The rapidly increasing globalization of business can yield enormous benefits for economic growth and development - but it could also lead to the domination of some markets by a few major corporations. Policies to maintain the efficient functioning of markets and limit the scope for restrictive business practices are therefore needed, the United Nations Conference on Trade and Development (UNCTAD) states today.
This key message is contained in World Investment Report 1997: Transnational Corporations(1), Market Structure and Competition Policy (WIR97). It is issued at a time of booming international investment, when the number of transnational corporations (TNCs) is growing fast and the stock of their assets and volume of their sales across the globe are hitting record levels. The liberalization of foreign direct investment (FDI) regimes is not only fostering this boom, but it is also creating more business competition in many markets.
WIR97 states that the scale of some mergers and acquisitions (M&As) and the possibility that some markets might be dominated by a few firms is raising important questions of competition policy. "This was recently highlighted, for example, in the European Union debate concerning the merger of Boeing and McDonnell Douglas, two of the world´s largest aerospace companies," notes WIR97.
Today´s report points out that because of the greater competitive strength that TNCs sometimes have FDI could increase market concentration and raise the scope for restrictive or anticompetitive practices by firms. But, as TNCs become more efficient through integrating production internationally, they can also enhance competition by introducing new, or better quality, products to national, regional and global markets. The widened scope of markets in an era of globalization enables TNCs to respond rapidly to higher prices anywhere in the world -- not only through trade, but also through international production. This type of supply response becomes particularly important in services, many of which are non-tradable.
Effective competition policies are essential
WIR97 stresses that the reduction of barriers to FDI and the establishment of positive standards of treatment for TNCs need to go hand-in-hand with the adoption of measures aimed at ensuring the proper functioning of markets including, among others, measures to control anti-competitive practices by firms. "Governments must foster open investment and trade policies, as well as a culture of competition, to maximize the potential of their economies," states UNCTAD Secretary-General Rubens Ricupero.
"The expansion of international production would not have been possible if it were not for the ongoing liberalization of FDI regimes. Maximizing the benefits of FDI requires effective competition policy instruments at the international level," adds the Secretary-General.
He states: "There is a potential for enormous efficiency gains because of the globalization of production and the integrated international business production systems, including alliances, that are emerging. But we want to stress that competition policies must be given increasing attention because of the need to balance the benefits of globalization against possible anticompetitive effects."
Combining key policies
A key message for governments is that competition policies, FDI policies and trade policies must be mutually supportive if efforts are to succeed to make markets function properly, WIR97 reports, in a special section entitled: Foreign Direct Investment, Market Structure and Competition Policy. Countries must not only have competition policies in place; they must ensure that they are effectively implemented. This requires, for example, a capable competition-enforcement agency with powers to investigate businesses. These powers should include the ability to analyze the competitive effects of concentrative forms of FDI.
Healthy economies require not only liberal trade and FDI regimes, but markets that are contestable - where firms can enter and exit markets with ease - and in which firms face the discipline of competition, states WIR97. In some instances, through their direct investments, M&As and joint ventures, TNCs may be able to reduce contestability and competition in markets, unless checked by governments. This does not only apply to direct equity participation by firms in foreign locations. It can also result from agreements between major firms in an international setting, for example, to concentrate their research and development operations.
WIR97 notes that, "to the extent that contestability and competition considerations gain in importance in guiding policies, and the more liberal trade and FDI policies become -- but, by themselves, do not always lead to contestable markets -- competition policy emerges as primus inter pares among policy instruments used to maintain contestability and competition" (p. xxxii).
Government actions - an increasingly complex task
About 60 nations today have national competition policies in place. But their evolution is becoming increasingly more complex.
As this report makes clear, the regionalization and globalization of markets and their underlying production structures make it increasingly difficult to define, and measure, market concentration and thus to determine the emergence of dominant positions (and the possibilities of abuse of market power) by referring solely to individual national markets.
International policy responses are therefore also needed, In this regard, WIR97 notes that while bilateral cooperation among competition authorities is growing, formal agreements are limited to a relatively small number of countries. Regional cooperation efforts are being seen in some areas. The European Union is a notable case, where member countries have agreed on common competition rules and have a common competition authority.
The report points out that work on restrictive business practices is proceeding in various fora. In particular, decisions were taken at the first Ministerial Conference of the World Trade Organization (WTO), in Singapore last December, to study relationships between trade, investment and competition policies. WTO Working Groups are to draw upon the work under way in UNCTAD and other intergovernmental fora. But noting that the UNCTAD Set of Principles and Rules for the Control of Restrictive Business Practices is the only multilateral instrument covering all aspects of the control of restrictive business practices, WIR97 asks whether new international initiatives are needed in this area.