Competition Policy and Transnational Competition Policy and Transnational Investment: Issues and Developments Investment: Issues and Developments

in Asia and the Pacificin Asia and the Pacific

Marc Proksch, UNESCAPMarc Proksch, UNESCAP

Determinants of national competitiveness Determinants of national competitiveness (Porter)(Porter)

Competition vs. CompetitivenessCompetition vs. Competitiveness

A high level of competition (rivalry) is a strong determinant of A high level of competition (rivalry) is a strong determinant of

national competitiveness as it optimizes the efficient allocation of national competitiveness as it optimizes the efficient allocation of

capital; triggers innovation and quality improvements, guarantees capital; triggers innovation and quality improvements, guarantees

market prices, and maximizes consumer welfaremarket prices, and maximizes consumer welfare

Individual businesses traditionally seek to avoid competition but Individual businesses traditionally seek to avoid competition but

industries and consumers (and the economy as a whole) thrive in a industries and consumers (and the economy as a whole) thrive in a

competitive environmentcompetitive environment

It can therefore be argued that a competition policy is required to It can therefore be argued that a competition policy is required to

ensure that adequate levels of competition are maintainedensure that adequate levels of competition are maintained

Five competitive forces which determine intensity of competition in a Five competitive forces which determine intensity of competition in a given industry (Porter)given industry (Porter)

FDI affects all five forces and can positively affect competition

Bargaining power of suppliers or customers can be enhanced (when it Bargaining power of suppliers or customers can be enhanced (when it is low) or reduced (when it is high) with TNC entry as supplier (e.g. is low) or reduced (when it is high) with TNC entry as supplier (e.g. automobile components) or customer (e.g. large retailer)automobile components) or customer (e.g. large retailer)

Role of TNC as supplier or customer is enhanced through backward Role of TNC as supplier or customer is enhanced through backward and forward linkagesand forward linkages

TNCs are new entrants and have power to lower barriers to entry: TNCs are new entrants and have power to lower barriers to entry: TNCs can provide substitutes through their high marketing and R&D TNCs can provide substitutes through their high marketing and R&D capabilitiescapabilities

TNCs can directly add to competition/rivalry in the industry by TNCs can directly add to competition/rivalry in the industry by increasing the number of playersincreasing the number of players

Contribution is particularly positive when TNCs are SMEsContribution is particularly positive when TNCs are SMEs

Possible negative impacts of TNCs on Possible negative impacts of TNCs on competitioncompetition

When TNCs are large and powerful, they may monopolize the local When TNCs are large and powerful, they may monopolize the local industry and raise entry barriers. I.e. through their superior industry and raise entry barriers. I.e. through their superior knowledge, management and marketing expertise and technological knowledge, management and marketing expertise and technological edge they can crowd out domestic enterprisesedge they can crowd out domestic enterprises

They have the power to engage in anti-competitive behaviour (e.g. They have the power to engage in anti-competitive behaviour (e.g.

predatory pricing, dumping, cartels)predatory pricing, dumping, cartels)

They can monopolize intellectual property rightsThey can monopolize intellectual property rights

They can take over monopoly public enterprises through privatizationThey can take over monopoly public enterprises through privatization

They can take over weak domestic enterprises (e.g. Asian 1997 crisis) They can take over weak domestic enterprises (e.g. Asian 1997 crisis)

and as a result they can rapidly become dominant player which may and as a result they can rapidly become dominant player which may

lead to abuselead to abuse

TNCs affect competition in developing countries through TNCs affect competition in developing countries through their dominant role in international tradetheir dominant role in international trade

They are involved in 2/3 of all international trade; 1/3 is intra-firm They are involved in 2/3 of all international trade; 1/3 is intra-firm

trade (UNCTAD, 2002)trade (UNCTAD, 2002)

They often get special privileges when they are export oriented They often get special privileges when they are export oriented

They are more likely to engage in dumpingThey are more likely to engage in dumping

They are major holders of IPR which may restrict tradeThey are major holders of IPR which may restrict trade

Domestic market-oriented TNCs will often call for trade protectionDomestic market-oriented TNCs will often call for trade protection

TNCs view of competitionTNCs view of competition

TNCs, like all businesses, tend to avoid competitionTNCs, like all businesses, tend to avoid competition

However, they are attracted to high growth economies which operate on However, they are attracted to high growth economies which operate on

market economic principles, including competitionmarket economic principles, including competition

Therefore, economies which demonstrate national competitiveness in a Therefore, economies which demonstrate national competitiveness in a

given industry (including competition) are better able to attract FDI in given industry (including competition) are better able to attract FDI in

that industrythat industry

However, once attracted, TNCs may strive to reduce competition However, once attracted, TNCs may strive to reduce competition

through their superior assetsthrough their superior assets

The contribution of TNCs to national development is therefore enhanced The contribution of TNCs to national development is therefore enhanced

through the implementation and enforcement of an adequate through the implementation and enforcement of an adequate

competition policy/law in addition to an adequate investment policy/lawcompetition policy/law in addition to an adequate investment policy/law

Investment policy vs. competition Investment policy vs. competition policypolicy

Goal of investment policy is to attract FDI. Improving competition may be part of Goal of investment policy is to attract FDI. Improving competition may be part of that policy. In turn, FDI may enhance competition (like increased imports)that policy. In turn, FDI may enhance competition (like increased imports)

Goal of competition policy is to maximize efficient utilization and allocation of Goal of competition policy is to maximize efficient utilization and allocation of resources and/or consumer welfare through the establishment of a level playing resources and/or consumer welfare through the establishment of a level playing field; FDI attraction can be part of that policy; competition policy ensures that field; FDI attraction can be part of that policy; competition policy ensures that TNCs cannot exploit their often superior assetsTNCs cannot exploit their often superior assets

Investment laws tend to have competition provisions while competition laws have Investment laws tend to have competition provisions while competition laws have implications for FDIimplications for FDI

Investment laws tend to discriminate among foreign and domestic companies; Investment laws tend to discriminate among foreign and domestic companies; competition law is non-discriminatory and therefore attracts FDIcompetition law is non-discriminatory and therefore attracts FDI

Sometimes both policies are incompatible, e.g. incentives to attract FDI give TNCs Sometimes both policies are incompatible, e.g. incentives to attract FDI give TNCs an unfair competitive edge; attracting more FDI may negatively affect the level of an unfair competitive edge; attracting more FDI may negatively affect the level of competitioncompetition

Therefore investment and competition policies should be mutually consistent and Therefore investment and competition policies should be mutually consistent and coherentcoherent

Experiences in Asia PacificExperiences in Asia Pacific

Investment policy and laws have become norm; however their implementation Investment policy and laws have become norm; however their implementation and enforcement have a mixed track record; institutional framework also tends and enforcement have a mixed track record; institutional framework also tends to be weakto be weak

In many countries, investment policies tend to focus on attracting FDI through In many countries, investment policies tend to focus on attracting FDI through incentives rather than on the basis of competitiveness factorsincentives rather than on the basis of competitiveness factors

In many countries competition is restrained as a result of market concentration In many countries competition is restrained as a result of market concentration and government intervention, including public enterprise monopolies. However, and government intervention, including public enterprise monopolies. However, privatization policies have been and/or are currently being implemented in privatization policies have been and/or are currently being implemented in virtually all Asian countriesvirtually all Asian countries

Competition policy and laws are relatively new concept and still lacking in many Competition policy and laws are relatively new concept and still lacking in many countries though awareness is growing, especially after the Asian 1997 crisiscountries though awareness is growing, especially after the Asian 1997 crisis

Often trade and investment laws and liberalization policies are quoted in the Often trade and investment laws and liberalization policies are quoted in the context of competition policy. However, while such laws/policies may promote context of competition policy. However, while such laws/policies may promote competition they do by themselves not regulate competition and prevent competition they do by themselves not regulate competition and prevent monopolies.monopolies.

Examples in the regionExamples in the region Republic of Korea: until crisis no effective pro-FDI and competition regime despite Republic of Korea: until crisis no effective pro-FDI and competition regime despite

1980 competition law; Even now, chaebols continue to dominate1980 competition law; Even now, chaebols continue to dominate India, Pakistan, Sri Lanka: competition regime/laws in place but their effective India, Pakistan, Sri Lanka: competition regime/laws in place but their effective

implementation/enforcement is often lacking; India is slowly liberalizing FDI and implementation/enforcement is often lacking; India is slowly liberalizing FDI and enacted new competition law in 2002; Sri Lanka has liberal investment regimeenacted new competition law in 2002; Sri Lanka has liberal investment regime

Hong Kong, China; Singapore: very liberal investment regimes; competition Hong Kong, China; Singapore: very liberal investment regimes; competition promoted but no consolidated competition policy or law (currently in process); promoted but no consolidated competition policy or law (currently in process); sectoral approach; market knows bestsectoral approach; market knows best

Economies in transition in Central Asia: competition law enacted in early 1990s; Economies in transition in Central Asia: competition law enacted in early 1990s; enforcement/implementation issue; main modality: privatizationenforcement/implementation issue; main modality: privatization

China, Viet Nam: main FDI destinations but investment regime does not meet China, Viet Nam: main FDI destinations but investment regime does not meet international standards; competition policies and legislation are fragmented and not international standards; competition policies and legislation are fragmented and not effective. In China, adoption of an anti-monopoly law is currently in process; Viet effective. In China, adoption of an anti-monopoly law is currently in process; Viet Nam adopted competition law in 2004.Nam adopted competition law in 2004.

ASEAN: Competition law in Thailand strengthened, in Indonesia formulated only ASEAN: Competition law in Thailand strengthened, in Indonesia formulated only in response to crisis (implementation?); Malaysia and Philippines have competition in response to crisis (implementation?); Malaysia and Philippines have competition policy but no specific competition lawpolicy but no specific competition law

LDCs like Bangladesh, Cambodia, Lao PDR and Nepal: investment policies and LDCs like Bangladesh, Cambodia, Lao PDR and Nepal: investment policies and laws in place and are very liberal by international standards, but poor enforcement laws in place and are very liberal by international standards, but poor enforcement due to lack of resources; no competition policy, lawdue to lack of resources; no competition policy, law

Some conclusionsSome conclusions

For some countries it was possible to develop rapidly despite For some countries it was possible to develop rapidly despite

restrictive FDI and competition regimesrestrictive FDI and competition regimes

However, the region faced a reality check in 1997However, the region faced a reality check in 1997

In the current era of globalization and liberalization it is doubtful that In the current era of globalization and liberalization it is doubtful that

successful development can be achieved without a strong supporting successful development can be achieved without a strong supporting

investment and competition regimeinvestment and competition regime

The issue is not whether you have excellent investment and The issue is not whether you have excellent investment and

competition laws: relevance, implementation and enforcement are competition laws: relevance, implementation and enforcement are

crucialcrucial

Need for consistency and coherence between industrial, trade, Need for consistency and coherence between industrial, trade,

investment, competition and IPR regimesinvestment, competition and IPR regimes

Proper policy responsesProper policy responses

Trade liberalization should be combined with conducive industrial, Trade liberalization should be combined with conducive industrial, investment and competition policies;investment and competition policies;

Industrial policy should strive towards forging strong backward and Industrial policy should strive towards forging strong backward and forward linkages between TNCs and domestic enterprises where feasibleforward linkages between TNCs and domestic enterprises where feasible

Establishment of proper investment and competition (and related) laws Establishment of proper investment and competition (and related) laws and institutions;and institutions;

Such laws need to be realistic and duly implemented and enforced and Such laws need to be realistic and duly implemented and enforced and applicable to public enterprisesapplicable to public enterprises

Enforcement institutions need proper expertise, mandate and resources;Enforcement institutions need proper expertise, mandate and resources; Coordination among institutions and consistency among laws and Coordination among institutions and consistency among laws and

regulations are essential: sometimes consolidations may be usefulregulations are essential: sometimes consolidations may be useful

Proper policy response, cont.Proper policy response, cont.

Privatization of government enterprises, especially monopolies. Successful Privatization of government enterprises, especially monopolies. Successful

privatization process requires healthy environment of competition. With privatization process requires healthy environment of competition. With

regard to public goods and services, government monopolies may be more regard to public goods and services, government monopolies may be more

desirabledesirable

IPR regime needs to balance investment promotion objectives with IPR regime needs to balance investment promotion objectives with

competition objectivescompetition objectives

For small countries, regional cooperation is essential, but even for bigger ones For small countries, regional cooperation is essential, but even for bigger ones

it is highly recommendedit is highly recommended

For FTAs to be effective, investment and competition provisions could be For FTAs to be effective, investment and competition provisions could be

included (e.g. ASEAN/AFTA has common frameworks for investment and IPR included (e.g. ASEAN/AFTA has common frameworks for investment and IPR

but not for competition)but not for competition)

Some questions arising from Asian Some questions arising from Asian experienceexperience

Is competition a necessary condition for competitiveness?Is competition a necessary condition for competitiveness?

How can competition be maximized: through the market How can competition be maximized: through the market

or through the government? I.e. is a competition policy/law or through the government? I.e. is a competition policy/law

necessary to ensure competition?necessary to ensure competition?

How does the need for competition be reconciled with the How does the need for competition be reconciled with the

need to create economies of scale for global need to create economies of scale for global

competitiveness? Are “national champions” compatible competitiveness? Are “national champions” compatible

with competition objectives?with competition objectives?