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Published : June 04, 2011 | Author : aniket1
Category : Miscellaneous | Total Views : 3835 | Unrated

Aniket Pandey pursuing integrated BBA(llb)specialization in corporate and business laws from University of Petroleum and energy studies.Major interest in Intellectual Property Rights and business laws.

Attaining Competitiveness through Competition

The strong live and the weak die. There is some bloodshed, and out of it emerges a much leaner industry, which tends to survive.

Ratan Tata
A competitive nature is as necessary to human well-being as is food, sleep & exercise. It is the driving force that situations us to generate the power necessary to satisfy our intrinsic needs. The fact cannot be denied that without some level of internal competitive drive, our very survival would be at risk. The idea of harmony co-existing with competitiveness seems to be the ultimate contradiction. Yet, a healthy level of competitiveness is the very thing that drives an individual to achieve greatness. At the same time, an unhealthy level of competitiveness engenders devastation and conflict, which allows for only negligible short-term gains. Learning how to assist and encourage each other while competing for the same or synonymous goals allows for fruitful and greater rewards in the long run. [1]

Understanding competition
Competition refers to the market situation in which sellers independently strive for buyer's patronage in order to achieve the business objectives of profits, sales or market share. In other words, it is the act of competing by an enterprise against other business enterprises for the purpose of achieving dominance in the market or attaining a reward or goal. It is the foundation on which a market system works. For market economy to function effectively, this competition has to be free and fair. Such a competition stimulates innovation and productivity and thus leads to the optimum allocation of resources in the economy; guarantees the protection of consumer interests; reduces costs and improves quality; accelerates growth and development and preserves economic and political democracy. [2]

Competition is a key driver of competitiveness of national economies. Competition puts pressure on enterprises to reduce costs, improve quality, undertake innovation and generally to strive towards excellence. Michael Porter, Professor at Harvard University is a recognized authority on competitiveness & economic development; in his view, it is difficult to visualize a business emerging as a global champion if it has not had to face competition at home. [3]

But market deformation practices and anti-competitive forces may restrict the working of healthy competition in the economy. Also, the era of economic reforms has unleashed ever increasing competitive forces through liberalization and globalization. In the absence of adequate safeguards, enterprises may undermine the market by resorting to unfair practices for their short term gains. Thus, there arises the need to have a proper regulatory environment which can ensure a healthy competition in the economy so that all business enterprises can grow and expand and stimulate economic development of a country. Hence, Government has formulated a Competition Policy which protects the interests of consumers and producers by promoting and sustaining a fair competition. [4]

Competition Policy
'Competition Policy' refers to the government policy designed to ensure contestability and fair competition in the market by removing or preventing those factors and forces which tend to distort such competition. It is a measure that directly affects the behaviour and structure of the enterprises .Such a policy is needed to ensure that the market-oriented economic regime results in competitive outcomes. It promotes the creation of a healthy business environment which improves static and dynamic efficiencies and leads to maximization of consumer and producer welfare. [5]

There are two elements of the competition policy: - [6]
A set of policies that enhance competition in local and national markets. These include :- liberalized trade policy , relaxed foreign direct investment (FDI) policy, policies for protection of intellectual property rights, deregulation of financial and capital markets as well as liberalized fiscal and exchange rate policy. Such an interface with other economic policies has helped in encouraging fair competition with greater efficiency in resource allocation.

Legislation designed to prevent anti-competitive business practices and artificial entry barriers. Such legislation facilitates market access and complements other competition promoting efforts of the Government.
Understanding Competitiveness
Competitiveness is the ability to provide products and services as or more effectively and efficiently than the relevant competitors. In the traded sector, this means sustained success in international markets without protection or subsidies. Although transportation costs might allow firms from a nation to compete successfully in their home market or in adjacent markets, competitiveness usually refers to advantage obtained through superior productivity. Measures of competitiveness in the traded sector include firm profitability, the firm's export quotient (exports or foreign sales divided by output), and regional or global market share. In the traded sector, performance in the international marketplace provides a direct measure of the firm's competitiveness. In the non-traded sector, competitiveness is the ability to match or beat the world's best firms in cost and quality of goods or services. Measuring competitiveness in the non-traded sector is often difficult, since there is no direct market performance test. Measures of competitiveness in this part of the economy include firm profitability and measures of cost and quality. In industries characterized by foreign direct investment, the firm's percentage of foreign sales (foreign sales divided by total sales) and its share of regional or global markets provide measures of firm competitiveness. At the industry level, competitiveness is the ability of the nation's firms to achieve sustained success against (or compared to) foreign competitors, again without protection or subsidies. Measures of competitiveness at the industry level include overall profitability of the nation's firms in the industry, the nation's trade balance in the industry, the balance of outbound and inbound foreign direct investment, and direct measures of cost and quality at the industry level. Competitiveness at the industry level is often a better indicator of the economic health of the nation than competitiveness at the firm level. The success of a single firm from the nation might be due to company-specific factors that are difficult or impossible to reproduce. The success of several firms from the nation in an industry, on the other hand, is often evidence of nation-specific factors that might be extended and improved. Assessing the competitiveness of an industry in which there is only one important firm requires an assessment of whether its success is due to monopoly rents, government support, or true efficiency. It is also important to note that the competitiveness of a single firm does not necessarily imply the competitiveness of an industry. [7]

For the nation, competitiveness means the ability of the nation's citizens to achieve a high and rising standard of living. In most nations, the standard of living is determined by the productivity with which the nation's resources are deployed, the output of the economy per unit of labor and/or capital employed. A high and rising standard of living for all the nation's citizens can be sustained only by continual improvements in productivity, either through achieving higher productivity in existing businesses or through successful entry into higher productivity businesses. Competitiveness at the national level is measured by the level and growth of the nation's standard of living, the level and growth of aggregate productivity, and the ability of the nation's firms to increase their penetration of world markets through exports or foreign direct investment. Although it is tempting to equate a nation's competitiveness in certain industries or sets of industries with competitiveness at the national level, or with a positive balance of trade, this temptation should be avoided. Comparative advantage dictates that any nation will be competitive in some industries and uncompetitive in others. A positive balance of trade has as much to do with the balance of domestic savings and investment as it does with the intrinsic capabilities of the nation's firms. [8]

Attaining competitiveness via competition [9]
The country needs an effective competition law to ensure that the market functions, and both consumers and the economy gain.

The government has now established a lean National Manufacturing Competitiveness Council, “to provide a continuing forum for policy interactions to energize and sustain the growth of the manufacturing industry”. It will be an advantage if it can also examine how the lack of an effective competition law and policy affects our competitiveness, and recommend appropriate steps for correction.

Once again, it is important to understand the distinction between competition policy and competition law. Competition policy creates and promote active competitive environment so as to ensure efficient allocation of resources in an economy as it aims to promote competition in our economy. Competition policy envelops various other policies, viz., investment, trade, labour, consumer etc to ensure that wherever there are conflicts; decisions to promote competition would get priority. A good example of this is the continuous de-reservation in the SSI sector. A competition law is a market instrument to ensure that firms behave and trade in a fair manner. However, the competition law cannot be a panacea to cure all ills of the market place.

The marketplace comprises of enterprises, farmers and households. They are consuming a large number of goods and services. Their efficiency and competitiveness are thus determined by their input costs. When the new Competition Act 2002 was being debated, many business interests lobbied against it, for the valid fear that it might be a new embodiment of the control regime’s MRTP Commission, and not a modern market regulator. This was grounded in the fact that once again like all our new regulatory bodies, we will have retirees manning the system, whose knowledge about economics and law is inadequate. Let’s take the telecom regulator as an example.

The CUTS research shows that the telecom sector’s phenomenal growth as a consequence of increasing competition is unfortunately true only to a partial extent.
The incumbent government operator: BSNL, which owned 60% share of the market in 2004, reports to the same ministry as TRAI does. It gets a more favourable treatment from the government. While TRAI, some of whose members and staff are former BSNL employees, too gives it a preferential treatment. One instance of BSNL’s status leading to anti-competitive outcomes: it operated an internet service and offers it to consumers as a package deal at a low cost vis-a-vis the charges on the use of the phone time. However, consumers of other internet service providers, who obtained the service through BSNL’s landline network, are not able to get the same pulse rate as is being charged to BSNL’s internet consumers. Independent ISPs cannot therefore able to compete with BSNL. And they consequently lost their consumers.

Turning to the goods sector particularly the raw material and intermediate goods sector, and how lack of competition affects our firms.

In many areas, there is a dominant player or if there are many, then they implicitly and/or explicitly behave in the same fashion. The chances of abuse are high in India due to high levels of concentration in many goods sectors. Let’s take the textile input sector for example. Of the two critical inputs: In 2004 analysis demonstrates that Reliance was the dominant player in the polyester staple fiber with a market share of 54%, while Grasim was the dominant player, almost a monopoly, in the viscose staple fiber with 91% of the market share. Per se they may not be indulging in anti-competitive practices but the possibility is distinct.

Considering the liberalization of trade, if such dominant firms do indulge in anti-competitive practices, imports can offer an antidote. Obviously this too would depend upon how they can get the tariffs ‘fixed’ favorably or ‘use’ the anti-dumping regime to take “engineered” actions. Contrary to the belief of many economists, trade liberalization is only a partial solution to competition problems in the market place. In this age of globalization with pressures on tariff barriers, choice of goods has increased substantially. However there is a catch in this. Increasingly firms world-wide enter into global cartels to exploit the market. Examining a small number of international cartels, which were discovered and prosecuted in the 1990s, a World Bank study has estimated that developing countries imported goods and services worth $81.1 billion per annum from these sectors, which would have collected monopoly rents in the range of $20-24 billion per annum. Another estimate showed that a cartel in bulk vitamins cost developing countries $3 billion during the 1990s. Of this the Indian industry paid overcharges of $25 million in that period, not a mean figure.

In the past we saw that the subject of international cartels featured in the discussions on a multilateral framework on competition at the WTO as part of the Doha Round. Though negotiations on it have been stopped, it will be worthwhile to recall our SSI lobby’s plea for a multilateral agreement, because, “such an accord would result not only in improved market access for Indian products, but also help reduce the prices of raw materials where cartels operate”.

This adequately makes the point that an effective competition law, including international cooperation to deal with cross-border issues, will not only promote consumer welfare, but also business welfare, i.e., better competitiveness.

It can be analyzed that competition has many stages and affects individuals in many different modes. It is eventually about increasing the fortune of people in terms of income, standard of living and quality of life. All of these things are endangered when a healthy level of competitiveness is not demonstrated. Understanding that there must always be an abundant of opportunities to succeed for everyone is the first step to create harmony within the confines of competition. Finally, a balance of the four value systems (hard work, wealth, social participation, & self achievement) will prevent aggression from reeling its ugly head while we engage in our contests and pursuits.

1.Create a healthy Compititiveness, Shawn Threadgill, On 5 August 2006 http://shawnthreadgill.wordpress.com/category/interconnectiveness/
2. Competition Protection, http://business.gov.in/growing_business/competition_pro.php,Last accessed on 20.4.2011
3. .Seminar on Competition Law and Policy. Jointly organized by Competition Commission of India and FICCI, Key note address by Shri Vinod Dhall, Member & Acting Chairperson, Competition Commission of India Hyderabad, 22 April, 2006
4. Supra; footnote 2
5. Ibid
6. Ibid
7. What is Competitiveness? Franziska Blunck, Publishing date: 26.06.2006 09:07 http://www.competitiveness.org/article/articleview/774/1/32/
8. Ibid
9. Competitiveness via Competition, Pradeep S. Mehta, Economic Times, 23 November 2004

Authors contact info - articles The  author can be reached at: aniketpandey@legalserviceindia.com

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