Industrial Policy

Industrial policy is a broad term that encompasses all forms of governmental intervention, directly or indirectly influencing business decisions, and is developed and adopted by countries to, among other things, foster economic development or to adjust for market failures. 

Among the more common forms, industrial policy measures can take the form of government investments, public procurement requirements, policies, subsidisation of specific companies, as well as the creation and protection of strong domestic competitors (so called “national champions”). 

Whereas industrial policy is directed, among other things, at correcting market failures and fostering economic development, competition policy is generally directed at stopping companies hindering the normal functioning of market mechanisms through anticompetitive behaviour. 

Competition policy, if enforced and executed properly, can often render the implementation of industrial policy unnecessary.  The advantage of pursuing aligned aims through competition policy and the competitive process rather than industrial policy, is that competition policy is far less costly and creates fewer negative externalities. It manages this through not directly and selectively intervening in market structures, but ensure a fair competitive setting for all market participants.

Competition and competition policy can be a substitute to industrial policy by way of the following: 

Promotion of efficiency and innovation

  • Competition policy generates strong and fair competition by ensuring that market mechanisms operate freely, deterring future unlawful conduct and ascertaining that no abusive conduct remains un-remedied.
  • The resulting intensified competitive pressure and competition, requires companies to become more competitive, by reducing costs to an efficient level and/or investing in innovation to improve quality or develop new products.
  • Intensified competition facilitates the benchmarking of companies and managerial performance, providing easier and more accurate assessment of performance, incentivising managers to act more efficiently.
  • Cost minimising, greater innovation and more efficient production allows companies to offer goods or services to customers at lower prices and/or better quality;
  • For consumers, a greater variety of options matching the heterogeneity of their needs leading to an increase in customer surplus and thereby consumer welfare.
  • For companies, lower prices and higher quality creates the opportunity to acquire larger market shares as lower prices or higher quality attracts more consumers.
  • The fostering of innovation and efficiency through intensified competition not only intensifies the effectiveness of companies, but also, in aggregate, boosts the country’s competitiveness and ability to compete on export markets. This, and the resulting exit of inefficient firms, undermines the need for government influenced mergers or other governmental interventions aimed at providing a competitive setting or economic growth.

Protection of consumers and efficient competitors

  • In a market with insufficient competition, companies with market power have the ability and incentive to set excessive or exploitative prices and/or other abusive conduct directed at forcing competitors out of the market.
  • In most competition law systems there are particular provisions for firms held to be in dominant positions. Competition policy prohibits such firms from resorting to these unlawful practices and provides for sanctions and remedies in the event of their occurrence.  These restrictions on dominant market participants allow competition policy to provide for a fair competitive setting.  This in turn effectively protects competitors (who are generally not the target for competition benefits) from unfair competition.
  • Competition policy can act against any competitive restrictions by dominant players rendering the creation by the State of additional domestic competitors (so called “national champions”) unnecessary.
  • Developing countries, in particular, can ensure that a robust competition policy and process limit the potential exploitation of their power by companies; the more aggressive the competition law enforcement, the higher the deterrence and detection probability, and thus the higher the positive results, and the more effective the targeted prevention and intended protection.

Facilitating entry of new competitors

  • Finally, an effective competition policy and process limits the raising of artificial barriers to entry through cartelised or abusive behaviour. It also allows for interventions to facilitate market entry by reducing those unfair barriers of entry that have already been created.
  • The entry of new firms in turn allows, among other things, for a wider variety of choice for consumers. This incentivises long-established competitors to improve their performance to avoid losing market shares, resulting in increased productivity, consumer welfare and, ultimately, economic growth.
  • By addressing the exclusionary conduct of dominant firms, competition authorities can facilitate entry in previously monopolised or otherwise restricted industrial sectors, rendering the need for wider government intervention.

All these effects allow for open and competitive markets, a maximisation of consumer welfare and economic growth without the necessity of resorting to industrial policy.  These competition policy initiatives enable an agency to demonstrate the benefit of competition in structural/ sectorial reform.

 

Resources:

Government in markets, Why competition matters – a guide for policy makers, Office of Fair Trading, 2009, http://www.oft.gov.uk/shared_oft/business_leaflets/general/OFT1113.pdf

Competition Policy, Industrial Policy and National Champions, OECD POLICY ROUNDTABLES, 2009, http://www.oecd.org/daf/competition/44548025.pdf;

Is Competition Policy Worth it?, Professor Paul A Geroski, September 2004, http://www.competition-commission.org.uk/assets/competitioncommission/docs/pdf/non-inquiry/our_peop/members/chair_speeches/pdf/geroski_uea_140904;

Why is competition important for growth and poverty reduction?, Nick Godfrey, OECD Global Forum on International Investment VII, http://www.oecd.org/investment/globalforum/40315399.pdf.

OECD Policy Round Tables, Energy Security and Competition Policy 2007 http://www.oecd.org/competition/abuse/39897242.pdf. The Round Table examined the links between competition policy and energy security.

Conway, Herd and Chalaux, March 2008, “Product Market Regulation and Economic Performance Across Indian States,” OECD Economics Department Working Pap1e0rs No. 600, http://search.oecd.org/officialdocuments/displaydocumentpdf/?doclanguage=en&cote=eco/wkp(2008)8. This paper uses the OECD’s indicators of product market regulation to assess the extent to which the regulatory environment affects economic performance across Indian states. The degree to which product market regulation is supportive of competition is found to vary considerably across states

Introductory Handbook for Undertaking Regulatory Impact Analysis (RIA), http://www.oecd.org/gov/regulatory-policy/44789472.pdf. Pages 7, 16 and 27

Competition Assessment Toolkit – Principles, http://www.oecd.org/daf/competition/46193173.pdf. Page 25 onwards

Reviving Growth And Productivity, “Better Policies” Series, September 2012, http://www.oecd.org/about/publishing/2012%2009_Italy_Brochure_EN.pdf. Pages 13 – 15.

EU Industrial Policy and Global Competition: Recent Lessons And Way Forward, European Competitiveness Report 2011, http://ec.europa.eu/enterprise/policies/industrial-competitiveness/competitiveness-analysis/european-competitiveness-report/files/ecr2011_ch6_en.pdf

The role of competition policy in promoting economic development: The appropriate design and effectiveness of competition law and policy, United Nations Conference on Trade and Development, 2010 http://unctad.org/en/docs/tdrbpconf7d3_en.pdf.To be effective in supporting the development process, competition law and policy (CLP) need to be supported and compatible with other complementary pro-development policies that can bear on economic development. A spectrum of factors – including social, economic and political environment – dictate the choices for competition provisions and enforcement design. Moreover, the priorities adopted by governments in terms of budgetary support, manpower availability and political support are key determinants of agency effectiveness. States would want to exercise their policy space to adapt their competition laws and enforcement institutions to local conditions. The report also discusses the impact of competition policy on economic development. In particular, it addresses (a) How effective can CLP be in promoting economic development? (b) What are the factors that can augment or impede such effectiveness? (c) Given that countries are at different stages of their economic development process, should the design and enforcement of their CLP vary and, if so, in what ways?