when the rules of the game reward efficiency instead of red tape.

For business and technology leaders, the message from Schumpeter and the World Bank is a daily guide:

1. In economic policy, discipline both incumbents and the State: the government's role is to guarantee basic education, open infrastructure (like Pix), and safety nets to retrain workers, never to protect inefficient companies from national or foreign competition.
2. Inside your own company, practice creative self-destruction: if you lead a consolidated company and are afraid to launch a cheaper and automated digital product because it will "cannibalize" your old high-margin manual line, rest assured that a competitor without that emotional attachment will do it for you. Cannibalize your own obsolete processes before the market does.

Continue deepening: also read 2041: the year the Brazilian population starts to shrink and Bolsa Família with an exit door: how to eliminate the fear of formal employment without increasing public spending by 1 real. Also explore the Agenda Brasil 2050 with interactive simulator and Brasília Arcade.

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References and Verifiable Readings

• Schumpeter, J. A. (1942). Capitalism, Socialism and Democracy. Harper & Brothers.
• Aghion, P., Antonin, C., & Bunel, S. (2021). The Power of Creative Destruction: Economic Upheaval and the Wealth of Nations. Harvard University Press.
• World Bank (2024). World Development Report 2024: The Middle-Income Trap. Washington, DC: World Bank Group.