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Merger Control and Economic Growth of LDCs: Some Observations and Recommendations

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Abstract

The aim of this paper is to evaluate merger control as a segment of competition policy in less developed countries (LDCs) and to propose desirable regimes, using economic growth as the evaluation standard. Three regimes of merger control are recommended, depending on the level of institutional and economic development: for LDCs with low levels of both, the absence of merger control is suitable; for LDCs with intermediate levels of both, very restricted merger control is recommended; this should evolve into somewhat restricted merger control for the remaining LDCs. Advocacy is recommended as the main substitute activity of the national competition authorities.

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Notes

  1. Although Ma (2016) demonstrated with a panel of data (109 countries over 15 years) that there is a statistically significant relationship between competition policy and democracy, and that the main mechanism of that relation is the protection of consumers and small producers, the strength of this relationship is rather weak. He finds that the appropriate way to safeguard democracy is by using taxation and transfers and providing income redistribution that is favourable to democracy. In short, competition policy should not be used for promoting democracy, although it can have beneficial effects in that respect.

  2. Within this model, the rents are crucial incentives for investments, and their allocation (appropriation by the investor or reinvestment) is of secondary importance, though some bottom line of their marginal product should be established. Nonetheless, if they are reinvested, due to the high expected returns, a virtuous circle can be established, to be undermined only by decreasing returns to investment. There is no empirical evidence on the allocation of rents in the LDC. Some empirical evidence is provided by Bertocchi and Canova (2002) and Akkermans (2017), but this approach is focused on foreign direct investments (FDIs) only, neglecting domestic investors, and is based on the national accounts approach: the difference between GNP and GDP, though corrected for the international wage flow (Akkermans 2017). Without appropriate empirical evidence, and without information on the intertemporal preferences of the investors, it can only be assumed that there is a mixture of reinvestment and dividends as rent allocations.

  3. According to the insights of growth theory, growth that is based on the improvement of efficiency is a transitory, not a steady state economic growth. In other words, it is a one-off increase of the GDP level. Although not sustainable, due to the widespread inefficiencies in LCDs, such an increase of the GDP—and consequently of GDP per capita—can be substantial.

  4. Tariff reductions should be considered as the first step in foreign trade liberalisation; but they are frequently compensated with non-tariff, very often hidden, trade barriers. In such situations, it is not necessary for non-competitive outcomes to be linked to uncompetitive domestic market structures, but rather to the protection from import competition. It can also be linked indirectly: A more concentrated structure of an industry makes collective action easier, and provides greater incentives for incumbent firms to lobby for various non-tariff barriers. Rodriguez and Williams (1994) provide a long list of non-tariff barriers: product standards, technical requirements, environmental standards, etc., all of which produce prices that are higher than marginal costs and yield concomitant rents for domestic producers.

  5. Only one segment of the indicator of competition policy (out of four that were used) deals with merger control as a component of competition policy. It answers the question whether a jurisdiction relies both on remedies and efficiencies in case-by-case deliberation of mergers and their effects: This is basically a question about the level of development of merger control.

  6. Evenett’s argument can be considered in another way: If there is no competition legislation whatsoever, there is uncertainty as to whether the country will introduce it and what it will be like, whether it would be restrictive or not. In other words, the devil that you know is better than the devil that you do not know. The same argument should not be used for merger control, as it is a one-off control and cannot be applied retroactively. Mergers that have been consummated in the past, when there was no merger control, cannot be challenged after its introduction.

  7. Lebedev et al. (2015) surveys the literature that considers performance rather than the incidence of cross-border mergers and acquisitions; they propose—although without empirical verification—that institutional development could be correlated with government effectiveness: increases in the efficiency of cross-border mergers.

  8. Erel et al. (2012) provided a through empirical analysis of cross-border mergers and their factors, but merger control was not one of them. The results support the insight that better accounting standards increase the number and level of cross-border mergers. Again, a potentially spurious positive correlation between stringent merger control and cross-border mergers can be observed.

  9. There is an argument that a deterred merger is not valuable because it does not create enough added value through increased returns, hence these mergers should be blocked anyhow as they do not increase social welfare. Nonetheless, the validity of this argument depends on the transaction costs and asymmetry of information. With both being great, the argument loses its validity.

  10. In the competition law terminology, this could be referred to as dynamic efficiency, and specified as the increase of total welfare (the sum of the consumer’s and producer’s surplus) over time, over a specific time horizon.

  11. Within the same LDC framework the result of the other theoretical model that mergers decrease incentives for investment (Mota and Tarantono 2016)—which is based on the assumption that there are no economies of scale—should be similarly considered.

  12. Not all endogenous barriers to entry are legal. Some of them can be due to the actions of incumbent firms. Nonetheless, it is reasonable to assume that most endogenous barriers to entry are legal—created and maintained by public policies—and we should not rule out that the private interests of the incumbent business elite can influence these policies.

  13. Nonetheless, the empirical analysis by Djankov et al. (2002) provided no evidence that autocracy has a statistically significant relation to the regulation of entry (i.e., legal barriers to entry).

  14. Davis and Williamson (2016) introduced deeply embedded institutions as culture in the analysis of barriers to entry. They have demonstrated that there is an interplay of culture and political/legal institutions. Individualism in an interplay with democratic political system or/and common law tradition can explain low barriers to entry. This result supports sustainability of barriers to entry in LDCs.

  15. The relation between income per capita and democracy, for example, proved not to be significant in the case of countries with substantial natural resources, but it proved to be significant in the cases of other LDCs (Fayad et al. 2012). This demonstrated that the econometric results are not robust to the change of the sample.

  16. Economy of scale is recorded not only in the case of competition policy and the NCAs operations. Alesina and Spalore (2003), considering the size of nations from an economic point of view, specify that economy of scale exists in virtually all cases of provision of public goods.

  17. The Coca-Cola/Cisneros case in Venezuela is the case that is usually referred to as the counterproductive outcome of merger control, with regard to the county’s economic growth.

  18. We are grateful to Daniel Sokol for this insight.

  19. A typical case of an abuse of this type is happened in Slovenia in 2003, with the blocking of a takeover of a domestic brewery (Union) by a multinational company (Interbrew). More than a decade later, the adverse consequences of such a decision/abuse are evident. More on that: https://www.reuters.com/article/us-slovenia-brewery-insight/slovenian-beer-turns-sour-as-state-fire-sale-looms-idUSBRE9BP03320131226 (10.12.2017).

  20. In some transition counties, such as Serbia, merger control effectively “hijacked” competition law enforcement, and most of the activities of the NCA are merger control cases. This is the consequence of low notification thresholds and high fees that are charged for notification, as substantial revenues of the NCAs from merger control provide no incentive to change anything. High fees that law offices charge for merger notification, along with the simple and repetitive jobs that are performed, contribute to the stability of this bad equilibrium.

  21. The impression of the violation of the economy of scope argument can come from an incorrect and out-of-context reading of Ghosal (2013) who specifies that “…the Agency is better off producing the full range of outputs as opposed to a restricted set” (p. 96). This is valid only under the assumption that the full range of outputs is produced. The recommendation to eliminate merger control implies that this assumption is violated.

  22. An efficiency defence would lead to a lack of transparency and legal uncertainty, unless there are clear guidelines—e.g., the 2004 EU merger regulation—which would decrease the legal uncertainty. But this institutional solution is not appropriate for LDCs because it is resource-demanding and it has an anti-merger bias. Chua (2015) recommends that in LDCs the burden of proof should be allocated to the firms—the merging parties—due to the lack of NCA resources that are available for case-by-case consideration of efficiency. Nonetheless, there is a need to verify the claims by the firms; and, due to the asymmetric information, this verification requires substantial NCA resources. Although Chua (2015) considers an efficiency defence very important for LDCs—especially for small LDCs—the arguments that are provided in his paper speak in favour of no merger control at all.

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Acknowledgements

We are grateful to Lorenzo Ciari, Vladimir Ivanović, Yannis Katsoulacos, Milan Kostić, Alexander Kurdin, Abel Mateus, Ivana Rakić, Eduardo Ribeiro, Bojan Ristić, Daniel Sokol, Yane Svetiev, two anonymous referees, and the participants of the Second World Congress of Comparative Economics, held in Saint Petersburg, Russia, on 15-17 June 2017, for their helpful comments and suggestions. Naturally, none of them is to be held accountable for possible remaining errors and value judgments in this paper.

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Begović, B., Popović, D. Merger Control and Economic Growth of LDCs: Some Observations and Recommendations. Rev Ind Organ 54, 381–408 (2019). https://doi.org/10.1007/s11151-018-9642-z

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