The Role of State-Firm Relationships in Fostering Competitiveness: Telefonica’s Upgrading

This paper examines the structures behind competitive transformation in telecommunications. The analysis is based on qualitative evidence from Telefonica’s transformation since the mid-1980s and comparisons with BT, Orange, and Deutsche Telekom. Telecommunications is a critical industry whose services are crucial inputs for most economic activities. Telefonica’s upgrading remains a rare example in which a non-leading firm reached the efficiency frontier. I argue that Telefonica’s upgrading cannot be explained without defining business-state interactions in Spain and characterizing the impact of the shift from the natural monopoly to the market paradigm. Spain resolved the tension between government objectives to universalise service and Telefonica’s concern for profitability through a non-hierarchical system of negotiated interactions and mutual exchanges that helped the state and the incumbent further their respective goals. Overall, this paper enters into the debate about the state’s role in industrial transformation and provides insights about the conditions that favour competitiveness in telecommunications.