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.
With reference to the passage, consider the following statements:
Which of the statements given above is/are correct?
only):
Statement 1 is correct. The passage emphasizes that while the impact of Foreign Direct Investment (FDI) is "not always pro-competitive," the implementation of an effective competition law is crucial to mitigate adverse consequences and ensure a level playing field. This context implies that the desired outcome of FDI, particularly when regulated by competition law, is to enhance competition within the domestic market.
Statement 2 is incorrect. The passage describes specific scenarios where the entry of foreign investors might lead to inflated prices, such as when a foreign corporation acquires a domestic enterprise and gains a dominant position, or when parent company mergers eliminate competition between their affiliates. However, the passage does not state that inflated prices are an "invariable" consequence of foreign investor entry. It highlights potential adverse outcomes that can be avoided with effective competition law, rather than universal effects.