Sure competition and allowing things to fail can, under the right circumstances, generate great advancements. But given the context of human history, it seems that decentralized feudal societies caused about as many technological revolutions as communist societies...
The development of advanced plate armor, gunpowder weapons, mechanical clocks, medieval cathedrals, innovation within glass making, lenses, spectacles etc suggest medieval society was plenty capable on innovation. Both earlier Greek city states and later medieval Italian city states demonstrated a large amount of innovation.
I would rather say that large monopolies outcompete smaller competing units in the short term but loose in the long term. We can see that in markets as well as in comparison between China and Europe. Fragmented Europe was at a disadvantage for several hundred years until that fragmentation started paying off.
There are two main downsides to centralization.
1) A single ruler means the whims of that ruler can have major impacts on the development of society. When the Ming abandoned their treasure fleets, there was no alternative power to step in and continue expanding maritime commerce. The emperor was so powerful that their monopoly on trade decided the course of history for the whole region: https://en.wikipedia.org/wiki/Ming_treasure_voyages
2) A unipolar power structure inherently seeks to maintain the status quo. When you have a dynasty that already has unquestioned authority within its borders while also having no plausible rivals outside them (at the time of the "great divergence" the Mongols had ceased to be a threat), ANY change leads to a loss of status and power for the ruling elite. Any commercial activity or technological advance was measured by whether it benefitted the emperor or hindered him.
None of this is to say that there weren't substantial downsides to the decentralized mess of European politics. In earlier time periods, the centralized model helped China to be the richest region on earth while Europe was one of the poorest, but post-Renaissance, competition between European states drove innovation and pressured those states to expand or die. Both of which led to Portuguese ships sailing into Guangzhou in 1513 rather than Ming ships sailing into Lisbon.
The Honourable East India company settled on opium as the one commodity which might settle their balance of payments problem. The period when China was poor was 100, 150 years in the 19th and 20th centuries, linked to specific bad governments (Great Leap Forward, cough).