Comprehension : Comprehension

Q 398 / 466

UPSC CSE Prelims 2012

The need for Competition Law becomes more evident when foreign direct investment (FDI) is liberalized. The impact of FDI is not always pro-competitive. Very often FDI takes the form of a foreign corporation acquiring a domestic enterprise or establishing a joint venture with one. By making such an acquisition the foreign investor may substantially lessen competition and gain a dominant position in the relevant market, thus charging higher prices. Another scenario is where the affiliates of two separate multinational companies (MNCs) have been established in competition with one another in a particular developing economy, following the liberalization of FDI. Subsequently, the parent companies overseas merge. With the affiliate’s no longer remaining independent, competition in the host country may be virtually eliminated and the prices of the products may be artificially inflated. Most of these adverse consequences of mergers and acquisitions by MNCs can be avoided if an effective competition law is in place. Also, an economy that has implemented an effective competition law is in a better position to attract FDI than one that has not. This is not just because most MNCs are expected to be accustomed to the operation of such a law in their home countries and know how to deal with such concerns but also that MNCs expect competition authorities to ensure a level playing field between domestic and foreign firms.

According to the passage, how does a foreign investor dominate the relevant domestic market?

  1. Multinational companies get accustomed to domestic laws.
  2. Foreign companies establish joint ventures with domestic companies.
  3. Affiliates in a particular market/sector lose their independence as their parent companies, overseas merge.
  4. Foreign companies lower the cost of their products as compared to that of products of domestic companies.

Which of the statements given above are correct?

EXPLANATION

Correct Option (B)

Statements 2 and 3 are correct.

  • Statement 2: The passage indicates that foreign investors can dominate the relevant domestic market by acquiring a domestic enterprise or establishing a joint venture with one. This action may substantially lessen competition and allow the foreign investor to gain a dominant position, leading to higher prices.
  • Statement 3: The passage describes a scenario where affiliates of two separate multinational companies, initially competing in a developing economy, lose their independence when their parent companies merge overseas. This consolidation can virtually eliminate competition in the host country, resulting in artificially inflated product prices.

Incorrect Options:

  • Statement 1: The passage mentions multinational companies being accustomed to domestic laws as a factor that makes an economy attractive for FDI, as it ensures a level playing field. It does not present this as a mechanism for foreign investors to dominate the domestic market.
  • Statement 4: The passage does not state that foreign companies dominate the domestic market by lowering the cost of their products compared to domestic companies. Instead, it focuses on strategies like mergers, acquisitions, and joint ventures that reduce competition and can lead to higher prices.