Regulation and
competition
– A literature review
Report 0218
Tillväxtverket, the Swedish Agency for Economic and Regional Growth, is a government agency under the Ministry of Enterprise and Innovation. We work to strengthen the competitivenss of Swedish businesses by facilitating entrepreneurship and creating attractive environments for companies in the regions. Our vision is more businesses in Sweden that want to grow, and have the capabilities and courage to do so. Knowledge, networks and funding are our main tools to achieve this. Some efforts are targeted directly at businesses or aspiring entrepreneurs, while other initiatives are aimed at developing the general terms and conditions that affect entrepreneurship. Our biggest single task is helping to ensure that EU funds are invested in projects that promote regional growth and employment. Reports by the Swedish Agency for Economic and Regional Growth can be downloaded on our website. If you would like to order a printed copy, or if you are looking for a report published before 2015, please visit our webshop at publikationer.tillvaxtverket.se. © Tillväxtverket Stockholm, March 2017 Digital: ISBN 978‐91‐88601‐15‐5 Report 0218 If you have queries regarding this publication, please contact: Caroline Wigerstad Telephone, switchboard +46(0)8‐681 91 00 Preface
In2014,theSwedishAgencyforEconomicandRegionalGrowthwasassignedbythe
SwedishGovernmenttoannuallyfollowuponhowbusinesses’administrativeburdenis
affectedbynewandamendedregulationsuntil2020.From2016,otherregulatorycosts
thanadministrativecostsarealsoincludedinthefollowup,includingindirecteffectssuch
asimpactsoncompetition.Tobuildupourinternalknowledgeonthesubjectofthe
impactofregulationoncompetition,aliteraturereviewhasbeencompletedonthetopic.
Thefocusoftheliteraturereviewistheimpactofregulationoncompetition,nationallyas
wellasinternationally.Aclearresultfromthestudyisthatindirecteffectsofregulation
aresignificantandhenceimportanttoconsiderwhendesigningnewregulation.
CarolineWigerstadhaswrittenthereport,underEvaHagsten’slead.Specialthanksis
dedicatedtoKristinaNyströmandLarsWidellforusefulcommentsandguidanceduring
theprocessofwritingthereport.
Stockholm,March2017
AnnaBünger
HeadofDivision
EnterpriseandIndustrialPolicy
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Table of Contents Summary ............................................................................................................................... 5 Introduction .......................................................................................................................... 6 Competition, regulation and economic growth ...................................................................... 7 Competition and growth ............................................................................................................... 7 Regulation and growth .................................................................................................................. 7 Theories of regulation ........................................................................................................... 9 Public interest theories ................................................................................................................. 9 Private interest theories ................................................................................................................ 9 The regulatory burden ......................................................................................................... 12 Direct and indirect costs of regulation ........................................................................................ 12 Impacts of regulation on competition ........................................................................................ 12 Number and range of firms ............................................................................................... 13 Firms’ ability to compete .................................................................................................. 14 Firms’ incentive to compete ............................................................................................. 15 Information available to consumers ................................................................................. 16 Labour market regulation ................................................................................................. 17 Measures of regulation ....................................................................................................... 18 OECD Product Market Regulation index ..................................................................................... 18 World Bank – Doing Business ...................................................................................................... 19 Comparing the two indices ......................................................................................................... 19 Conclusion ........................................................................................................................... 20 Sources................................................................................................................................ 21 4/24
Summary Competitionisgenerallyrecognisedasacrucialdriverofeconomicgrowth.Rulesand
regulation,inturn,areapre‐conditionforthefunctioningofmarketsandenabling
competition.However,regulationcanalsonegativelyimpactoncompetitioninseveral
ways,includingbylimitingthenumberofsuppliersinthemarketorlimitingthe
incentivesorabilityoffirmstocompete.Regulationwhichcreatesentrybarriersor
burdensomelabourmarketregulationarehighlightedintheliteratureasparticularly
problematicintermsofhinderingeffectivecompetition.This,inturn,canhavesignificant
impactonproductivityandeconomicgrowth.
Otherexamplesofregulationsthatcanbedamagingtocompetitionincludeprice
regulationsorrestrictionstomarketingactivities(limitingfirms’abilitytocompete)orthe
introductionofself‐regulatoryregimesencouragingcartel‐likebehaviourorrequirements
thatbusinessespublishcertaininformationabouttheoperationoftheirbusiness(limiting
firms’incentivetocompete).Whatismore,anotherimportantfactorofeffective
competitionistheavailabilityofgoodqualityinformationaboutgoodsandservices,
enablingconsumerstomakeinformeddecisionsaboutwhichsuppliertochoose.Rules
thatcauseorallowcomplexpricingsystems,forexample,havebeenshowntohamper
consumeractivity,reducingcompetitivepressureamongsuppliers.
Theimpactoflabourmarketregulationoncompetitionandbusinessactivityisanarea
whereextensiveresearchhasbeendone.Theempiricalevidenceappearsambiguous
however.Ontheonehand,heavylabourmarketregulation,intermsofforexamplestrict
employmentprotection,hasbeensuggestedtohamperfirmentryordiscourage
businessesfromexpanding.Ontheotherhand,aflexiblelabourmarketwithlowhiring‐
andfiringrestrictionsmayaffectemployeebehaviourbymakingthemfeeldiscouragedto
investintheirownskills.Hence,toostrictandtooflexiblelabourmarketregulationsmay
bothultimatelynegativelyimpactonfirmcreationorfirmproductivityindifferentways,
andcouldbyextensionreducecompetitiveness.
Governmentshaveinrecentyearstendedtofocusonreducingtheregulatoryburdenfor
businessesintermsofadministrationanddirectcompliancecostsofregulation.Whilethis
hasbeen,andis,regardedpositiveforbusinesses,theliteratureshowsthatsomeofthe
mostsignificantimpactsofregulationtaketheformofindirecteffectssuchasinhibiting
competitionandtheformationofnewfirms.Hence,itisarguedtobeofimportanceto
considersuchindirecteffectswhengovernmentsproposeneworamendedrules.
Acknowledgingthefullpotentialimpactofrulesandregulationsbeforeimplementation
shouldcontributetothecreationofgoodqualityrules,whichencouragecompetitionand
contributetoboostingeconomicgrowthandconsumerwelfare.
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Introduction Competition,whichisaprocessofrivalrybetweenfirms,isacrucialfactordriving
economicgrowth(Buccirossietal,2011).Actingasadiscipliningdevice,competition
placespressureonfirmstoinnovateandbecomemoreefficient,andensuresthatmore
productivefirmsincreasetheirmarketshareattheexpenseoflessproductivefirms
(NordicCompetitionAuthorities,2013).Theincreaseinproductivityontheaggregate
levelultimatelycontributestoincreasedeconomicgrowth.Competitioncanalsoactasa
defenceagainstprotectionismandcontributestokeepingmarketsopentonewentrants,
makingcountriesmoreattractiveasarecipientofforeigndirectinvestment.Crucially,
effectivecompetitiontendstobringbenefitstocustomersintermsoflowerprices,higher
qualityandmorechoice(Stucke,2013).
Rulesandregulation,inturn,areapre‐conditiontoensurethefunctioningofmarketsand
toalloweffectivecompetitionbetweenfirms.However,poorlydesignedrulescanimpose
significantcostsonbusinessesandsocietyasawhole;theycandeterinvestmentand
innovation;discourageorhindercompetition;andmakeitmoredifficulttotradewith
othereconomies(GrowthAnalysis,2010).Thechallengeisforpolicymakerstodesign
rulesandregulationssothattheobjectivesofcreatingwell‐functioningmarkets,ensuring
thathealthandsafetyandothersocialandenvironmentalobjectivesarepursuedinaway
thatminimisesthenegativeimpactsofregulation(OECD,2014).Balanceneedstobe
struckbetweenthenecessityofrulesforthefunctioningofmarketsandachievinga
minimumlevelofregulatoryburdenwhichdoesnotimpededomesticandinternational
competition.
Intermsofreducingtheregulatoryburdeninrecentyears,emphasishasprimarilybeen
onremovingadministrativecostsassociatedwithcomplyingwithregulation,while
indirectcosts,includingnegativeeffectsoncompetition,havelargelybeenoverlooked.
Fromtheliteratureitisclearthatitwouldbebeneficialwithagreaterfocusonthe
indirectconsequencesofregulation,inadditiontodirectcosts,whenimplementingnew
rules.Thiscouldcontributetobettertargetedandmoreeffectiverules,moreeffective
competitionandultimatelyincreasedconsumerwelfareandeconomicgrowth.
Thepurposeofthisreportistoprovideanoverviewoftheavailableresearchonthe
impactofregulationoncompetition.Thereportfocusesontheharmfuleffectsof
regulationoncompetition.Itdoesnotconsiderthepotentialmarketfailuresorother
social,environmentalorpoliticalmotiveswhichmayjustifytheregulationsinquestion.
First,adiscussionaroundcompetition,regulationandeconomicgrowthisprovided.This
isfollowedbyabriefoverviewofsomeoftheavailabletheoriesofhowregulationcomes
about.Third,theregulatoryburden,includingdirectandindirectcostsofregulation,is
discussed.Forth,someempiricalevidencefromtheliteratureontheimpactofrulesand
regulationontheeconomyandcompetitionispresented.Fifth,dataandsomeconclusions
fromtwointernationalindicesmeasuringtheregulatoryburdenispresented.Finally,
someconcludingremarksareprovided.
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Competition, regulation and economic growth Competition and growth Competitioniswidelyrecognisedasavitalfactorcontributingtoacceleratedeconomic
growthandincreasedconsumerwelfare,primarilyduetoitsstimulatingeffectson
increasingefficiency(Gomaa,2014;Buccirossietal,2011).Itisarguedtoenhanceboth
productiveefficiency,byminimisingproductioncosts,anddynamicefficiency,by
providingincentivesforthedevelopmentofnewproductsandproductiontechniques.
However,thecontributionofcompetitiontoeconomicgrowthhasbeenwidelydebatedby
economists.Sometheoriesarguethatcompetitionconstrainsinnovation,whileothers
maintaintheopposite.TheSchumpeterianbranchofendogenousgrowththeorybelongs
totheformer,andarguesthatsomedegreeofmarketpowerallowingabnormalprofitsis
necessarytoprovidetheincentiveforfirmstodevelopnewproductsandprocesses
(Gaffard,2006).Accordingly,productmarketcompetitionisarguedtoreduceincentives
forinnovationandgrowth.Whatismore,weakpatentprotectionisarguedtonegatively
impactonresearchanddevelopment(R&D)incentivesbyreducingtheexpectedduration
ofrentsfrominnovation(Aghionetal,2000).
Counter‐arguingtheSchumpeterianview,Aghionetal(2000)havepointedoutthatthe
incentivetoinnovatedoesnotdependontherentsoftheinnovatorperse,butratheron
thedifferencebetweentherentsofasuccessfulinnovatorandanunsuccessfulone.
Indeed,Aghionetal(2000)highlightthatinreality,mostinnovativeactivityoccurswithin
industriescomprisingmorethanonefirm.Crucially,theyarguethatmoreproductmarket
competitionmayreduceafirm’spre‐innovationrentsbymorethanitreducespost‐
innovationrents.Inthisscenario,anincreaseinproductmarketcompetitioncanstimulate
R&Dbyincreasingtheincrementalprofitfrominnovating,strengtheningthemotiveto
innovateinordertoescapecompetitionwith“neck‐and‐neck”rivals(Aghionetal,2000).
Intheirstudy,Aghionetal(2000)investigatewhethermoreintensecompetitionisgood
orbadforinnovationandgrowth.TheresultsshowthattheSchumpeterianeffectofmore
competitionisalmostalwaysoutweighedbytheincreasedincentiveforfirmstoinnovate
inordertoescapecompetition.Thatis,whenallowingproductmarketcompetitionand
thelevelofpatentprotectiontovaryintheirmodel,itisfoundthatthemaximumgrowth
rateisalwaysachievedbyallowingthemaximumdegreeofcompetition.Lookingatpatent
protectioninisolation,thestudyfindsthatasthelevelofpatentprotectionweakens,the
growthratealwaysfalls.
Regulation and growth Therelationshipbetweenregulationandeconomicgrowthisacomplexone,asregulation
isbothapreconditionforthefunctioningofmarketsaswellasacommonlycited
hindranceforfirmstoenternewmarkets,innovateandgrow(GrowthAnalysis,2010).
Regulationalsoaffectsdifferenttypesoffirmsdifferently.Adistinctioniscommonlymade
betweenbusinessesthathavethecapacityandinteresttoinnovatetheirwayoutof
regulationandthosewhodonothavethiscapacity(UKDepartmentforBusiness
Enterprise&RegulatoryReform,2008).Theformertendstobelargerfirmswithan
innovationtrack‐recordandadegreeofmarketpowerthatallowsthemtopassonsome
ofthecostsofmorestringentregulationtotheircustomers.Smallerfirmsmaynothave
thecapacitytodothis(UKDepartmentforBusinessEnterprise&RegulatoryReform,
2008).Hence,theburdenofregulationisoftenmorelikelytoaffectsmallandmedium‐
sizedenterprises(SMEs)negatively.SMEs,whoareseenascrucialdriversofcompetition,
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jobcreationandeconomicgrowth,arethereforesometimesexemptfromnewregulatory
measures(Rincon‐Aznaretal;2010,UKGovernment,2015).
Withregardstoregulationandeconomicgrowth,astudybytheOECDshowsthat
increasedcompetitionthroughdomesticproductmarketreformsintheEUandtheUSto
OECDbest‐practiselevelsisassociatedwithbothstatic(one‐off)anddynamic
(continuous)gainsinGDPviaanimprovementinmulti‐factorproductivity(i.e.the
combinedproductivityoflabourandcapital)(OECD,2005b).Inthestudy,bestpractiseis
determinedbythecountrywiththeleastrestrictivepolicystancesfortwokey
componentsofproductmarketregulation;statecontrolandbarrierstoentrepreneurship.
Regardingstatecontrol,bestpracticewassetbyAustralia,whowasestimatedtohavethe
leastrestrictivepolicyrelatedtothesizeandscopeofthepublicenterprisesector.
DenmarkandIrelandwereassessedashavingthelowestadministrativeburdensonthe
start‐upofnewbusiness,andIrelandandtheUKwereestimatedtohavethelowest
barrierstocompetition.Staticgainswereprojectedtoarisefrombetterallocationof
existingresourcesandfromatake‐upofslackintheuseofresources.Dynamicgains,in
turn,wereexpectedtoarisefromgreatereffortstoinnovateandoptimiseproduction,and
frommorerapiddiffusionofnewtechnologies.
Theeffectsofregulatoryreformenablingmorecompetitiononforexampleinnovation
andproductivitycanbediversehowever,anddependonfactorssuchasthetechnological
characteristicsoftheindustriesorthedistanceofafirmorcountrytothetechnological
frontier(ScarpettaandTressel,2002;NicolettiandScarpetta,2003;Rincon‐Aznaretal,
2010;Aghionetal,2006).Insectorswherefirmsaretechnologicallysimilar,firms’
potentialtoinnovateandcatchupmightbegreaterandincreasedcompetitionmight
provideanincentiveforfirmstoinnovateinorderforincumbentsto‘escape’competition
(Rincon‐Aznaretal,2010).Theoveralleffectofincreasedcompetitionontheeconomyis
arguedtobestrongerthehigherproportionoftechnologicallysimilarindustries.For
example,NicolettiandScarpetta(2003)showthatstrictproductmarketregulationanda
lackofregulatoryreformsmayunderlietherelativelypoorerproductivityperformanceof
someEuropeancountriesovertheperiod1984‐1998,particularlyinhigh‐techandICT‐
relatedindustries.Reasonsforthis,itisargued,includethatregulationwhichlimitsentry
mayhavehinderedtheadoptionofexistingtechnologybyareductionincompetitive
pressureandrestrictednewhigh‐techfirmsfromenteringthemarket.Anumberofother
studiesoftheICTsectoralsosuggestthatentrybarriersresultingfromregulationhave
hadnegativeimpactonproductivitygrowthinthesector.Itisarguedthattheadoption
anddisseminationoftechnologyinthissectorisheavilydependentontheentryofnew,
oftensmall,firms,whichtendtobemoresensitivetoregulatorybarriers(UKDepartment
forBusinessEnterprise&RegulatoryReform,2008).
Whatismore,astudybyCicconeandPapaioannou(2007)showsthatcountrieswhere
legalstatustooperatefirmscanbeobtainedmorequicklyseesignificantlymoreentryin
industriesthatexperienceexpansionaryglobaldemandandtechnologyshifts.Klapperet
al(2006),inturn,investigatetheeffectofmarketentryregulationsonthecreationofnew
limited‐liabilityfirms,theaveragesizeofentrantsandthegrowthofincumbentfirms.
Theyfindthatcostlyregulationshamperthecreationofnewfirms,especiallyinindustries
thatshouldnaturallyhavehighentry.Theseregulationsalsoforcenewentrantstobe
largerandcauseincumbentfirmsinnaturallyhigh‐entryindustriestogrowmoreslowly.
Theauthorsmakethepointthatentryregulationhascostsoverandabovethedirectcosts
ofcomplianceandenforcementandthatauthoritiesshouldweighintheseexcesscosts
whenmakingpolicydecisions.Anotherstudylookingatregulatoryreformsofthe
businesssectorinSwedenduringthe1990ssupportsthisfinding,arguingthatimposing
regulationswithoutconsideringthepotentialeffectsonbusinesssectorincentivesand
efficiencymightbecounterproductive(Heymanetal,2015).
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Theories of regulation Governmentsinterveneinmarketsforvariousreasons,oneofwhichistoenableeffective
competitionbetweenfirms.Rulesandregulationareneededtosecuretransparentand
efficientcompetitivemarkets.Particularlyimportantarerulesrelatedtopropertyrights
andcrediblesanctionssystemswhenpropertyrightsareviolated(Swedish
EntrepreneurshipForum,2015).Otherreasonsforgovernmentinterventioninclude
preventionorcorrectionofmarketfailures,whichcanarisefromthepresenceof
externalitiesandpublicgoods,excessivemarketpower,theexistenceofnatural
monopoliesandinefficienciesfrominsufficientorasymmetricinformation.Inreality,
thereareanumberofcomplexpoliticalandotherinterestsinvolvedinthemakingof
rules,inadditiontoservingsocial,economicandenvironmentalgoals.Legitimatepublic
welfaregoalsaremixedwiththeinterestsofvariouspowerfulgroupsandorganisationsin
society.Thereareanumberoftheoriesastohowthishappensintheliterature.
Public interest theories Thepublicinteresttheoryofregulationassumesthatregulationservestheinterestsof
consumersbyrestrictingharmfulactionsofbusinesses(denHertog,1999;2010;Posner,
1974).Thetheoryassumesthatregulatoryinterventionoccurstocorrectmarketfailure
underthepremisethatthiswillincreasesocialwelfare(denHertog,1999;2010;Djankov
etal,2002).Itassumesthatregulatorshavesufficientinformationandenforcement
powerstoeffectivelypromotetheinterestofthepublic,aimingatachievinganoptimal
allocationofresourcestobenefitsociety.Similarly,thestartingpointoftheAustrian
theoryofregulation,whichisareformulatedversionofthepublicinteresttheory,isalso
thatregulationiswellintendedandpotentiallyjustified,butarguesthatmismanagement
byregulatorsand/ortheinterventioninthemarketandthedistortionitcreatesskews
competitionandcausesproblemsinthemarket.Theseproblemsmayinturnrequire
furtherinterventions,creatingaspiralofeverincreasinglevelsofregulation,asadditional
rulesareimposedtocorrectforthedistortionscreatedbytheoriginalrulesinthefirst
place(GrowthAnalysis,2010).
However,aspointedoutbyPosner(1974),ifthepublicinteresttheoryofregulationis
correct,regulationwouldmainlybefoundinindustrieswherethedangerofmonopolyis
thegreatestandinindustriesthatgeneratesignificantpositiveornegativeexternalities
(Posner,1974).Thisisnotthecase–regulationdoesnotappeartobepositively
correlatedwiththepresenceofexternalitiesormonopolisticmarketstructure.Posner
(1974)alsoarguesthatthesocalledAustrianversionofthepublicinteresttheoryis
unsatisfactory.Thisisbasedonevidencethatthosewithlegislativepowersfrequently
desiresociallyundesirableresultsofregulation.Inaddition,evidenceshowing
mismanagementbyregulatoryagenciesisweak.
Private interest theories Anotherstrandoftheoriesofregulation,socalledprivateinteresttheories,assumethat
regulatorsdonothavesufficientinformationwithrespecttocosts,demand,qualityand
otherdimensionsoffirmbehaviour.Theycanthereforeonlyimperfectly,ifatall,promote
thepublicinterestwhencontrollingfirms(denHertog1999;2010;GrowthAnalysis,
2010).Thepublicchoicetheory,whichsitswithinprivateinteresttheoriesofregulation,
startsfromthepremisethatallindividuals,includingpublicservants,aredrivenbyself‐
interest(denHertog1999;2010;GrowthAnalysis,2010;Djankovetal,2002).Politicians
areassumedtomakedecisionsinfavourofbusinessesinordertomaximisetheirown
chancesofbecomingre‐elected.Whatismore,thepublicchoicetheoryarguesthat
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employeesofregulatoryagenciesarealsodrivenbyself‐interest,maximisingtheirown
satisfactionandnotthatofthepublic.Thisinsightsuggeststhatregulatoryagencies
attempttoexpandtheirbureaucraticstructureinordertoservetheinterestsofthe
bureaucrats.Bureaucratsarebelievedtorespondfavourablytolobbyistsandspecial
interestgroups.
Thecapturetheorystatesthatgovernmentregulationsoftenendupservingtheregulated
firmsratherthanthepublic(denHertog1999;2010).Thetheoryproclaimsthatfirms
seeklicensingandotherregulatoryprovisionstopreventotherfirmsfromenteringthe
market,orseekpriceregulationtopreventpricecompetition.Regulatorsmightendup
takingovertheroleofforexamplemonitoringcartelpricingschemes,whichindividual
firmsinacartelwouldbeincapableofdoingthemselves.Theregulatedfirms,whopossess
aninformationadvantageovertheregulatoryauthoritieswhooftenrelyoninformation
providedbythosefirms,therebyfindwaystogettheregulatorstoenforceregulations
thatprotectprofits.Ultimately,regulatorsget“captured”bythefirmstheyaresupposedto
beregulating.TheChicagotheoryposesthatregulationisacquiredbytheindustryandis
designedandoperatedprimarilyforitsownbenefit(denHertog,2010).Itarguesthat
interestgroupsthatcanorganisethemselveslessexpensivelythanotherswillexercise
politicalinfluence.Politicians,assumedtoaimforre‐election,honourthedemandfor
regulationsbytheinterestgroupswhosupplyvotesandotherresourcesinreturn.
However,criticsoftheprivateinteresttheoriespointoutthatregulationinpracticeoften
appearstoservetheinterestofconsumersratherthantheinterestsoftheindustry.What
ismore,muchregulation,suchasenvironmentalregulationandhealthandsafety
regulation,isopposedbybusinesses(denHertog,2010).Generally,though,ithasbeen
arguedtobedifficulttoempiricallytesttheprivateinteresttheories,notleastduetothe
factthattheinfluenceofoneinterestgroupdependsontheinfluencesofotherinterest
groupsandontheimportanceoftheconstituencyfortheregulator(denHertog,2010).It
isconsidereddifficulttodeterminetherelativeimportanceofaninterestgroup.
Testingthevalidityofthedifferenttheoriesofregulation,Djankovetal(2002)lookatdata
onregulationofentryofstart‐upfirmsin85countries,includingthenumberof
procedures,officialtimeandofficialcostthatastart‐upmustbearbeforeitcanoperate
legally(Djankovetal,2002).Thestudyshowsthatcountrieswithheavierregulationof
entryhavehighercorruptionandlargerunofficialeconomies,butnotbetterqualityof
publicorprivategoods.Countrieswithmoredemocraticandlimitedgovernmentshave
lighterentryregulation.Theevidencesupportsthepublicchoiceviewthatentry
regulationbenefitspoliticiansandbureaucrats,butisinconsistentwithpublicinterest
theories(Djankovetal,2002).Othersarguethattheoriesofregulationaredifficulttotest
empirically,andthatitisdifficulttorankpublicandprivatetheoriesintermsofwhichis
bestatexplainingtheexistenceofregulation(denHertog,2003;2010;Posner,1974).
Toconclude,thoughdifficulttotestempirically,theavailableevidenceintheliterature
seemstosupportprivateinteresttheoriesofregulationtoagreaterextentthanpublic
interesttheories.Generally,bothstrandsoftheoriesseemtosuggestthatthelevelof
regulationwillexceedthatwhichisoptimalforsociety(GrowthAnalysis,2010).
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Table1.Summaryoftheoriesofregulation1
Theory Rationale
Intervention to correct market failures and to Public interest theories increase social welfare. Regulation is well intended, but the distortion in the market the intervention creates causes Austrian theory problems which require further interventions. Regulatory spiral. Regulators do not have sufficient information regarding costs, demand, quality and other Private interest theories dimensions of firm behaviour. Can therefore only imperfectly, if at all, promote the public interest when regulating firms. All individuals are driven by self‐interest. Politicians make decisions in favour of businesses Public choice theory in order to maximise their own chances of becoming re‐elected. Regulations often end up serving the regulated firms rather than the public. Regulated firms, which possess an information advantage over the Capture theory regulatory authorities, get regulators to enforce regulations that protect profits. Regulators get “captured” by the firms they are supposed to be regulating. Regulation is acquired by the industry and is designed and operated primarily for its own benefit. Interest groups that can organise Chicago theory themselves less expensively than others will exercise political influence. Politicians honour the demand for regulations by the interest groups who supply votes and other resources in return. 1Thislistisbynomeansexhaustive.SeePosner(1974)ordenHertog(1999,2010)forexamplesofmore
thoroughreviewsoftheeconomictheoriesofregulation.
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The regulatory burden Direct and indirect costs of regulation Independentofthejustificationandpotentialbenefitsofregulation,itimposescostson
societyandcanhavepotentiallysignificantmacro‐andmicroeconomicconsequences
(NicolettiandScarpetta,2003;GelauffandLejour,2006).Regulationcanhavebothdirect
andindirectcosts(EuropeanCommission,2013).Directcostsaremadeupoffinancial
costs,includingregulatorychargessuchasfees,leviesandtaxes;investmentcosts;
enforcementcosts;andadministrativecosts.Theycanbeone‐off,suchasthepurchasing
ofnewequipment,orrecurring,forexampleifarulerequiresspecificperiodicbehaviours,
suchasperiodicalre‐trainingofstafforperiodicalreportingrequirements.Duetolearning
effects,somecostsofregulationdecreaseovertime,forexamplebysometasksbecoming
lessstaffintensiveandlesstimeconsumingtocarryout(GrowthAnalysis,2010).Direct
costsalsoincludesocalledhasslecosts,whichareassociatedwithwaitingtimeand
delays,redundantlegalprovisionsandcorruption(EuropeanCommission,2013).
Indirectcosts,inturn,areincurredinareasorexperiencedbyconsumers,government
agenciesorotherstakeholdersthatarenotunderthedirectscopeoftheregulation,or
whenregulationhasunintendedeffectsonforexamplecompetitioninaparticularmarket
oronthebehaviouroffirms(EuropeanCommission,2013).Sucheffectscanforexample
involveentrepreneursrefrainingfromstartingabusinessinthefirstplaceordiscouraging
establishedfirmsfrominvesting,innovatingandgrowing.Imposingregulationwithout
considerationofthepotentialimpactontheincentivesandefficiencyofbusinessesmight
negativelyimpactoncompetitionandmayultimatelyhampereconomicgrowth(Heyman
etal,2015;SwedishForumforEntrepreneurship,2015).Whatismore,diverting
resourcestowardsregulatorycomplianceratherthanotherproductiveusescreatesan
opportunitycostofregulation(EuropeanCommission,2013).Suchcostsarerarely
accountedforwhentheregulatoryburdenisconsidered.
Governmentshaveinrecentyearsfocussedontryingtoreducethedirectcostsof
compliance,withaparticularfocusonreducingtheadministrativeburdenforbusinesses
(SwedishEntrepreneurshipForum,2015).Areductionintheadministrativeburdenof
regulationisassumedtofreeupresourcesthatcanbemoreproductivelyemployed
elsewhere(GelauffandLejour,2006).However,indirectcostsofregulationhavebeen
arguedtopotentiallyincurmoresignificanteffectsofregulation(Crafts,2006;Growth
Analysis,2010).Hence,ithasbeensuggestedthatthedefinitionoftheregulatoryburden
iswidenedtoincludethetotalcosttosocietyofregulation(Crafts,2006;GrowthAnalysis,
2010).
Impacts of regulation on competition Indirecteffectsofregulationoncompetitioncanbesignificant,notleastbecause
competitioniscloselylinkedwithaspectssuchasinnovation,productivity,employment
andjobopportunitiesandeconomicgrowth(UKOfficeofFairTrading,2011).Competition
maybeaffectedifregulationisintroducedwhich,eitherdirectlyorindirectly,limitsthe
numberoffirmsinamarketoraltersfirms’abilityorincentivetocompete.Regulation
whichlimitstheabilityofconsumerstomakedecisionsaroundgoodsandservicesthey
purchasecanalsonegativelyimpactoncompetition.Effectsoncompetitioncanoccurboth
onanationalandinternationallevel.
TheOECDhasissuedguidanceaimedatregulatorswhenundertakingregulatoryimpact
assessments,includingasectiononhownewrulesandregulationmightimpacton
competition(OECD,2016).Theguidancestatesthataproposalofregulatorychangeis
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likelytohaveanimpactoncompetitionifoneormoreofthefollowingeffectsofregulation
istrue:
Ifitlimitsthenumberorrangeoffirms(e.g.throughgrantingexclusiverightsfora
suppliertoprovideagoodorservice,establishingalicenseorpermitasarequirement
ofoperation,orsignificantlyraisingthecostofentryorexitbyasupplier).
Ifitlimitstheabilityoffirmstocompete(e.g.throughlimitingsellers’abilitytoset
pricesforgoodsorservices,limitingthefreedomofsupplierstoadvertiseormarket
theirproductsorsettingstandardsforproductqualitywhichprovidesanadvantageto
somesuppliersoverothers).
Ifitreducestheincentiveoffirmstocompete(e.g.throughcreatingaself‐regulatory
orco‐regulatoryregime,requiringinformationonsupplieroutputs,prices,salesor
coststobepublished,orexemptingtheactivityofaparticularindustryorgroupof
suppliersfromtheoperationofgeneralcompetitionlaw).
Ifitlimitsthechoicesandinformationavailabletoconsumers(e.g.bylimitingthe
abilityofconsumerstodecidefromwhomtheypurchase,reducingmobilityof
customersbetweensuppliersbyincreasingthecostsofswitchingsuppliers,or
fundamentallychangingtheinformationrequiredbybuyerstoshopeffectively).
Inadditiontotheabovementionedfactors,beingabletoadjustthelevelandcomposition
oftheworkforceinordertoadapttochangingdemandconditionsisvitalforeffective
businessoperation.Businesses’abilitytodothiswillpartlydependonthelabourmarket
regulationsinplace(WorldBank,2016;Bjuggren,2013).Regulationsrelatedtothelabour
marketarenotexplicitlymentionedintheOECD’scompetitionassessmentchecklist,but
canstillhavesubstantialimpactoncompetition,notleastcountries’abilitytocompete
internationally(OECD,2013).Indeed,studieshaveshownthatlabourmarketregulations
canhavesignificantimpactonanumberofeconomicoutcomes,includingaggregatejob
flows,productivity,growthandthespeedofadjustmenttoeconomicshocks(WorldBank,
2016;OECD,2013).Thepotentialimpactoflabourmarketregulationoncompetitionis
dealtwithinaseparatesectionofthisreport.Examplesofsuchregulationinclude
minimumwage,sickpay,unemploymentprotectionandrulesaroundtheprocessof
disputeresolution,affectingboththecostoflabourandthecostoflabouradjustment
(Rincon‐Aznaretal,2010).
Number and range of firms Regulationcanaffectthenumberofsuppliersinamarketinanumberofways;implicitly
bycreatingbarrierstoentryandexit,andexplicitlybyforexamplerenationalisingan
industry,grantingabusinessexclusiverightstoamarket,orrestrictingthenumberof
suppliersinageographicalarea(OECD,2016).Newbusinessesenteringthemarketand
replacinglessproductiveonesisanimportantfactorofbusinessdynamismandeconomic
growth(Brandt,2004).Areportinvestigatingtherelationshipbetweenregulationand
economicperformancenotesthatseveralfirmlevelstudiesshowthatentryliberalisation
andtheprocessofentryandexithashadapositiveinfluenceonproductivitygrowthina
numberofOECDcountries(Rincon‐Aznaretal,2010).
Regulationcreatingbarrierstoentrycanconsistofconsiderableadministrativeand
bureaucraticproceduresassociatedwithstartingabusiness,includingthelengthoftimeit
takes;thenumberandcostofanypermitsorlicensesrequired;orminimumcapital
requirementstostartabusiness(WorldBank,2016).Otherexamplesofentrybarriers
includedifficultiesassociatedwithobtainingaccesstocredit,thetaxregime,difficulties
closingabusinessorlabourmarketregulationsmakingitdifficultorcostlytohireandfire
staff.
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Intheirstudy,vanSteletal(2007)examinethelinkbetweenbusinessregulationand
entrepreneurshipin39countriesusingfivecategoriesofregulationderivedfromthe
WorldBank’sDoingBusinessmethodology.Thecategoriesincludestartingabusiness,
labourmarketregulation,gettingcredit,payingtaxesandclosingabusiness(vanSteletal,
2007).Adistinctionismadebetweennecessityandopportunityentrepreneursinthe
study,anditisarguedthatopportunityentrepreneursareparticularlyaffectedby
regulation.Thisisexplainedbythefactthat,astheytendtohavehighergrowth
expectations,opportunityentrepreneursaremorelikelytobedeterredfromenteringa
marketiftheythinkthatregulationmightpreventthemfromreachingtheiroptimalsize.
Thestartingabusinesscomponentinthestudycomprisesnumberofprocedurestolegally
startandoperateabusiness;costandtimerequiredtocompleteeachprocedure;and
minimumcapitalrequirements.Ofthese,onlytheminimumcapitalrequirement
componentisfoundtobeanobstacleforentrepreneurship(vanSteletal,2007).This,itis
argued,couldbeexplainedbythefactthatwhilethecreativeentrepreneurmakessureto
eitherovercomeoravoidbureaucraticburdens,achievingtheminimumcapital
requirementislikelytobemoredifficulttoovercome.Generally,theresultsinvanStelet
al’sstudyindicatethatadministrativebarrierstoentryplayonlyamodestrolein
explainingvariationsinbusinessentryratesacrosscountries.Theauthorsconcludeby
arguingthatthefocusofpolicymakersonreducingsuchbarriersmaybebetterplaced
elsewhere(vanSteletal,2007).
Conversely,astudybyBrandt(2004)findsthattheadministrativeburdenonstart‐ups,
includingtheamountoflicensesandpermitsrequired,isshowntohaveapotentially
significantnegativeimpactonentryrates.Inaddition,Brandt(2004)drawsattentionto
theimportanceofexitbarriersbyshowingthattheimpactofthenumberofyearsduring
whichcreditorshaveclaimsonbankruptfirms’assetsonfirmentryandsurvivalhasa
significantlynegativeeffectonfirmentry.Thestudyalsoshowsthatincountrieswithhigh
entryandexitbarriers,firmsinvestmoretimeingatheringinformationaboutmarket
conditions,competitorsandtheirownpotentialprofitabilitypriortoentering(Brandt,
2004).Firmswhichfindoutthattheyhavelittlechanceofsurvivaltendtorefrainfrom
enteringthemarketintheseinstances,causinglowerentryratesandhighersurvivalrates
comparedwithcountrieswhereentryandexitislesscostly.Usingdataonaverage
survivalratesestimatedfordifferentcohortsoffirmsthatenteredthemarketfromthe
late1980stothe1990s,survivalratesareshowntobeparticularlyhighinSwedenandthe
Netherlands,reachingalmost90percent(Brandt,2004).Thiscompareswithsurvival
ratesinothercountries,includingtheUK,PortugalandDenmarkamongothers,which
varybetween62and88percent.Itisalsomentionedthatcrosscountrydifferencesin
firmentryratespartlycouldbeexplainedbydifferencesinrisktoleranceindifferent
countries.
Regardingtaxation,BraunerhjelmandEklund(2013)findthatnotjustthetaxrate,but
alsotheadministrativeburdenthatthetaxsystemimposesonfirmssignificantlyreduces
newfirmformation.Theyfindthatatenpercentreductioninthetaxadministrative
burdenresultsinathreepercentincreaseinentryrates.TheWorldBank’sDoing
Business2016reporthighlightsthisaswell,emphasisingtheeaseofpayingtaxes,
regardlessofthecorporatetaxrate,asasignificantdeterminantoffirmentry(World
Bank,2016).
Firms’ ability to compete Firmscompetewitheachotherthrougharangeofdifferentchannels,includingbyprice;
byofferingproductsofdifferingqualityorcharacteristics;andbyusingdifferentsales
channels.Theycanalsousebrandingandadvertisingasameansofemphasisingthe
differencesintheirproductsrelativetotheircompetitors.Consequently,regulations
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whichlimitfirms’abilitytocompeteincludespricecontrols,productorproduction
methodspecificationsandlimitstothefreedomoffirmstoadvertiseormarkettheir
products(OECD,1998).
Restrictionsoncomparativeadvertisingbyimposingarequirementthatanysuch
advertisementisvalidatedbyanindependentauthorityisanexampleofregulationwhich
severalcountrieshaveinplaceandwhichlimitstheabilityoffirmstocompete(OECD,
2016).Whilesuchregulationmayensurethattheclaimsandpromisesmadeby
businessesarevalidatedandcorrect,andmayindeedfacilitatefaircompetition,
unwarrantedrestrictionsoncomparativeadvertisingmaydepriveconsumersofuseful
informationaboutthedifferencesinproductquality,attributesandpricesacross
suppliers.Thiscouldhavenegativeeffectsoncompetition.
Inotherinstances,businessesmaynotbeallowedtoadvertisetheirproductsatall,ormay
berestrictedtousingcertaintypesofmediaorcertaintimesoftheday(OECD,2016).This
issometimesthecasewithpharmaceuticalcompaniesandproductsrelatedtoalcoholand
tobacco.InSwedenforexample,advertisingofalcoholrelatedproductswasbanneduntil
2003.Todayitisstrictlyregulated,wherebyadvertsofalcoholrelatedproductsneedtobe
accompaniedbywarningtexts;canonlyinvolveproductswithalcoholcontentsbelow15
percentalcoholbyvolume;andcannotbetargetedatpeopleunder25yearsofage(SFS
2010:1622).Thistypeofregulationisoftenappliedtodemeritgoodsandtendstobe
justifiedonthegroundsthatconsumption,orover‐consumption,oftheproductsmaybe
detrimentaltoconsumers’health,orinotherwaysaresociallyundesirable.However,such
regulationsmayhinderdisseminationofvaluableinformationaboutproductqualityand
otherattributes.Restrictionsonadvertisingmayalsorestricttheentryofnewfirmsby
reducingtheirabilitytocreatebrandawareness(OECD,2016).
Havingproductandproductionprocessspecificationsandotherqualitystandardsinplace
isoftennecessaryandprotectsconsumersandemployees(OECD,2016).Suchstandards
areoftenprevalentinthefoodindustryandtheconstructionindustryforexample.
However,toostringentrulesoncontentandminimumqualitymaynegativelyimpacton
firms’abilitytocompete,limitingthenumberofproducersandrangeofproducts.
Firms’ incentive to compete Regulationcanaffectcompetitionnegativelybyalteringfirms’incentivestoactasrivals.
Forexample,restrictingabusinessfromexpandingitsmarketshareorgrowingitsprofit
mayreducethevigourwithwhichthatbusinesscompetesagainstotherbusinesses
(OECD,2016).Otherexamplesofincentivealteringregulationsincludetheintroductionof
self‐orco‐regulatoryregimes,orallowingcooperationandinformationexchangebetween
firms.Regulationswhichinhibitthewillingness,abilityorincentiveofcustomerstoswitch
betweensuppliersmayalsoreducetheincentiveforbusinessestocompete(OECD,2016).
Self‐andco‐regulationhavebeenarguedtohavearangeofpotentialadvantages,for
examplethroughenhancedregulatorycredibilitythroughtheinvolvementofindustryand
otherinterestedpartiesintheregulatoryprocess,orthroughimprovedregulatoryquality
fromdrawingontheexpertiseoftheindustryindesigningtherules.Whatismore,ithas
beenarguedtobringenforcementcostsavingsbymakingtheregulatedpartiespartofthe
monitoringofenforcementoftherules.Andindeed,suchregulationcanenhance
competitionthroughagreementsondesignandstandardsamongmarketparticipants
(OECD,2016).However,thereisariskinvolvedinbringingcompetitorstogetherinsucha
manner,sinceeventhoughtheintentionmaybetodiscussmattersofproductdesignand
safetystandards,participantsmaybetemptedtosharethoughtsonfirmstrategiesrelated
topricing,quantityandotheraspects(OECD,2016).Thismayultimatelyleadtoprice
coordinationbetweenfirms,orcoordinationtopreventnewentry.
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Exemptionsfromnationalcompetitionlawsareprevalentinnumeroussectorsinmany
countries,includingwithinenergyandutilities,transport,communicationsand
agriculture.PreconditionsthatneedtobemetforexemptionstoapplyinSwedeninclude
thatthebusinessescanprovethatcooperationimprovestheproductionordistributionof
aproduct,orthatitpromotestechnologicaldevelopment(SwedishCompetition
Authority).Inaddition,consumersneedtoreapareasonableproportionoftheprofitthat
arisesduetothecooperation.Sometimes,allowingsuchcooperationhasthepurposeof
ensuringstandardsanduniformity;promotinginnovationthroughjointventures;or
counteringbuyerpower(OECD,2016).Anoftenusedexampleofthisisfoundwithin
agriculture,wherejointactivitybyagro‐foodproducershasbeenarguedtobringa
numberofpotentialbeneficialeffects,includingachievingeconomiesofscaleandscope,
reducedtransactioncostsandpossibilitiestoconductresearch(OECD,2005a).However,
whiletheremaybelegitimatereasonsforallowingsuchcooperation,unintendedside‐
effectsmayariseascompetitorsareallowedtoexchangeinformationaboutpricesand
quantitiesandengageincollusion.Anexampleofsuchanoccurrence,aspointedoutby
theOECD,iswhentheDanishcompetitionauthorityin1993decidedtocollectandpublish
firm‐specifictransactionsfortwogradesofready‐mixedconcreteinthreeregionsof
Denmark(OECD,2010).Withinayearofpublicationofthedata,averagepricesofthetwo
gradeshadincreasedby15‐20percent,anditisarguedthatthepublicationofpricesmay
havefacilitatedcollusionandcontributedtotheincreaseinprices.
Information available to consumers Consumershavingaccesstoinformationaboutgoodsandservicesisessentialforeffective
competitiontotakeplace.Itallowsthemtoproperlysearchforthebestdealsandto
comparequalityandpricesofferedbycompetingfirms,puttingpressureonthemto
competemoreaggressivelywithoneanother(Stucke,2013).IntheUKforexample,a
reviewoftheenergysectorin2015bytheUKCompetitionandMarketsAuthorityfound
potentialevidenceofweakcustomerengagementintheretailenergymarket,signallinga
problemwithlackofcompetitioninthemarket(UKCompetition&MarketsAuthority,
2015b;2016).Specifically,theanalysisshowedsignificantgainsavailabletoenergy
consumersfromswitchingenergysupplier.This,inturn,wasarguedtobeapotential
consequenceoftheprevailingdifficultyforconsumerstocomparethecomplexand
competingoffersbyvariousenergysuppliers.Thereviewresultedinarangeof
suggestionsofreformstorevitalisecompetitionintheUKenergysector.Proposed
measuresincluded,amongotherthings,reformstoenablepricecomparisonwebsitesto
playabiggerroleinhelpingcustomersfindthebestoffersforthem(UKCompetition&
MarketsAuthority,2016).
Significantswitchingcostsorcomplexswitchingrulesmayalsohavenegativeeffectson
competition,ascustomersare‘lockedin’tocontractsastheymayfindittooexpensiveor
toodifficulttoswitchsuppliers(Chen,2011).Thisisnotanuncommonfeaturein
telecommunications,thebankindustry,insuranceandenergymarkets(Chen,2011).In
2014inSwedenforexample,reformswereintroducedtotheelectroniccommunications
law,withoneofthepurposesbeingtomakeiteasierforconsumerstoswitch
communicationsproviderandincreasingmobilityandcompetitioninthemarket
(SwedishMinistryofEnterpriseandInnovation,2013).Amongotherthings,amaximum
noticeperiodofonemonthwasintroducedforconsumerswishingtoendtheircontracts,
andarequirementthatoperatorsunlockphonesimmediatelyandatnocosttoconsumers
iftheywishforthistobedoneafterthecontracthasexpired(SFS2003:389).
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Labour market regulation Addingtothecostoflabourandlimitingfirms’abilitytoadapttheirworkforceto
changingeconomicconditions,labourmarketregulationcannegativelyimpacton
competition.Indeed,thestudybyvanSteletal(2007)findsthatlabourmarket
regulationshaveagreaterimpactonbusinessstart‐upratesthantheadministrative
burdenassociatedwithstartingabusiness.Thisimpliesthatthoseconsideringtostarta
businessseemtobemoreinfluencedbyfactorsthatcomeintoplayoncethebusinesshas
alreadybeenestablished,ratherthanthoseaffectingthemimmediatelyatthestart‐up
stage.Theeffectoflabourmarketregulationonentrepreneurshipcanpartlybeexplained
bythefactthatlessrigidregulationsdiminishesthesafetyofapaidjob,andthemore
likelyemployeesmaybetostarttheirownbusiness.Inaddition,businessownershipis
likelytobecomemoreattractivethemoreflexibilitytheownerhasinrunningthe
business.
Whatismore,labourmarketregulationintermsofforexamplestringentemployment
protectionlegislationhasbeenfoundtohaveasmallnegativeimpactonlong‐run
productivitygrowth,potentiallybyrestrictingmovementoflabourintoemerging,high‐
productivityfirms(OECD,2007).AnotherstudybytheOECDshowsthatfiringrestrictions
arecostlierinindustriescharacterisedbyrapidtechnologicalchange,suchasICT,andthat
countrieswhereregulationsaremorestringentthereforetendtospecialiseinindustries
wheretherateoftechnologicalchangeisslower(OECD,2013).Similarly,Gustand
Marquez(2002)showthatburdensomeregulatoryenvironments,inparticular
regulationsaffectinglabourmarketpractices,hinderedtheadoptionofinformation
technologiesandslowedproductivitygrowthinanumberofindustrialcountriesinthe
1990s(GustandMarquez,2002).Labourmarketregulationhasalsobeenarguedto
reducetheproductivitygrowthratebyslowingdownthereallocationfromoldand
decliningsectorstonewanddynamicones(Rincon‐Aznaretal,2010).Whatismore,
rigiditiesinlabourmarkets,employmentprotectionlegislationinparticular,whichadds
tothecostoflabour,havebeenshowntodiscouragefirmsfromexportingthrough
reducedcompetitivenessasaresultfromareductioninfirms’operatingprofits(Helpman
andItshoki,2010).
However,althoughthenegativeeffectsofstringentlabourmarketregulationappeartobe
moreextensivelydocumentedintheliterature,toolaxlabourmarketregulationcouldalso
haveadverseeffectsonfirmproductivity(Bjuggren,2013).Thiscouldforexamplebethe
caseifworkersarenotallowedtotakesickleaveorhavetoworklonghourswithno
weeklyrestdays.Inaddition,employmentprotectionlegislationcanhaveimportant
effectsonworkerbehaviourasitmightincreasetheincentiveofemployeestoacquire
morefirmspecificskills.Itmayalsopreventsignificantcostsassociatedwithjob
displacement,suchasearinglosses,lossofjob‐specificskillsandexperienceandvarious
socialcostsarisingfromhealthproblemswhichmaystemfromjoblessness(Bjuggren,
2013;OECD,2013).Thus,itappearstobeimportantthatpolicymakersstrikeabalance
betweenallowinganefficientreallocationoflabourresourcesandtheneedtoprotect
employees(OECD,2013).
17/24
Measures of regulation Thereareanumberofinternationalindicesmeasuringcompetitivenessavailable,
allowingforcomparisonsbetweencountries.Twooftenquotedexamplesofsuch
measureswhereregulationplaysabigrolearedescribedbelow;OECD’sProductMarket
Regulation(PMR)indexandtheWorldBank’sDoingBusiness(DB)index.
OECD Product Market Regulation index In1998,theOECDdevelopedaneconomy‐wideindicatorofproductmarketregulation
(PMR).ThePMRindicatoriscomplementedbyasetofindicatorsthatmeasureregulation
atthesectorlevel.Theindicatorisanattempttoturnqualitativedataonlawsand
regulationintoquantitativeindicators.ThePMRdataiscollectedthroughaquestionnaire
senttogovernmentsinOECDandnon‐OECDcountries,andisupdatedeveryfiveyears.
TheaggregatePMRindicatoristhesimpleaverageacrossthethreehigh‐levelindicators
statecontrol,barrierstoentrepreneurshipandbarrierstotradeandinvestment,under
whichthereare18low‐levelindicators.
Asmentioned,OECDcountrieshaveconsiderablyliberalisedtheirproductmarketsover
thepast15years,withreformstypicallybeinglargeratthebeginningoftheperiod.
Countrieswhohaveloweredbarrierstoentrepreneurshiphavedonesoinparticularby
streamliningadministrativeproceduresforstart‐ups,generallysimplifyingrulesand
proceduresandimprovingaccesstoinformationaboutregulation.Examplesofmeasures
toreducethelevelofstatecontrolthatcountrieshavetakenincludeabolishingprice
controlsorimprovingthedesignofpricecontrolschemes.Intermsofsectors,progress
hasslowedinairandroadtransportwhilethepaceofreforminprofessionalserviceshas
acceleratedsomewhat.
In2013,Swedenranked26thoutof33countriesontheeconomy‐widePMR,fairlyclose
totheOECDaverage(Koskeetal,2015).DuetoanumberofOECDcountrieshaving
continuedtostreamlineregulations,incombinationwithSweden’sPMRbarelychanging
overthepastdecade,Sweden’srankinghasmovedfrom9thin2003to26thin2013
(OECD,2015b).Swedenispointedoutashavingrelativelycomplexproceduresrelatedto
licensesandpermits,aswellashavingarelativelyhighrateofpublicownershipof
companies(OECD,2015b).
TheindexshowsthattheNetherlandsandtheUKhavesignificantlymorecompetition‐
friendlyproductmarketregulationthantheaverageOECDcountry,whilePMRis
significantlylesscompetitionfriendlythantheOECDaverageinPoland,Greece,Korea,
Mexico,IsraelandTurkey(Koskeetal,2015).Amongthecountrieswhoseregulatory
stanceisclosetotheOECDaverage,includingSweden,therankingisarguednottohave
anyrealsignificanceastheregulatorypracticesinthisgroupareconsideredtobesoclose
toeachother.
DecompositionoftheoverallPMRindicatorfortheOECDasawholeintothethreehigh‐
levelcomponentssuggeststhatcompetition‐unfriendlyregulationsarehigherintheareas
ofstatecontrolandbarrierstoentrepreneurshipthanintheareaofbarrierstotradeand
investment.Withinthestatecontrolcomponent,highscoresareprimarilydrivenbypublic
ownershipoffirmsinbusinesssectorsandthepoorgovernanceofthesefirms.High
scoresonthebarrierstoentrepreneurshipcomponentaretypicallydrivenbyastrong
protectionofincumbentsinnetworksectorsandhighadministrativeburdensonspecific
firmssuchasretailshopsandroadfreightcompanies.
18/24
World Bank – Doing Business Foroveradecade,theWorldBankhaspublishedanannualreport,DoingBusiness(DB),
withquantitativedataonthemainregulatoryconstraintsaffectingdomesticsmalland
medium‐sizedbusinessesthroughouttheirlifecycles.The2016reportpresentsdatafor
189economieswithinformationfromtenareasofbusinessregulationandfocuseson
regulationsandregulatoryprocessesinvolvedinsettingupandoperatingabusiness
(WorldBank,2016).
Thetenareas(startingabusiness,dealingwithconstructionpermits,gettingelectricity,
registeringproperty,gettingcredit,protectingminorityinvestors,payingtaxes,trading
acrossborders,enforcingcontractsandresolvinginsolvency)areincludedinadistancetoa
frontierscoreandeaseofdoingbusinessranking.Thedistancetofrontierscorecaptures
thegapbetweenaneconomy’sperformanceandameasureofbestpracticeacrossthe
entiresample.100isthefrontierand0isfurthestawayfromthefrontier.Theindex
consistsof36indicators.
Thelatestversionoftheindexcontainsimprovementstosomeoftheindicatorsby
expandingthefocusonefficiencyofatransactionoraservicetoalsoincludeaspectsofthe
qualityofthatservice(WorldBank,2016).Forexample,theregisteringpropertyindicator
setassessestheefficiencyoflandadministrationsystems.Inthe2016versionoftheindex,
theindicatoralsoencompassesaspectsofthequalityofthesystems,includingmeasuring
thereliability,transparencyandgeographiccoverageoflandadministrationsystems,as
wellasaspectsofdisputeresolutionforlandissues.Inthecaseofindicatorsthatalready
coveraspectsofquality,thefocushasbeenexpandedtoincludeadditionalgoodpractices
covered,asisthecasewiththeindicatorprotectingminorityinvestors.
DoingBusiness2016resultsshowthatthe30bestperformingcountriesarenotthose
withtheleastregulation,butratherthosewithgoodrulesthatallowefficientand
transparentfunctioningofbusinessesandmarketswhileprotectingthepublicinterest.
OECDhigh‐incomeeconomiesareamongthosewiththebestscoresonaverage,with
Singapore(scoring87.34),NewZealand(86.79)andDenmark(84.40)atthetopofthelist.
Swedenranks8th,withascoreof81.72.Swedenismentionedashavingconsiderably
reducedthetimerequiredtoregisteracompanysincethelastreport.
Comparing the two indices TheOECD’sPMRturnsqualitativedataintoaquantitativemeasureofthedegreetowhich
policiespromoteorinhibitcompetitioninareasoftheproductmarketwherecompetition
isthoughttobeviable:TheDoingBusinessindexisaquantitativemeasure,which
indicatestheregulatorycostsassociatedwithdoingbusiness.Thetwoindicescanbe
viewedascomplementarytooneanother.Indeed,thetwoindiceshavebeenshowntobe
correlated(Jacobzoneetal,2010).Thiscorrelationindicatesthatwhenacountryhasa
highqualityregulatorymanagementsystemitisalsolikelytobeperformingwellinterms
ofthegeneralbusinessfriendlinessandcompetitionenvironments(Jacobzoneetal,
2010).
19/24
Conclusion Regulationand,importantly,regulatoryqualityiscrucialforthefunctioningofmarkets,
economicgrowthandconsumerwelfare.Onestrandoftheoriesofregulation,socalled
publicinteresttheories,posethatregulationisputinplaceasaresponsetomarket
failures.Theexistenceoftheexcessiveregulatoryburdenisexplainedbythefactthatthe
regulatoryinterventioncreatesdistortionsinthemarket,requiringfurtherregulatory
measuresinanever‐endingspiral.Theotherstrandoftheories,socalledprivateinterest
theories,arguethatregulationistheresultofvariouspowerfulinterestgroupsinsociety
whobenefitfromcertainrulesandwhogettheirregulatoryneedssatisfiedbypoliticians
andbureaucrats,whoactintheirownself‐interest,aimingforre‐electionorcareer
advances.Whileempiricalevidencetestingthevarioustheoriesisrelativelyscarce,at
leastonestudyfindsevidencetosupporttheprivateinteresttheoryratherthanpublic
interesttheory.Still,noonetheoryislikelytobeabletoprovideasatisfactoryexplanation
fortheexistenceofregulationingeneral.Instead,theyprovideahelpfulstartingpointfor
understandingregulatoryinterventionandcanprovidepotentialexplanationsastowhy
thelevelofregulationisoftenlikelytoexceedthelevelwhichwouldbeoptimalfor
society.
Howeverwellintendedandjustified,itisclearfromtheliteraturethatrulesand
regulationcanbringsignificantdirectandindirectcoststoindividuals,businessesandthe
economyasawhole,notleastthroughnegativeimpactsoncompetition.Competitioncan
benegativelyaffectedbyregulationwhichcreatesentrybarriersandlimitsthenumberof
suppliersinthemarket,orregulationwhichlimitstheincentivesorabilityoffirmsto
compete.Regulationwhichrestrictstheamountofinformationavailabletoconsumers,
inhibitingthemfrommakingwellinformedchoiceswithregardstoconsumptioncanalso
hampercompetition.Particularlywelldocumentedintheliteratureistheimpactof
regulationonfirmentry.Entrepreneurshipandfirmentryisregardedasoneofthekey
driversofcompetition,innovation,jobcreationandeconomicgrowth,andderegulation
enablingnewfirmcreationhasbeenshowntohaveimportanteffectsoncountries’
productivity.
Theimpactoflabourmarketregulationoncompetitionandbusinessactivityisanother
areawhereextensiveresearchhasbeendone.Generally,theempiricalevidenceappears
toindicatethattoostrictlabourmarketregulationcanhamperfirmentryanddiscourage
businessesfromexpanding.However,tooflexiblelabourmarketregulationcanaffect
employeebehaviournegatively,asemployeesmayfeeldiscouragedfrominvestingintheir
ownskills,hamperingfirmproductivity.
Fromtheliteratureitcanbeconcludedthat,whilegovernments’focusonreducingthe
regulatoryburdenintermsofadministrationanddirectcompliancecostsinrecentyears
ispositiveforbusinesses,someofthemostsignificantimpactsofregulationmayindeed
taketheformofindirecteffectssuchasinhibitingcompetitioninthemarketandhindering
ordiscouragingtheformationofnewfirms.Thereappearstobeadelicatebalance
betweenprovidinganinstitutionalenvironmentthatisconducivetobusinessentryand
growthandpassingthepointwhereoverregulationcurbsthepotentialwelfareeffects
relatedtoentrepreneurshipandgrowingfirms.Consideringindirectimpactswhen
proposingnewandamendedrulescouldultimatelycontributetobetterqualityregulation
whichencouragescompetition,ultimatelyboostingeconomicgrowthandincreasing
consumerwelfare.
20/24
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Tillväxtverket
Swedish Agency for Economic
and Regional Growth
Tel +46 8-681 91 00
tillvaxtverket.se
Tillväxtverket, the Swedish Agency for Economic and Regional Growth,
is a government agency under the Ministry of Enterprise and Innovation.
We work to strengthen the competitivenss of Swedish businesses by facilitating
entrepreneurship and creating attractive environments for companies in the
regions. Our vision is more businesses in Sweden that want to grow, and
have the capabilities and courage to do so.
Knowledge, networks and funding are our main tools to achieve this.
Some efforts are targeted directly at businesses or aspiring entrepreneurs,
while other initiatives are aimed at developing the general terms and
conditions that affect entrepreneurship. Our biggest single task is helping
to ensure that EU funds are invested in projects that promote regional
growth and employment.