13 Enforcement

This chapter explores the myriad difficulties and obstacles for competition law enforcement in developing countries and suggests possible solutions to some of these difficulties. Competition culture is generally lacking in developing countries. In addition, developing country authorities often face a particularly challenging enforcement environment due to past policy failures by the government, especially in the context of privatization. Another major external impediment to effective competition law enforcement is the lack of political will on the part of the government to enforce the law. The chapter also looks at the lack of authority independence, financial resources, enforcement powers, availability of data, and judicial expertise. Institutional design can have a bearing on setting of enforcement priorities. Poor institutional design may take flexibility away from the authority and make it impossible for the authority to set enforcement priorities. Apart from enforcement, however, another very important part of an authority’s work is advocacy. It is through advocacy with the general public that the authority can hope to build a competition culture. Meanwhile, it is through advocacy with the government that the authority can ensure government policies do not create intractable competition problems that are beyond the capability of the authority to solve. The chapter then considers the benefits and limitations of a regional approach to competition law enforcement. Enforcement and procedure

12 The Intellectual Property–Competition Interface

This chapter focuses on the interface between intellectual property and competition laws. The interface is the most complex between competition law on the one hand and patent law on the other hand. Developing countries only engage in what can be called laggard innovation, which includes acquisition of tacit knowledge, imitation, and process innovation. This may call for a reconsideration of the appropriate approach to the patent–competition interface in developing countries because laggard innovations, with the exception of process innovation, are not the subject of protection of the patent system. If laggard innovations are not the subject matter of protection of the patent system, the patent-competition rules should have little relevance for the quest for innovations in developing countries. In fact, one can argue that the patent system is an impediment to one of the main sources of laggard innovation, imitation, and that the patent-competition rules should be adjusted in a way to facilitate it if one were serious about adopting a pro-growth approach to competition law enforcement in developing countries. This implies that for developing countries that do not produce patentable innovations, there is no need to balance between patent and competition policies. There is in fact no conflict between these two policy objectives. Intellectual property rights and Market-sharing and customer allocation Enforcement and procedure

8 A Proposed Approach

This chapter offers a coherent approach to competition law enforcement in developing countries. The promotion of economic growth and development should be the paramount objective of competition law enforcement in developing countries. However, ascribing the objective of the promotion of economic growth and development to competition law enforcement in developing countries does not require a detraction from a focus on promoting competition. In addition, competition law enforcement in developing countries must abide by the principle of causing no harm to the poor in society. If a developing country decides to pursue industrial policy, its competition authority may be asked to balance between competition and industrial policy objectives. Ultimately, competition law enforcement in developing countries must take into account the economic characteristics of developing countries as well as the enforcement capacity of developing country authorities.

7 Economic Characteristics of Developing Countries

This chapter highlights the economic characteristics of developing countries. The economy of a developing country may possess characteristics that distinguish it from an industrialized economy, and markets often function differently in developing countries. These characteristics include small, fragmented, and less competitive domestic markets; widespread poverty, which further exacerbates the small size of the domestic market; significant variations in firm productivity; barriers to entrepreneurship; missing institutions and prevalence of market failure; poorly developed financial markets; heavy state presence; prevalence of the informal sector; domination of large business groups; and widespread corruption and state capture. Approaches to competition law enforcement formulated in industrialized economies are based on the economic environment of these countries and do not reflect the circumstances of a developing country economy. The chapter then discusses each economic characteristic one by one, proposing necessary adjustments to competition law doctrines and enforcement approaches.

6 Industrial Policy and Competition Law Enforcement

This chapter examines the role of industrial policy in developing countries. On the one hand, industrial policy is arguably the antithesis of competition law and policy. Industrial policy substitutes government planning for competition and is vehemently opposed if not maligned by adherents of free market economics. Industrial policy as practiced in some countries such as Japan and Korea have entailed government-organized cartels and the grooming of national champions, both of which are direct affronts to the notion of competition. On the other hand, to the defenders of industrial policy, it has successfully lifted a number of Asian countries out of poverty and turned them into industrial and technological powerhouses. However, even the extent to which the success of these economies can be attributed to industrial policy is highly contested. There are hence two layers to the controversy. The first is whether industrial policy worked at all. The second is even if it did, whether a growth strategy relying on competition is superior to industrial policy, and if not, how competition law enforcement should accommodate industrial policy.

11 Merger Control

This chapter discusses how developing countries should approach merger review. One of the first issues that needs to be addressed is whether developing country authorities should devote resources to merger review at all. It has been argued that merger review is time-consuming and resource-intensive and should be left to more sophisticated and well-funded authorities. The time and resource intensity of merger review comes down to institutional design. It is thus concluded that an ex ante regime is preferable. A developing country authority can choose between mandatory and voluntary notifications and adjust its notification thresholds to strike a balance between maintaining sufficient scrutiny over problematic mergers and conserving enforcement resources. The chapter then considers various options available to developing country authorities. However, a number of other issues remain. The first is what is the appropriate welfare standard. It is argued that despite the highly controversial nature of the issue, the consumer welfare standard should be preferred. The second is how developing country authorities should analyze different types of merger: horizontal, vertical, and conglomerate. The answer to this question depends on the authority’s enforcement capacity. Merger control Horizontal mergers Vertical effects Vertical agreements Conglomerate effects Judicial remedies

9 Cartels and Restrictive Agreements

This chapter explores how developing countries should approach restrictive agreements under the framework proposed in the previous chapter. Certain things are the same regardless of whether it is an industrialized economy or a developing country. Cartels are generally considered to be the cardinal sin in competition law and should be prohibited in any country. What may need to be adjusted in developing countries, however, is the proof required to establish an agreement from circumstantial evidence. One may even question whether the insistence on an agreement serves any useful purpose for developing countries. As for non-cartel horizontal agreements, it has been suggested that horizontal cooperation agreements may make valuable contributions to productivity growth. Given that productivity growth is one of the main engines of economic growth, developing country authorities may need to adopt a more permissive attitude toward horizontal cooperation agreements. At the same time, further linkages between competitors in already highly concentrated markets may render collusion or price coordination even more likely. Therefore, a compromise will need to be reached between these two conflicting considerations. The chapter also considers vertical agreements.

1 Basic Premise and Classification of Developing Countries

This chapter argues that there is no one universal approach to competition law and that the design and enforcement of competition law needs to take into account the political, economic, and social circumstances of the country. Given the overwhelming obstacles to attaining economic growth and development, economic policies in a developing country must be tailored to maximize the prospect of growth and development. This means that competition law enforcement should aim to promote growth and meet development needs, even if this may lead to conflict with other objectives of competition law such as the protection of consumer welfare and the pursuit of economic efficiency. Moreover, the various classifications of developing countries suggest that there is significant diversity among them. Indeed, there are likely to be significant differences in terms of market conditions among developing countries. Thus, it is unlikely that there is a single approach to competition law enforcement suitable for all of them.

Introduction

This introductory chapter provides an overview of competition law in developing countries. Following the proliferation of competition law across the globe in the last few decades, developing countries now comprise a majority of the jurisdictions that have in place a competition law. At least in terms of the language of the main substantive provisions on restrictive agreements and abuse of dominance, many of these new jurisdictions have chosen to follow the U.S. and the EU models. However, the proliferation of competition law regimes has given rise to a fear of balkanization of competition law enforcement and an excessive compliance burden for businesses, especially multi-national corporations. Out of this fear grew the rallying cry for convergence. The implicit assumption behind the drive for convergence is that there exists one or a handful of models of competition law enforcement that are suitable for most countries across the globe, to which new jurisdictions are expected to converge. Some commentators and officials have challenged this, questioning whether the legal principles regulating markets in the industrialized economies of the United States and the European Union can be transplanted directly to developing countries. Apart from the need to tailor to the local economic environment, competition law must contribute to the economic growth and development agenda of developing countries.

4 Competition (Law Enforcement) and Economic Growth

This chapter assesses whether competition promotes economic growth. In contemplating the design of competition policy in a developing country, the first question to be answered is whether a policy that aims to maximize competition with competition law enforcement will deliver economic growth and meet the development needs of a developing country. As indicated by all the growth models examined in the previous chapter, the key to economic growth is the ability to create more output for the economy with existing resources; it relies on productivity gains and innovation. The chapter then examines whether competition promotes productivity growth and innovation. Overall, there is overwhelming evidence that increased competition leads to higher productivity and economic growth. There is also very strong evidence that competition law enforcement promotes productivity and economic growth. However, it should be noted that at least one study concludes that competition law enforcement has negligible effect on economic growth. Meanwhile, there is some conflicting evidence as to whether a minimum degree of institutional capacity is needed to allow a country to benefit from the introduction of competition law. One other factor that has been traditionally given a high degree of importance for economic growth in developing countries is foreign direct investment.