Transcript Competition Law and Innovation

ASEAN Competition Conference
“Fostering the Promotion of Competition
Policy for Regional Development”
15-16 November 2011, Bali
Dr R Ian McEwin
•Visiting Professor of Law, National University of
Singapore and Chulalongkorn University, Bangkok
•Director, Global Economics Group, Chicago
•Senior Economic & Regulatory Advisor, Rajah & Tann, Singapore
Comments on Healey and Pasaribu
• Both useful contributions on the benefits to Australia and Indonesia
• Australia
– Illustrates the importance of a co-ordinated economic policy approach to
competition reform – Australia was a ‘basket case’ economically in the 1970s
when competition law was introduced in 1974.
– Started slow – regulator looked at anti-competitive practices – surprised at
extent of cartels etc - then competition advocacy became important and led to
the Hilmer reforms – based on sound economic analysis by the Productivity
Commission and think tanks like the Centre for Policy Studies at Monash
University.
– Shows importance of fundamental economic research to policy
– Australia has done much better than Europe and the U.S. due to good
competition policies
• Indonesia
– Empirical work shoes competition is good for consumers, economic growth
and development (also to firms – as they become more efficient their market
opportunities increase)
– Important to quantify benefits – too little empirical work around the world –
particularly good results on SMS cartel - KPPU is to be congratulated on doing
this work – not much done by other competition authorities around the world
– Important that benefits be shown to consumers but also to firms
Likely Challenges in ASEAN
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Introducing regulation of competition into countries without a culture of
competition is difficult
Better to have simple clearly understood laws – business and legal certainty is
important – best achieved by using an economics effects approach to the law
– that way legal certainty is increased – so legal institutions matter
Enforcement should focus on issues that have an immediate impact on
economic welfare e.g. cartels - which people can understand if price
reductions follow
But some business will fight it because they have made considerable profits
from lack of competition in the past – particularly in Asia where obtaining
protection from competition from the top guarantees big profits.
Resisting interference – particularly at the political level – commissions need
to be independent and have commissioners who understand the importance
of competition to overall economic welfare and development – what to do
when consumers in other ASEAN countries benefit more from domestic
reform?
Big rewards to economic growth and development from an economics
focussed competition law – even those who stand to lose in the short-term
gain in the long term – if they are as good as they say they are.
Competition law and Economic Performance
Arguments that Competition Law
Hinders Economic Performance
Arguments that Competition Law
Promotes Economic Performance
•
Cartels good because they prevent
price competition – good on social
stability grounds and also help to
finance investments needed for
growth
•
Cartels not the best way to finance
investment – better to use
investment credits, subsidies. Social
costs of increase competition can be
ameliorated by higher incomes,
transfer payments
•
Mergers are needed to promote
national champions
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Unconstrained rivalry in certain
industries like banking sector and
network industries is inefficient
•
Larger firms do not have greater
productivity levels and growth –
better to compete at home to
compete overseas (Porter) No.
Argument for a sectoral exemption
from general competition law but not
from competition policy
•
Allowing local companies to behave
predatorily towards overseas
companies is good
•
Overseas companies force local
companies to be efficient and so be
internationally competitive
Introducing Competition Policy
• Competition policy is less interventionist than other mainly
industrial policies adopted by many developing countries.
• Greater reliance on markets is inevitable as economics develop
because central planners do not have sufficient information to
know what is happening
• For example, Graham notes that:
"When the leading export sector of a nation becomes increasingly
complex, industrial policy fails to work as well as it apparently did at
earlier stages of development. Hence in order to continue to
develop internationally competitive export industries, government...
have found that as a pragmatic matter, adoption of less
interventionist policies has been necessary.“
Graham “Competition policies in the Dynamic Industrialising Economies: the case of China, Korea
and Chinese Taipei” Mimeo prepared for OECD Development Centre.
Why Did Countries Introduce Competition Policies ?
• Palim (1998) looked at reasons why 70 countries
implemented competition policy
• He found that the implementation of competition policy was
associated with economic reform and increased level of
development
• In Europe, Palim found that the implementation of
competition law was significantly associated with:
– Europe’s market unification attempts (for relevant countries),
– dramatic economic crises (debt default), and
– the transition from a planned to a market economy
• Palim found no evidence that:
– foreign aid had a positive influence on the implementation of
competition policy
– the implementation of competition policy was related to
international trade
The Importance of Legal Institutions
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Legal and institutional structures are important to economic growth. Where
property rights are properly protected, competition law helps to promote efficient
firm growth because they can capture the returns from their investments.
Competition law can help to ensure that firms cannot take advantage of their market
power to reduce the profitability of other, more efficient firms. Businesses will have
greater confidence that they can compete on the merits and so efficient firms will
not be deterred from entering a markets. Knowing that other firms will have to
compete on the merits forces other firms to behave competitively and efficiently.
Competition law can help to protect developing countries against anticompetitive
practices by overseas companies. In the early stages of development and a limited
industrial base, developing countries have to rely on imports. To the extent that such
imports are subjected to anti-competitive practices either by domestic firms or by
foreign suppliers of these imports, importing countries will face higher import prices.
Not only are final consumers disadvantaged but if local firms use higher priced
imports in production then their products will be less competitive both locally and in
export markets
Competition law helps to ensure that both local and foreign investors feel more
confident about protecting their investments. This will lead to more foreign
investment as they will feel better protected by anti-competitive conduct by less
efficient firms.
Competition policy helps to allow firms to compete on the basis of relative efficiency,
and therefore provides the incentive to improve internal efficiencies, and invest to
promote dynamic efficiency.
Evidence on the Relationship Between Competition Law
and Economic Performance
• Dutz and Hayri (1999) studied the strength of association
between intensity of economy wide competition and growth. To
capture intensity of economy wide competition, they
constructed three types of variables related to policy, structure
and mobility.
– Policy measures capture the quality of the microeconomic incentive
regime and the enabling legal and regulatory framework in areas that
directly promote competition.
– Structure variables reflect the extent to which market structure is
concentrated from an economy wide perspective.
– Mobility variables capture the ease with which new enterprises can
enter and grow in any market.
• Their results indicate that there is a strong correlation between
the effectiveness of competition policy and growth. They
concluded that the effect of competition policy on growth is
robust and goes beyond that of trade liberalisation, institutional
quality and a generally favourable policy environment.
Evidence on the Relationship Between Competition Law
and Economic Performance
• Bee San and Changfa Lo (2002) examined the social
and economic impact of the implementation of the
Fair Trade Law (FTL) on Taiwan's economy. They
utilised a multi-equation system taking into account
FTC's statistics on decision with sanctions, together
with key macroeconomic indicators. Their results
showed that the implementation of the FTL in Taiwan
would significantly enhance Taiwan's international
competitiveness and its exports. In addition, the
implementation of FTL would also create more job
opportunities and stimulate more innovation efforts.
Dutz and Vagliasindi (2000)
European Economic Review Vol 44, May 2000, pp 762-772
• Between 1990 and 1996, competition laws were adopted in 22 of the 26
transition economies of eastern Europe and the former Soviet Union. They
define a range of competition policy implementation criteria relevant for
transition and developing economies
• They assessed the effectiveness of competition policy implementation across 18
countries based on data from each country's competition authorities and
supplemented with assessments by legal practitioners.
• They related three dimensions of the effectiveness of competition law
1.
2.
3.
Enforcement
competition advocacy and
institutional effectiveness)
to indicators measuring the intensity of competition (measured by economywide enterprise mobility).
• They found a robust positive relationship between effective competition law
implementation and intensity of competition (i.e. the expansion of more
efficient private firms)
• NOTE: They found most important factor in effective competition was
institutional effectiveness which highlights the importance of independence
(from pressure groups), transparency and the effectiveness of appeals
Evidence on Relationship Between
Competition law and Economic Performance
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Dutz and Hayri (2001) also examined whether economy-wide anti-trust policy or
measures of concentration are significantly and robustly correlated with higher
rates of per capita economic growth
They used data from over one hundred countries during 1986-1995. The
effectiveness of anti-trust policy was measured by answers to a large survey of top
executives in 53 countries, posing questions about anti-monopoly policy in their
country, as well as a measure of mobility of the largest firms.
They found that measures of effective antitrust policy are positively associated
with residual growth (that is, growth that is not explained by variables for which
there is some consensus that they lead to higher economic growth – trade
openness, human capital and investment in physical capital).
Additional sensitivity analysis indicates that effective anti-trust policy has an
impact distinct from that of trade openness. In a previous study using the same
data set, Dutz and Hayri (2000) had also established that there is a strong
correlation between the effectiveness of competition policy and growth. Their
analysis suggests that the effect of competition on growth goes beyond that of
trade liberalisation to institutional quality and a generally favourable policy
environment.
Dutz, A. and Hayri, A (2002), Does Effective Anti-trust Policy Spur Economic
Growth? Paper presented at the OECD Global Forum on Competition February
2002
Kee and Hoekman “Imports, Entry and Competition Law as
market Disciplines World Bank (2003)
• Kee and Hoekman (2003) investigate the effect of
competition law on the contestability of markets in 42
countries over a period of 18 years. They find that
competition law has no direct impact on industry
markups. However, they find some evidence of
competition law having indirect impact on industry
markups in the long run by promoting a larger number
of domestic firms. The authors also make the startling
suggestion that the reduction of trade barriers and
government regulation over entry-exit conditions yield a
higher level of benefit compared to the implementation
of competition policy.
Michael W. Nicholson “An Antitrust Law Index for Empirical
Analysis of International Competition Policy
Jnl of Competition Law & Economics (2008) 4 (4): 1009-1029.
• The Antitrust Law Index maps the presence of “laws on the
book” into a numerical measure of competition regimes by
assigning binomial scores for the presence of particular
laws in a jurisdiction, and then summing the individual
components to yield a total score.
• The key result is that strong laws do not necessarily
represent effective antitrust policy. There appears to be a
nonlinear relationship between adaptation of antitrust laws
and the size of national economies.
• The results suggest that the impetus for adopting antitrust
laws appears to be related to the guidelines of “model”
laws and highlights the gap between de jure legislation and
de facto implementation.”
“THE EFFECT OF COMPETITION LAW ENFORCEMENT ON ECONOMIC
GROWTH” Tay-Ceng Ma, Jnl of Competition Law & Economics (2011)
• Tries to identify the effect of competition law on productivity growth by
conducting a cross-country study using a sample of 101 countries that
enforce competition law.
• The evidence shows that the effect exhibits an asymmetrical pattern
depending on the stage of development of each country.
– For the poor less developed countries (LDCs) whose institutional
frameworks do not exceed a threshold level, competition law has a very
limited effect on changing economic activity, and its legislation is neither
harmful nor helpful in terms of market competition or economic growth.
– For developed countries (DCs) and middle-income LDCs, although their
institutional frameworks have passed a threshold level, the effect of
competition law on growth still depends on the law enforcement efficiency
of the government.
– That is: “Without an efficient enforcement scheme, a stronger
competition law not only cannot support productivity growth, but
might also slow down the potential path of growth.”
Conclusions
• Competition law enforcement is critical to
productivity and economic growth – vested
interests can hinder growth
• Competition authorities should focus on the
economic effects of conduct – not just apply the
rules – mistakes made for long-time in the United
States (up until the 1960s) and Europe (up until
the 1990s)
• Significant benefits for everyone in ASEAN particularly by changing attitudes to competition
and rivalry – as happened in Australia from the
1980s onwards