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.
What is the inference from this passage?
The passage emphasizes that an effective competition law is crucial for managing the implications of liberalized Foreign Direct Investment (FDI). It states that such a law can prevent adverse consequences of mergers and acquisitions by multinational companies (MNCs), which might otherwise lead to reduced competition and dominant market positions. Furthermore, the passage explicitly notes that MNCs expect competition authorities to "ensure a level playing field between domestic and foreign firms." This directly supports the inference that competition law facilitates a fair competitive environment amidst FDI.
The passage states, "The impact of FDI is not always pro-competitive," indicating that foreign investors and multinational companies do not invariably dominate the domestic market. It describes scenarios where dominance *may* occur but does not present it as a universal outcome.
The passage does not advocate for a general prohibition on mergers. Instead, it suggests that "Most of these adverse consequences of mergers and acquisitions by MNCs can be avoided if an effective competition law is in place." This implies that regulatory oversight through competition law, rather than outright banning, is the mechanism to address potential risks associated with mergers.
While the passage discusses the impact of FDI and how an effective competition law can attract it, it does not declare FDI as an absolute necessity for the growth of countries with open economies. The focus is on regulating FDI to ensure fair competition and attract investment, not on its indispensability for economic growth.