infonet-economy

The econometric literature on the effects of competition law on investment focuses almost exclusively on the consequences for inflows of foreign direct investment. What is more, the empirical papers in this literature can be counted on the figures of one hand and contain potentially contradictory findings. Precious little has been made of the potential effects of competition law enforcement on the level and composition of investment by state bodies and by domestic firms, which is surprising given that some of the recent enforcement cases in developing countries have almost certainly affected the returns on such domestic investments.

This short paper describes what evidence is available and suggests that existing explanations of the effects of competition law and its enforcement on investment in developing countries are too narrow in scope. While this may suggest that the potential contribution of a competition law to a nation's investment climate is probably greater than previously thought, it should also be recognised that the widely-accepted objective of such laws is not to bolster investment per se. In fact, there may be occasions when enforcement agencies take actions that have the effect of reducing investment outlays by a firm or state body; reminding us that not all investments are welfare-enhancing. Having said that, there are good reasons (which are stated in this paper) to suppose that, when appropriately enforced, competition laws enhance the long-term economic performance of an economy.