COMPETITION POLICY ENFORCEMENT …

1 OECD Global Forum on International Investment OECD Investment Division COMPETITION POLICY ENFORCEMENT EXPERIENCES FROM developing countries AND IMPLICATIONS FOR INVESTMENT Rijit Sengupta & Cornelius Dube Session : COMPETITION POLICY This paper was submitted in response to a call for papers conducted by the organisers of the OECD Global Forum on International Investment. It is distributed as part of the official conference documentation and serves as background material for the relevant session in the programme. The views expressed in this paper do not necessarily represent those of the OECD or its member governments. 2 COMPETITION POLICY ENFORCEMENT EXPERIENCES FROM developing countries AND IMPLICATIONS FOR INVESTMENT OECD Global Forum on International Investment VII Best practices in promoting investment for development 27-28 March 2008, Paris, France Rijit Sengupta1 & Cornelius Dube2 March 2008 CUTS Centre for COMPETITION , Investment & Economic Regulation (CUTS CCIER) CUTS International D-217 Bhaskar Marg, Bani Park, Jaipur 302016, India Ph: +91 141 228 2821 Fx: +91 141 228 2485 Email: 1 Rijit Sengupta is Centre Coordinator & Deputy Head, CUTS Centre for COMPETITION , Investment & Economic Regulation (CUTS CCIER), CUTS International based in Jaipur, India.

2 2 Cornelius Dube works as an Economist with CUTS CCIER, CUTS International. 3 Table of Contents Page Nos. I. INTRODUCTION .. 4 II. COMPETITION POLICY AND INVESTMENT PROMOTION THE THEORETICAL CONSTRUCT .. 4 IV. THE OECD PFI AND COMPETITION POLICY .. 9 V. FACTORS AFFECTING COMPETITION ENFORCEMENT AND INVESTMENT PROMOTION .. 9 VI. ADDRESSING THE CHALLENGES .. 12 VII. CONCLUSION .. 14 VIII. BIBLIOGRAPHY .. 16 4 I. Introduction Over the last decade or so there has been a considerable interest in developing countries for adopting COMPETITION laws, either at the behest of external pressures or as a result of internal developments. It can be inferred from an analysis of motivations that in most of the cases, adoption of COMPETITION POLICY has been as a result of pressure from outside agencies (bilateral, multilateral, advisers, etc.) rather than internal POLICY reforms. Having employed such a reactive approach to evolving COMPETITION regimes, governments in the developing world have failed to support the process of COMPETITION law adoption through concurrent POLICY measures and practices that support COMPETITION in the market, contributing to economic growth and development.

3 The literature is replete with evidence that an effective COMPETITION regime contributes to investment and catalyses progress towards economic development. The World Development Report 2005 (A Better Investment Climate for Everyone), suggests that removing barriers to COMPETITION should be one of the prime considerations for governments, while taking investment climate improvement decisions. The World Investment Report 2003 (FDI policies for Development: National and International Perspectives) had earlier asserted How to ensure COMPETITION , including the control of restrictive trade practices, by foreign affiliates of TNCs to be a key question for national governments to address, while shaping policies in response to international investment scenario( Rewrite last sentence in indirect speech to make it sound less laboured). CUTS experiences on COMPETITION POLICY and law issues across developing countries suggest the existence of various barriers to the implementation of COMPETITION POLICY and/or law which also hinder investments.

4 Addressing these factors presents a challenge for many developing country governments, as is elaborated in one of the sections in this paper. Some of the possible ways of addressing these challenges have also been highlighted in this paper, drawing experiences collated from various developing countries . It is expected that such examples would help countries struggling to implement their COMPETITION regimes, thereby facilitating the evolution of a level playing field conducive to investment. II. COMPETITION POLICY and investment promotion the theoretical construct Fig: Linkage between effective COMPETITION ENFORCEMENT and investment promotion - described COMPETITION POLICY COMPETITION Law Eliminate barriers to entry and exit of new business entities Curb Anti-competitive practices Increased COMPETITION in the market Greater Investment COMPETITION Regime 5 A brief discussion of what an effective COMPETITION POLICY entails is necessary at the outset for a better understanding of how such a POLICY can influence investment.

5 In some papers, COMPETITION POLICY is often used interchangeably with COMPETITION law. This paper would like to clarify this ambiguity at the outset. COMPETITION POLICY is essentially understood to refer to all governmental measures that can have an impact on COMPETITION , in local and national markets, by directly affecting the behaviour of enterprises and the structure of industry. COMPETITION POLICY is an instrument for achieving an efficient allocation of resources, technical progress and consumer welfare. It also helps to regulate concentration of economic power detrimental to COMPETITION and promotes flexibility in adjusting to the changing international economic milieu3. With regard to such varied functions there are two components of a comprehensive COMPETITION POLICY . The first component refers to a set of government measures that enhance COMPETITION or competitive outcomes in the markets, such as relaxed industrial policies, liberalized trade POLICY , conducive entry and exit conditions, reduced controls in the economy and greater reliance on market forces.

6 The other component of COMPETITION POLICY is a COMPETITION law and its effective implementation to prevent anti-competitive behaviour by businesses, to rule out abusive market conduct by dominant enterprise, to regulate potentially anticompetitive mergers and to minimize unwarranted government/ regulatory controls4. It is well-established that COMPETITION law can regulate markets best if it is part of a comprehensive COMPETITION POLICY rather than when it has been enacted in isolation. It is the enactment of a COMPETITION law without a complementary adoption of most of the other elements of COMPETITION POLICY that has resulted in some operational shortcomings in many developing countries . The following paragraphs elucidate the components of a COMPETITION POLICY that have bearing on investment decisions. i. Trade POLICY A country s trade POLICY can play an important part in shaping COMPETITION in its economy.

7 The volume of goods available in the market depends on the extent to which the economy is open to the outside world. Having a tight trade POLICY restricts COMPETITION in the market, and can result in the manipulation of the market by dominant domestic firms. On the other hand, trade liberalisation results in an influx of goods into the economy, which could also have a huge impact on the nature and extent of COMPETITION in the market, and encourages domestic COMPETITION as well. In order to achieve an optimal level of COMPETITION in an economy the trade POLICY of a country should be formulated to stimulate private participation in the economy (both in terms of attracting new firms and also in strengthening the position of existing ones). ii. Industrial openness The level of COMPETITION in an economy reflects the country s attitude towards entry and growth of firms. Regulations focusing on entry and establishment of business in a country are important in shaping up COMPETITION .

8 If a country has a restrictive industrial POLICY regime in which entry and growth of firms is subjected to stringent licensing conditions and monitoring, a low level of investment is guaranteed and the resulting level of COMPETITION is also low. An effective COMPETITION POLICY advocates for the removal of obstacles and facilitates investment flows by providing a predictable legal and regulatory environment that reduces the scope of arbitrary decision-making, thereby instilling transparency in the system. 3 CUTS (1999), Role of COMPETITION POLICY in Economic development and the Indian experience . 4 Planning Commission of India (2007), Report of the Working Group on COMPETITION POLICY , Government of India. 6 iii. Attitude towards privatisation Privatisation enhances the potential for COMPETITION by providing conditions conducive for entry of new players.

9 Government involvement in the economy, particularly in direct COMPETITION with private companies, deters private participation and stifles COMPETITION . The intention of a country to improve COMPETITION in the market through privatisation can be handicapped if proper care is not taken in planning its privatisation programme. iv. Other critical POLICY considerations There are certain other POLICY considerations that can have an impact on COMPETITION by affecting the firms decision to enter an industry. The formulation of COMPETITION POLICY should take into consideration implications of such policies as well: a) Labour POLICY : Labour regulations impact production cost and convenience adversely and result in entry into the informal sector being preferred to significant investment in the formal sector. b) Exit Rules: Certain regulations like bankruptcy laws, insolvency laws might make it difficult for companies to exit their business in a country, and thus negatively affect investment decisions by prospective investors.

10 C) Consumer protection POLICY : Although it is generally accepted that there is a convergence between the objectives of consumer protection POLICY and COMPETITION POLICY , there exists scope for conflict as well which works to the detriment of investment. III. Features of a COMPETITION POLICY some interesting cases Though COMPETITION law has a history of more than 100 years, which has seen over 100 countries enacting COMPETITION laws, the adoption of a comprehensive COMPETITION POLICY by some countries is relatively a recent phenomenon. There are very few countries who have a comprehensive COMPETITION POLICY statement. Australia, Botswana, Malawi, Mexico, Hong Kong are some such examples. Australia Australia is a good example of a developed country in this regard, with the National COMPETITION POLICY articulating the following six elements into its COMPETITION POLICY : (i) limiting anti-competitive conduct of firms; (ii) reforming regulation which unjustifiably restricts COMPETITION ; (iii) reforming the structure of public monopolies to facilitate COMPETITION ; (iv) providing third-party access to certain facilities that are essential for COMPETITION ; (v) restraining monopoly pricing behaviour; and (vi) fostering "competitive utrality" between government and private businesses, when they country s commitment to promote COMPETITION as one of the means to promote investment is evident from its present investment regime.