Report 0218

Regulation and competition – A literature review

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 

3/24

PrefaceIn2014,theSwedishAgencyforEconomicandRegionalGrowthwasassignedbytheSwedishGovernmenttoannuallyfollowuponhowbusinesses’administrativeburdenisaffectedbynewandamendedregulationsuntil2020.From2016,otherregulatorycoststhanadministrativecostsarealsoincludedinthefollowup,includingindirecteffectssuchasimpactsoncompetition.Tobuildupourinternalknowledgeonthesubjectoftheimpactofregulationoncompetition,aliteraturereviewhasbeencompletedonthetopic.Thefocusoftheliteraturereviewistheimpactofregulationoncompetition,nationallyaswellasinternationally.Aclearresultfromthestudyisthatindirecteffectsofregulationaresignificantandhenceimportanttoconsiderwhendesigningnewregulation.CarolineWigerstadhaswrittenthereport,underEvaHagsten’slead.SpecialthanksisdedicatedtoKristinaNyströmandLarsWidellforusefulcommentsandguidanceduringtheprocessofwritingthereport.Stockholm,March2017AnnaBünger

HeadofDivisionEnterpriseandIndustrialPolicy

4/24

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 

5/24

Summary Competitionisgenerallyrecognisedasacrucialdriverofeconomicgrowth.Rulesandregulation,inturn,areapre‐conditionforthefunctioningofmarketsandenablingcompetition.However,regulationcanalsonegativelyimpactoncompetitioninseveralways,includingbylimitingthenumberofsuppliersinthemarketorlimitingtheincentivesorabilityoffirmstocompete.Regulationwhichcreatesentrybarriersorburdensomelabourmarketregulationarehighlightedintheliteratureasparticularlyproblematicintermsofhinderingeffectivecompetition.This,inturn,canhavesignificantimpactonproductivityandeconomicgrowth.Otherexamplesofregulationsthatcanbedamagingtocompetitionincludepriceregulationsorrestrictionstomarketingactivities(limitingfirms’abilitytocompete)ortheintroductionofself‐regulatoryregimesencouragingcartel‐likebehaviourorrequirementsthatbusinessespublishcertaininformationabouttheoperationoftheirbusiness(limitingfirms’incentivetocompete).Whatismore,anotherimportantfactorofeffectivecompetitionistheavailabilityofgoodqualityinformationaboutgoodsandservices,enablingconsumerstomakeinformeddecisionsaboutwhichsuppliertochoose.Rulesthatcauseorallowcomplexpricingsystems,forexample,havebeenshowntohamperconsumeractivity,reducingcompetitivepressureamongsuppliers.Theimpactoflabourmarketregulationoncompetitionandbusinessactivityisanareawhereextensiveresearchhasbeendone.Theempiricalevidenceappearsambiguoushowever.Ontheonehand,heavylabourmarketregulation,intermsofforexamplestrictemploymentprotection,hasbeensuggestedtohamperfirmentryordiscouragebusinessesfromexpanding.Ontheotherhand,aflexiblelabourmarketwithlowhiring‐andfiringrestrictionsmayaffectemployeebehaviourbymakingthemfeeldiscouragedtoinvestintheirownskills.Hence,toostrictandtooflexiblelabourmarketregulationsmaybothultimatelynegativelyimpactonfirmcreationorfirmproductivityindifferentways,andcouldbyextensionreducecompetitiveness.Governmentshaveinrecentyearstendedtofocusonreducingtheregulatoryburdenforbusinessesintermsofadministrationanddirectcompliancecostsofregulation.Whilethishasbeen,andis,regardedpositiveforbusinesses,theliteratureshowsthatsomeofthemostsignificantimpactsofregulationtaketheformofindirecteffectssuchasinhibitingcompetitionandtheformationofnewfirms.Hence,itisarguedtobeofimportancetoconsidersuchindirecteffectswhengovernmentsproposeneworamendedrules.Acknowledgingthefullpotentialimpactofrulesandregulationsbeforeimplementationshouldcontributetothecreationofgoodqualityrules,whichencouragecompetitionandcontributetoboostingeconomicgrowthandconsumerwelfare.

6/24

Introduction Competition,whichisaprocessofrivalrybetweenfirms,isacrucialfactordrivingeconomicgrowth(Buccirossietal,2011).Actingasadiscipliningdevice,competitionplacespressureonfirmstoinnovateandbecomemoreefficient,andensuresthatmoreproductivefirmsincreasetheirmarketshareattheexpenseoflessproductivefirms(NordicCompetitionAuthorities,2013).Theincreaseinproductivityontheaggregatelevelultimatelycontributestoincreasedeconomicgrowth.Competitioncanalsoactasadefenceagainstprotectionismandcontributestokeepingmarketsopentonewentrants,makingcountriesmoreattractiveasarecipientofforeigndirectinvestment.Crucially,effectivecompetitiontendstobringbenefitstocustomersintermsoflowerprices,higherqualityandmorechoice(Stucke,2013).Rulesandregulation,inturn,areapre‐conditiontoensurethefunctioningofmarketsandtoalloweffectivecompetitionbetweenfirms.However,poorlydesignedrulescanimposesignificantcostsonbusinessesandsocietyasawhole;theycandeterinvestmentandinnovation;discourageorhindercompetition;andmakeitmoredifficulttotradewithothereconomies(GrowthAnalysis,2010).Thechallengeisforpolicymakerstodesignrulesandregulationssothattheobjectivesofcreatingwell‐functioningmarkets,ensuringthathealthandsafetyandothersocialandenvironmentalobjectivesarepursuedinawaythatminimisesthenegativeimpactsofregulation(OECD,2014).Balanceneedstobestruckbetweenthenecessityofrulesforthefunctioningofmarketsandachievingaminimumlevelofregulatoryburdenwhichdoesnotimpededomesticandinternationalcompetition.Intermsofreducingtheregulatoryburdeninrecentyears,emphasishasprimarilybeenonremovingadministrativecostsassociatedwithcomplyingwithregulation,whileindirectcosts,includingnegativeeffectsoncompetition,havelargelybeenoverlooked.Fromtheliteratureitisclearthatitwouldbebeneficialwithagreaterfocusontheindirectconsequencesofregulation,inadditiontodirectcosts,whenimplementingnewrules.Thiscouldcontributetobettertargetedandmoreeffectiverules,moreeffectivecompetitionandultimatelyincreasedconsumerwelfareandeconomicgrowth.Thepurposeofthisreportistoprovideanoverviewoftheavailableresearchontheimpactofregulationoncompetition.Thereportfocusesontheharmfuleffectsofregulationoncompetition.Itdoesnotconsiderthepotentialmarketfailuresorothersocial,environmentalorpoliticalmotiveswhichmayjustifytheregulationsinquestion.First,adiscussionaroundcompetition,regulationandeconomicgrowthisprovided.Thisisfollowedbyabriefoverviewofsomeoftheavailabletheoriesofhowregulationcomesabout.Third,theregulatoryburden,includingdirectandindirectcostsofregulation,isdiscussed.Forth,someempiricalevidencefromtheliteratureontheimpactofrulesandregulationontheeconomyandcompetitionispresented.Fifth,dataandsomeconclusionsfromtwointernationalindicesmeasuringtheregulatoryburdenispresented.Finally,someconcludingremarksareprovided.

7/24

Competition, regulation and economic growth 

Competition and growth  Competitioniswidelyrecognisedasavitalfactorcontributingtoacceleratedeconomicgrowthandincreasedconsumerwelfare,primarilyduetoitsstimulatingeffectsonincreasingefficiency(Gomaa,2014;Buccirossietal,2011).Itisarguedtoenhancebothproductiveefficiency,byminimisingproductioncosts,anddynamicefficiency,byprovidingincentivesforthedevelopmentofnewproductsandproductiontechniques.However,thecontributionofcompetitiontoeconomicgrowthhasbeenwidelydebatedbyeconomists.Sometheoriesarguethatcompetitionconstrainsinnovation,whileothersmaintaintheopposite.TheSchumpeterianbranchofendogenousgrowththeorybelongstotheformer,andarguesthatsomedegreeofmarketpowerallowingabnormalprofitsisnecessarytoprovidetheincentiveforfirmstodevelopnewproductsandprocesses(Gaffard,2006).Accordingly,productmarketcompetitionisarguedtoreduceincentivesforinnovationandgrowth.Whatismore,weakpatentprotectionisarguedtonegativelyimpactonresearchanddevelopment(R&D)incentivesbyreducingtheexpecteddurationofrentsfrominnovation(Aghionetal,2000).Counter‐arguingtheSchumpeterianview,Aghionetal(2000)havepointedoutthattheincentivetoinnovatedoesnotdependontherentsoftheinnovatorperse,butratheronthedifferencebetweentherentsofasuccessfulinnovatorandanunsuccessfulone.Indeed,Aghionetal(2000)highlightthatinreality,mostinnovativeactivityoccurswithinindustriescomprisingmorethanonefirm.Crucially,theyarguethatmoreproductmarketcompetitionmayreduceafirm’spre‐innovationrentsbymorethanitreducespost‐innovationrents.Inthisscenario,anincreaseinproductmarketcompetitioncanstimulateR&Dbyincreasingtheincrementalprofitfrominnovating,strengtheningthemotivetoinnovateinordertoescapecompetitionwith“neck‐and‐neck”rivals(Aghionetal,2000).Intheirstudy,Aghionetal(2000)investigatewhethermoreintensecompetitionisgoodorbadforinnovationandgrowth.TheresultsshowthattheSchumpeterianeffectofmorecompetitionisalmostalwaysoutweighedbytheincreasedincentiveforfirmstoinnovateinordertoescapecompetition.Thatis,whenallowingproductmarketcompetitionandthelevelofpatentprotectiontovaryintheirmodel,itisfoundthatthemaximumgrowthrateisalwaysachievedbyallowingthemaximumdegreeofcompetition.Lookingatpatentprotectioninisolation,thestudyfindsthatasthelevelofpatentprotectionweakens,thegrowthratealwaysfalls.

Regulation and growth Therelationshipbetweenregulationandeconomicgrowthisacomplexone,asregulationisbothapreconditionforthefunctioningofmarketsaswellasacommonlycitedhindranceforfirmstoenternewmarkets,innovateandgrow(GrowthAnalysis,2010).Regulationalsoaffectsdifferenttypesoffirmsdifferently.Adistinctioniscommonlymadebetweenbusinessesthathavethecapacityandinteresttoinnovatetheirwayoutofregulationandthosewhodonothavethiscapacity(UKDepartmentforBusinessEnterprise&RegulatoryReform,2008).Theformertendstobelargerfirmswithaninnovationtrack‐recordandadegreeofmarketpowerthatallowsthemtopassonsomeofthecostsofmorestringentregulationtotheircustomers.Smallerfirmsmaynothavethecapacitytodothis(UKDepartmentforBusinessEnterprise&RegulatoryReform,2008).Hence,theburdenofregulationisoftenmorelikelytoaffectsmallandmedium‐sizedenterprises(SMEs)negatively.SMEs,whoareseenascrucialdriversofcompetition,

8/24

jobcreationandeconomicgrowth,arethereforesometimesexemptfromnewregulatorymeasures(Rincon‐Aznaretal;2010,UKGovernment,2015).Withregardstoregulationandeconomicgrowth,astudybytheOECDshowsthatincreasedcompetitionthroughdomesticproductmarketreformsintheEUandtheUStoOECDbest‐practiselevelsisassociatedwithbothstatic(one‐off)anddynamic(continuous)gainsinGDPviaanimprovementinmulti‐factorproductivity(i.e.thecombinedproductivityoflabourandcapital)(OECD,2005b).Inthestudy,bestpractiseisdeterminedbythecountrywiththeleastrestrictivepolicystancesfortwokeycomponentsofproductmarketregulation;statecontrolandbarrierstoentrepreneurship.Regardingstatecontrol,bestpracticewassetbyAustralia,whowasestimatedtohavetheleastrestrictivepolicyrelatedtothesizeandscopeofthepublicenterprisesector.DenmarkandIrelandwereassessedashavingthelowestadministrativeburdensonthestart‐upofnewbusiness,andIrelandandtheUKwereestimatedtohavethelowestbarrierstocompetition.Staticgainswereprojectedtoarisefrombetterallocationofexistingresourcesandfromatake‐upofslackintheuseofresources.Dynamicgains,inturn,wereexpectedtoarisefromgreatereffortstoinnovateandoptimiseproduction,andfrommorerapiddiffusionofnewtechnologies.Theeffectsofregulatoryreformenablingmorecompetitiononforexampleinnovationandproductivitycanbediversehowever,anddependonfactorssuchasthetechnologicalcharacteristicsoftheindustriesorthedistanceofafirmorcountrytothetechnologicalfrontier(ScarpettaandTressel,2002;NicolettiandScarpetta,2003;Rincon‐Aznaretal,2010;Aghionetal,2006).Insectorswherefirmsaretechnologicallysimilar,firms’potentialtoinnovateandcatchupmightbegreaterandincreasedcompetitionmightprovideanincentiveforfirmstoinnovateinorderforincumbentsto‘escape’competition(Rincon‐Aznaretal,2010).Theoveralleffectofincreasedcompetitionontheeconomyisarguedtobestrongerthehigherproportionoftechnologicallysimilarindustries.Forexample,NicolettiandScarpetta(2003)showthatstrictproductmarketregulationandalackofregulatoryreformsmayunderlietherelativelypoorerproductivityperformanceofsomeEuropeancountriesovertheperiod1984‐1998,particularlyinhigh‐techandICT‐relatedindustries.Reasonsforthis,itisargued,includethatregulationwhichlimitsentrymayhavehinderedtheadoptionofexistingtechnologybyareductionincompetitivepressureandrestrictednewhigh‐techfirmsfromenteringthemarket.AnumberofotherstudiesoftheICTsectoralsosuggestthatentrybarriersresultingfromregulationhavehadnegativeimpactonproductivitygrowthinthesector.Itisarguedthattheadoptionanddisseminationoftechnologyinthissectorisheavilydependentontheentryofnew,oftensmall,firms,whichtendtobemoresensitivetoregulatorybarriers(UKDepartmentforBusinessEnterprise&RegulatoryReform,2008).Whatismore,astudybyCicconeandPapaioannou(2007)showsthatcountrieswherelegalstatustooperatefirmscanbeobtainedmorequicklyseesignificantlymoreentryinindustriesthatexperienceexpansionaryglobaldemandandtechnologyshifts.Klapperetal(2006),inturn,investigatetheeffectofmarketentryregulationsonthecreationofnewlimited‐liabilityfirms,theaveragesizeofentrantsandthegrowthofincumbentfirms.Theyfindthatcostlyregulationshamperthecreationofnewfirms,especiallyinindustriesthatshouldnaturallyhavehighentry.Theseregulationsalsoforcenewentrantstobelargerandcauseincumbentfirmsinnaturallyhigh‐entryindustriestogrowmoreslowly.Theauthorsmakethepointthatentryregulationhascostsoverandabovethedirectcostsofcomplianceandenforcementandthatauthoritiesshouldweighintheseexcesscostswhenmakingpolicydecisions.AnotherstudylookingatregulatoryreformsofthebusinesssectorinSwedenduringthe1990ssupportsthisfinding,arguingthatimposingregulationswithoutconsideringthepotentialeffectsonbusinesssectorincentivesandefficiencymightbecounterproductive(Heymanetal,2015).

9/24

Theories of regulation 

Governmentsinterveneinmarketsforvariousreasons,oneofwhichistoenableeffectivecompetitionbetweenfirms.Rulesandregulationareneededtosecuretransparentandefficientcompetitivemarkets.Particularlyimportantarerulesrelatedtopropertyrightsandcrediblesanctionssystemswhenpropertyrightsareviolated(SwedishEntrepreneurshipForum,2015).Otherreasonsforgovernmentinterventionincludepreventionorcorrectionofmarketfailures,whichcanarisefromthepresenceofexternalitiesandpublicgoods,excessivemarketpower,theexistenceofnaturalmonopoliesandinefficienciesfrominsufficientorasymmetricinformation.Inreality,thereareanumberofcomplexpoliticalandotherinterestsinvolvedinthemakingofrules,inadditiontoservingsocial,economicandenvironmentalgoals.Legitimatepublicwelfaregoalsaremixedwiththeinterestsofvariouspowerfulgroupsandorganisationsinsociety.Thereareanumberoftheoriesastohowthishappensintheliterature.

Public interest theories Thepublicinteresttheoryofregulationassumesthatregulationservestheinterestsofconsumersbyrestrictingharmfulactionsofbusinesses(denHertog,1999;2010;Posner,1974).Thetheoryassumesthatregulatoryinterventionoccurstocorrectmarketfailureunderthepremisethatthiswillincreasesocialwelfare(denHertog,1999;2010;Djankovetal,2002).Itassumesthatregulatorshavesufficientinformationandenforcementpowerstoeffectivelypromotetheinterestofthepublic,aimingatachievinganoptimalallocationofresourcestobenefitsociety.Similarly,thestartingpointoftheAustriantheoryofregulation,whichisareformulatedversionofthepublicinteresttheory,isalsothatregulationiswellintendedandpotentiallyjustified,butarguesthatmismanagementbyregulatorsand/ortheinterventioninthemarketandthedistortionitcreatesskewscompetitionandcausesproblemsinthemarket.Theseproblemsmayinturnrequirefurtherinterventions,creatingaspiralofeverincreasinglevelsofregulation,asadditionalrulesareimposedtocorrectforthedistortionscreatedbytheoriginalrulesinthefirstplace(GrowthAnalysis,2010).However,aspointedoutbyPosner(1974),ifthepublicinteresttheoryofregulationiscorrect,regulationwouldmainlybefoundinindustrieswherethedangerofmonopolyisthegreatestandinindustriesthatgeneratesignificantpositiveornegativeexternalities(Posner,1974).Thisisnotthecase–regulationdoesnotappeartobepositivelycorrelatedwiththepresenceofexternalitiesormonopolisticmarketstructure.Posner(1974)alsoarguesthatthesocalledAustrianversionofthepublicinteresttheoryisunsatisfactory.Thisisbasedonevidencethatthosewithlegislativepowersfrequentlydesiresociallyundesirableresultsofregulation.Inaddition,evidenceshowingmismanagementbyregulatoryagenciesisweak.

Private interest theories Anotherstrandoftheoriesofregulation,socalledprivateinteresttheories,assumethatregulatorsdonothavesufficientinformationwithrespecttocosts,demand,qualityandotherdimensionsoffirmbehaviour.Theycanthereforeonlyimperfectly,ifatall,promotethepublicinterestwhencontrollingfirms(denHertog1999;2010;GrowthAnalysis,2010).Thepublicchoicetheory,whichsitswithinprivateinteresttheoriesofregulation,startsfromthepremisethatallindividuals,includingpublicservants,aredrivenbyself‐interest(denHertog1999;2010;GrowthAnalysis,2010;Djankovetal,2002).Politiciansareassumedtomakedecisionsinfavourofbusinessesinordertomaximisetheirownchancesofbecomingre‐elected.Whatismore,thepublicchoicetheoryarguesthat

10/24

employeesofregulatoryagenciesarealsodrivenbyself‐interest,maximisingtheirownsatisfactionandnotthatofthepublic.Thisinsightsuggeststhatregulatoryagenciesattempttoexpandtheirbureaucraticstructureinordertoservetheinterestsofthebureaucrats.Bureaucratsarebelievedtorespondfavourablytolobbyistsandspecialinterestgroups.Thecapturetheorystatesthatgovernmentregulationsoftenendupservingtheregulatedfirmsratherthanthepublic(denHertog1999;2010).Thetheoryproclaimsthatfirmsseeklicensingandotherregulatoryprovisionstopreventotherfirmsfromenteringthemarket,orseekpriceregulationtopreventpricecompetition.Regulatorsmightenduptakingovertheroleofforexamplemonitoringcartelpricingschemes,whichindividualfirmsinacartelwouldbeincapableofdoingthemselves.Theregulatedfirms,whopossessaninformationadvantageovertheregulatoryauthoritieswhooftenrelyoninformationprovidedbythosefirms,therebyfindwaystogettheregulatorstoenforceregulationsthatprotectprofits.Ultimately,regulatorsget“captured”bythefirmstheyaresupposedtoberegulating.TheChicagotheoryposesthatregulationisacquiredbytheindustryandisdesignedandoperatedprimarilyforitsownbenefit(denHertog,2010).Itarguesthatinterestgroupsthatcanorganisethemselveslessexpensivelythanotherswillexercisepoliticalinfluence.Politicians,assumedtoaimforre‐election,honourthedemandforregulationsbytheinterestgroupswhosupplyvotesandotherresourcesinreturn.However,criticsoftheprivateinteresttheoriespointoutthatregulationinpracticeoftenappearstoservetheinterestofconsumersratherthantheinterestsoftheindustry.Whatismore,muchregulation,suchasenvironmentalregulationandhealthandsafetyregulation,isopposedbybusinesses(denHertog,2010).Generally,though,ithasbeenarguedtobedifficulttoempiricallytesttheprivateinteresttheories,notleastduetothefactthattheinfluenceofoneinterestgroupdependsontheinfluencesofotherinterestgroupsandontheimportanceoftheconstituencyfortheregulator(denHertog,2010).Itisconsidereddifficulttodeterminetherelativeimportanceofaninterestgroup.Testingthevalidityofthedifferenttheoriesofregulation,Djankovetal(2002)lookatdataonregulationofentryofstart‐upfirmsin85countries,includingthenumberofprocedures,officialtimeandofficialcostthatastart‐upmustbearbeforeitcanoperatelegally(Djankovetal,2002).Thestudyshowsthatcountrieswithheavierregulationofentryhavehighercorruptionandlargerunofficialeconomies,butnotbetterqualityofpublicorprivategoods.Countrieswithmoredemocraticandlimitedgovernmentshavelighterentryregulation.Theevidencesupportsthepublicchoiceviewthatentryregulationbenefitspoliticiansandbureaucrats,butisinconsistentwithpublicinteresttheories(Djankovetal,2002).Othersarguethattheoriesofregulationaredifficulttotestempirically,andthatitisdifficulttorankpublicandprivatetheoriesintermsofwhichisbestatexplainingtheexistenceofregulation(denHertog,2003;2010;Posner,1974).Toconclude,thoughdifficulttotestempirically,theavailableevidenceintheliteratureseemstosupportprivateinteresttheoriesofregulationtoagreaterextentthanpublicinteresttheories.Generally,bothstrandsoftheoriesseemtosuggestthatthelevelofregulationwillexceedthatwhichisoptimalforsociety(GrowthAnalysis,2010).

11/24

Table1.Summaryoftheoriesofregulation1Theory  Rationale

Public interest theories Intervention to correct market failures and to increase social welfare. 

Austrian theory 

Regulation is well intended, but the distortion in the market the intervention creates causes problems which require further interventions. Regulatory spiral. 

Private interest theories 

Regulators do not have sufficient information regarding costs, demand, quality and other dimensions of firm behaviour. Can therefore only imperfectly, if at all, promote the public interest when regulating firms. 

Public choice theory 

All individuals are driven by self‐interest. Politicians make decisions in favour of businesses in order to maximise their own chances of becoming re‐elected.  

Capture theory 

Regulations often end up serving the regulated firms rather than the public. Regulated firms, which possess an information advantage over the regulatory authorities, get regulators to enforce regulations that protect profits. Regulators get “captured” by the firms they are supposed to be regulating. 

Chicago theory 

Regulation is acquired by the industry and is designed and operated primarily for its own benefit. Interest groups that can organise 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)forexamplesofmorethoroughreviewsoftheeconomictheoriesofregulation.

12/24

The regulatory burden 

Direct and indirect costs of regulation  Independentofthejustificationandpotentialbenefitsofregulation,itimposescostsonsocietyandcanhavepotentiallysignificantmacro‐andmicroeconomicconsequences(NicolettiandScarpetta,2003;GelauffandLejour,2006).Regulationcanhavebothdirectandindirectcosts(EuropeanCommission,2013).Directcostsaremadeupoffinancialcosts,includingregulatorychargessuchasfees,leviesandtaxes;investmentcosts;enforcementcosts;andadministrativecosts.Theycanbeone‐off,suchasthepurchasingofnewequipment,orrecurring,forexampleifarulerequiresspecificperiodicbehaviours,suchasperiodicalre‐trainingofstafforperiodicalreportingrequirements.Duetolearningeffects,somecostsofregulationdecreaseovertime,forexamplebysometasksbecominglessstaffintensiveandlesstimeconsumingtocarryout(GrowthAnalysis,2010).Directcostsalsoincludesocalledhasslecosts,whichareassociatedwithwaitingtimeanddelays,redundantlegalprovisionsandcorruption(EuropeanCommission,2013).Indirectcosts,inturn,areincurredinareasorexperiencedbyconsumers,governmentagenciesorotherstakeholdersthatarenotunderthedirectscopeoftheregulation,orwhenregulationhasunintendedeffectsonforexamplecompetitioninaparticularmarketoronthebehaviouroffirms(EuropeanCommission,2013).Sucheffectscanforexampleinvolveentrepreneursrefrainingfromstartingabusinessinthefirstplaceordiscouragingestablishedfirmsfrominvesting,innovatingandgrowing.Imposingregulationwithoutconsiderationofthepotentialimpactontheincentivesandefficiencyofbusinessesmightnegativelyimpactoncompetitionandmayultimatelyhampereconomicgrowth(Heymanetal,2015;SwedishForumforEntrepreneurship,2015).Whatismore,divertingresourcestowardsregulatorycomplianceratherthanotherproductiveusescreatesanopportunitycostofregulation(EuropeanCommission,2013).Suchcostsarerarelyaccountedforwhentheregulatoryburdenisconsidered.Governmentshaveinrecentyearsfocussedontryingtoreducethedirectcostsofcompliance,withaparticularfocusonreducingtheadministrativeburdenforbusinesses(SwedishEntrepreneurshipForum,2015).Areductionintheadministrativeburdenofregulationisassumedtofreeupresourcesthatcanbemoreproductivelyemployedelsewhere(GelauffandLejour,2006).However,indirectcostsofregulationhavebeenarguedtopotentiallyincurmoresignificanteffectsofregulation(Crafts,2006;GrowthAnalysis,2010).Hence,ithasbeensuggestedthatthedefinitionoftheregulatoryburdeniswidenedtoincludethetotalcosttosocietyofregulation(Crafts,2006;GrowthAnalysis,2010).

Impacts of regulation on competition Indirecteffectsofregulationoncompetitioncanbesignificant,notleastbecausecompetitioniscloselylinkedwithaspectssuchasinnovation,productivity,employmentandjobopportunitiesandeconomicgrowth(UKOfficeofFairTrading,2011).Competitionmaybeaffectedifregulationisintroducedwhich,eitherdirectlyorindirectly,limitsthenumberoffirmsinamarketoraltersfirms’abilityorincentivetocompete.Regulationwhichlimitstheabilityofconsumerstomakedecisionsaroundgoodsandservicestheypurchasecanalsonegativelyimpactoncompetition.Effectsoncompetitioncanoccurbothonanationalandinternationallevel.TheOECDhasissuedguidanceaimedatregulatorswhenundertakingregulatoryimpactassessments,includingasectiononhownewrulesandregulationmightimpactoncompetition(OECD,2016).Theguidancestatesthataproposalofregulatorychangeis

13/24

likelytohaveanimpactoncompetitionifoneormoreofthefollowingeffectsofregulationistrue:

Ifitlimitsthenumberorrangeoffirms(e.g.throughgrantingexclusiverightsforasuppliertoprovideagoodorservice,establishingalicenseorpermitasarequirementofoperation,orsignificantlyraisingthecostofentryorexitbyasupplier).

Ifitlimitstheabilityoffirmstocompete(e.g.throughlimitingsellers’abilitytosetpricesforgoodsorservices,limitingthefreedomofsupplierstoadvertiseormarkettheirproductsorsettingstandardsforproductqualitywhichprovidesanadvantagetosomesuppliersoverothers).

Ifitreducestheincentiveoffirmstocompete(e.g.throughcreatingaself‐regulatoryorco‐regulatoryregime,requiringinformationonsupplieroutputs,prices,salesorcoststobepublished,orexemptingtheactivityofaparticularindustryorgroupofsuppliersfromtheoperationofgeneralcompetitionlaw).

Ifitlimitsthechoicesandinformationavailabletoconsumers(e.g.bylimitingtheabilityofconsumerstodecidefromwhomtheypurchase,reducingmobilityofcustomersbetweensuppliersbyincreasingthecostsofswitchingsuppliers,orfundamentallychangingtheinformationrequiredbybuyerstoshopeffectively).

Inadditiontotheabovementionedfactors,beingabletoadjustthelevelandcompositionoftheworkforceinordertoadapttochangingdemandconditionsisvitalforeffectivebusinessoperation.Businesses’abilitytodothiswillpartlydependonthelabourmarketregulationsinplace(WorldBank,2016;Bjuggren,2013).RegulationsrelatedtothelabourmarketarenotexplicitlymentionedintheOECD’scompetitionassessmentchecklist,butcanstillhavesubstantialimpactoncompetition,notleastcountries’abilitytocompeteinternationally(OECD,2013).Indeed,studieshaveshownthatlabourmarketregulationscanhavesignificantimpactonanumberofeconomicoutcomes,includingaggregatejobflows,productivity,growthandthespeedofadjustmenttoeconomicshocks(WorldBank,2016;OECD,2013).Thepotentialimpactoflabourmarketregulationoncompetitionisdealtwithinaseparatesectionofthisreport.Examplesofsuchregulationincludeminimumwage,sickpay,unemploymentprotectionandrulesaroundtheprocessofdisputeresolution,affectingboththecostoflabourandthecostoflabouradjustment(Rincon‐Aznaretal,2010).

Number and range of firms 

Regulationcanaffectthenumberofsuppliersinamarketinanumberofways;implicitlybycreatingbarrierstoentryandexit,andexplicitlybyforexamplerenationalisinganindustry,grantingabusinessexclusiverightstoamarket,orrestrictingthenumberofsuppliersinageographicalarea(OECD,2016).Newbusinessesenteringthemarketandreplacinglessproductiveonesisanimportantfactorofbusinessdynamismandeconomicgrowth(Brandt,2004).AreportinvestigatingtherelationshipbetweenregulationandeconomicperformancenotesthatseveralfirmlevelstudiesshowthatentryliberalisationandtheprocessofentryandexithashadapositiveinfluenceonproductivitygrowthinanumberofOECDcountries(Rincon‐Aznaretal,2010).Regulationcreatingbarrierstoentrycanconsistofconsiderableadministrativeandbureaucraticproceduresassociatedwithstartingabusiness,includingthelengthoftimeittakes;thenumberandcostofanypermitsorlicensesrequired;orminimumcapitalrequirementstostartabusiness(WorldBank,2016).Otherexamplesofentrybarriersincludedifficultiesassociatedwithobtainingaccesstocredit,thetaxregime,difficultiesclosingabusinessorlabourmarketregulationsmakingitdifficultorcostlytohireandfirestaff.

14/24

Intheirstudy,vanSteletal(2007)examinethelinkbetweenbusinessregulationandentrepreneurshipin39countriesusingfivecategoriesofregulationderivedfromtheWorldBank’sDoingBusinessmethodology.Thecategoriesincludestartingabusiness,labourmarketregulation,gettingcredit,payingtaxesandclosingabusiness(vanSteletal,2007).Adistinctionismadebetweennecessityandopportunityentrepreneursinthestudy,anditisarguedthatopportunityentrepreneursareparticularlyaffectedbyregulation.Thisisexplainedbythefactthat,astheytendtohavehighergrowthexpectations,opportunityentrepreneursaremorelikelytobedeterredfromenteringamarketiftheythinkthatregulationmightpreventthemfromreachingtheiroptimalsize.Thestartingabusinesscomponentinthestudycomprisesnumberofprocedurestolegallystartandoperateabusiness;costandtimerequiredtocompleteeachprocedure;andminimumcapitalrequirements.Ofthese,onlytheminimumcapitalrequirementcomponentisfoundtobeanobstacleforentrepreneurship(vanSteletal,2007).This,itisargued,couldbeexplainedbythefactthatwhilethecreativeentrepreneurmakessuretoeitherovercomeoravoidbureaucraticburdens,achievingtheminimumcapitalrequirementislikelytobemoredifficulttoovercome.Generally,theresultsinvanSteletal’sstudyindicatethatadministrativebarrierstoentryplayonlyamodestroleinexplainingvariationsinbusinessentryratesacrosscountries.Theauthorsconcludebyarguingthatthefocusofpolicymakersonreducingsuchbarriersmaybebetterplacedelsewhere(vanSteletal,2007).Conversely,astudybyBrandt(2004)findsthattheadministrativeburdenonstart‐ups,includingtheamountoflicensesandpermitsrequired,isshowntohaveapotentiallysignificantnegativeimpactonentryrates.Inaddition,Brandt(2004)drawsattentiontotheimportanceofexitbarriersbyshowingthattheimpactofthenumberofyearsduringwhichcreditorshaveclaimsonbankruptfirms’assetsonfirmentryandsurvivalhasasignificantlynegativeeffectonfirmentry.Thestudyalsoshowsthatincountrieswithhighentryandexitbarriers,firmsinvestmoretimeingatheringinformationaboutmarketconditions,competitorsandtheirownpotentialprofitabilitypriortoentering(Brandt,2004).Firmswhichfindoutthattheyhavelittlechanceofsurvivaltendtorefrainfromenteringthemarketintheseinstances,causinglowerentryratesandhighersurvivalratescomparedwithcountrieswhereentryandexitislesscostly.Usingdataonaveragesurvivalratesestimatedfordifferentcohortsoffirmsthatenteredthemarketfromthelate1980stothe1990s,survivalratesareshowntobeparticularlyhighinSwedenandtheNetherlands,reachingalmost90percent(Brandt,2004).Thiscompareswithsurvivalratesinothercountries,includingtheUK,PortugalandDenmarkamongothers,whichvarybetween62and88percent.Itisalsomentionedthatcrosscountrydifferencesinfirmentryratespartlycouldbeexplainedbydifferencesinrisktoleranceindifferentcountries.Regardingtaxation,BraunerhjelmandEklund(2013)findthatnotjustthetaxrate,butalsotheadministrativeburdenthatthetaxsystemimposesonfirmssignificantlyreducesnewfirmformation.Theyfindthatatenpercentreductioninthetaxadministrativeburdenresultsinathreepercentincreaseinentryrates.TheWorldBank’sDoingBusiness2016reporthighlightsthisaswell,emphasisingtheeaseofpayingtaxes,regardlessofthecorporatetaxrate,asasignificantdeterminantoffirmentry(WorldBank,2016).

Firms’ ability to compete 

Firmscompetewitheachotherthrougharangeofdifferentchannels,includingbyprice;byofferingproductsofdifferingqualityorcharacteristics;andbyusingdifferentsaleschannels.Theycanalsousebrandingandadvertisingasameansofemphasisingthedifferencesintheirproductsrelativetotheircompetitors.Consequently,regulations

15/24

whichlimitfirms’abilitytocompeteincludespricecontrols,productorproductionmethodspecificationsandlimitstothefreedomoffirmstoadvertiseormarkettheirproducts(OECD,1998).Restrictionsoncomparativeadvertisingbyimposingarequirementthatanysuchadvertisementisvalidatedbyanindependentauthorityisanexampleofregulationwhichseveralcountrieshaveinplaceandwhichlimitstheabilityoffirmstocompete(OECD,2016).Whilesuchregulationmayensurethattheclaimsandpromisesmadebybusinessesarevalidatedandcorrect,andmayindeedfacilitatefaircompetition,unwarrantedrestrictionsoncomparativeadvertisingmaydepriveconsumersofusefulinformationaboutthedifferencesinproductquality,attributesandpricesacrosssuppliers.Thiscouldhavenegativeeffectsoncompetition.Inotherinstances,businessesmaynotbeallowedtoadvertisetheirproductsatall,ormayberestrictedtousingcertaintypesofmediaorcertaintimesoftheday(OECD,2016).Thisissometimesthecasewithpharmaceuticalcompaniesandproductsrelatedtoalcoholandtobacco.InSwedenforexample,advertisingofalcoholrelatedproductswasbanneduntil2003.Todayitisstrictlyregulated,wherebyadvertsofalcoholrelatedproductsneedtobeaccompaniedbywarningtexts;canonlyinvolveproductswithalcoholcontentsbelow15percentalcoholbyvolume;andcannotbetargetedatpeopleunder25yearsofage(SFS2010:1622).Thistypeofregulationisoftenappliedtodemeritgoodsandtendstobejustifiedonthegroundsthatconsumption,orover‐consumption,oftheproductsmaybedetrimentaltoconsumers’health,orinotherwaysaresociallyundesirable.However,suchregulationsmayhinderdisseminationofvaluableinformationaboutproductqualityandotherattributes.Restrictionsonadvertisingmayalsorestricttheentryofnewfirmsbyreducingtheirabilitytocreatebrandawareness(OECD,2016).Havingproductandproductionprocessspecificationsandotherqualitystandardsinplaceisoftennecessaryandprotectsconsumersandemployees(OECD,2016).Suchstandardsareoftenprevalentinthefoodindustryandtheconstructionindustryforexample.However,toostringentrulesoncontentandminimumqualitymaynegativelyimpactonfirms’abilitytocompete,limitingthenumberofproducersandrangeofproducts.

Firms’ incentive to compete 

Regulationcanaffectcompetitionnegativelybyalteringfirms’incentivestoactasrivals.Forexample,restrictingabusinessfromexpandingitsmarketshareorgrowingitsprofitmayreducethevigourwithwhichthatbusinesscompetesagainstotherbusinesses(OECD,2016).Otherexamplesofincentivealteringregulationsincludetheintroductionofself‐orco‐regulatoryregimes,orallowingcooperationandinformationexchangebetweenfirms.Regulationswhichinhibitthewillingness,abilityorincentiveofcustomerstoswitchbetweensuppliersmayalsoreducetheincentiveforbusinessestocompete(OECD,2016).Self‐andco‐regulationhavebeenarguedtohavearangeofpotentialadvantages,forexamplethroughenhancedregulatorycredibilitythroughtheinvolvementofindustryandotherinterestedpartiesintheregulatoryprocess,orthroughimprovedregulatoryqualityfromdrawingontheexpertiseoftheindustryindesigningtherules.Whatismore,ithasbeenarguedtobringenforcementcostsavingsbymakingtheregulatedpartiespartofthemonitoringofenforcementoftherules.Andindeed,suchregulationcanenhancecompetitionthroughagreementsondesignandstandardsamongmarketparticipants(OECD,2016).However,thereisariskinvolvedinbringingcompetitorstogetherinsuchamanner,sinceeventhoughtheintentionmaybetodiscussmattersofproductdesignandsafetystandards,participantsmaybetemptedtosharethoughtsonfirmstrategiesrelatedtopricing,quantityandotheraspects(OECD,2016).Thismayultimatelyleadtopricecoordinationbetweenfirms,orcoordinationtopreventnewentry.

16/24

Exemptionsfromnationalcompetitionlawsareprevalentinnumeroussectorsinmanycountries,includingwithinenergyandutilities,transport,communicationsandagriculture.PreconditionsthatneedtobemetforexemptionstoapplyinSwedenincludethatthebusinessescanprovethatcooperationimprovestheproductionordistributionofaproduct,orthatitpromotestechnologicaldevelopment(SwedishCompetitionAuthority).Inaddition,consumersneedtoreapareasonableproportionoftheprofitthatarisesduetothecooperation.Sometimes,allowingsuchcooperationhasthepurposeofensuringstandardsanduniformity;promotinginnovationthroughjointventures;orcounteringbuyerpower(OECD,2016).Anoftenusedexampleofthisisfoundwithinagriculture,wherejointactivitybyagro‐foodproducershasbeenarguedtobringanumberofpotentialbeneficialeffects,includingachievingeconomiesofscaleandscope,reducedtransactioncostsandpossibilitiestoconductresearch(OECD,2005a).However,whiletheremaybelegitimatereasonsforallowingsuchcooperation,unintendedside‐effectsmayariseascompetitorsareallowedtoexchangeinformationaboutpricesandquantitiesandengageincollusion.Anexampleofsuchanoccurrence,aspointedoutbytheOECD,iswhentheDanishcompetitionauthorityin1993decidedtocollectandpublishfirm‐specifictransactionsfortwogradesofready‐mixedconcreteinthreeregionsofDenmark(OECD,2010).Withinayearofpublicationofthedata,averagepricesofthetwogradeshadincreasedby15‐20percent,anditisarguedthatthepublicationofpricesmayhavefacilitatedcollusionandcontributedtotheincreaseinprices.

Information available to consumers 

Consumershavingaccesstoinformationaboutgoodsandservicesisessentialforeffectivecompetitiontotakeplace.Itallowsthemtoproperlysearchforthebestdealsandtocomparequalityandpricesofferedbycompetingfirms,puttingpressureonthemtocompetemoreaggressivelywithoneanother(Stucke,2013).IntheUKforexample,areviewoftheenergysectorin2015bytheUKCompetitionandMarketsAuthorityfoundpotentialevidenceofweakcustomerengagementintheretailenergymarket,signallingaproblemwithlackofcompetitioninthemarket(UKCompetition&MarketsAuthority,2015b;2016).Specifically,theanalysisshowedsignificantgainsavailabletoenergyconsumersfromswitchingenergysupplier.This,inturn,wasarguedtobeapotentialconsequenceoftheprevailingdifficultyforconsumerstocomparethecomplexandcompetingoffersbyvariousenergysuppliers.ThereviewresultedinarangeofsuggestionsofreformstorevitalisecompetitionintheUKenergysector.Proposedmeasuresincluded,amongotherthings,reformstoenablepricecomparisonwebsitestoplayabiggerroleinhelpingcustomersfindthebestoffersforthem(UKCompetition&MarketsAuthority,2016).Significantswitchingcostsorcomplexswitchingrulesmayalsohavenegativeeffectsoncompetition,ascustomersare‘lockedin’tocontractsastheymayfindittooexpensiveortoodifficulttoswitchsuppliers(Chen,2011).Thisisnotanuncommonfeatureintelecommunications,thebankindustry,insuranceandenergymarkets(Chen,2011).In2014inSwedenforexample,reformswereintroducedtotheelectroniccommunicationslaw,withoneofthepurposesbeingtomakeiteasierforconsumerstoswitchcommunicationsproviderandincreasingmobilityandcompetitioninthemarket(SwedishMinistryofEnterpriseandInnovation,2013).Amongotherthings,amaximumnoticeperiodofonemonthwasintroducedforconsumerswishingtoendtheircontracts,andarequirementthatoperatorsunlockphonesimmediatelyandatnocosttoconsumersiftheywishforthistobedoneafterthecontracthasexpired(SFS2003:389).

17/24

Labour market regulation 

Addingtothecostoflabourandlimitingfirms’abilitytoadapttheirworkforcetochangingeconomicconditions,labourmarketregulationcannegativelyimpactoncompetition.Indeed,thestudybyvanSteletal(2007)findsthatlabourmarketregulationshaveagreaterimpactonbusinessstart‐upratesthantheadministrativeburdenassociatedwithstartingabusiness.Thisimpliesthatthoseconsideringtostartabusinessseemtobemoreinfluencedbyfactorsthatcomeintoplayoncethebusinesshasalreadybeenestablished,ratherthanthoseaffectingthemimmediatelyatthestart‐upstage.Theeffectoflabourmarketregulationonentrepreneurshipcanpartlybeexplainedbythefactthatlessrigidregulationsdiminishesthesafetyofapaidjob,andthemorelikelyemployeesmaybetostarttheirownbusiness.Inaddition,businessownershipislikelytobecomemoreattractivethemoreflexibilitytheownerhasinrunningthebusiness.Whatismore,labourmarketregulationintermsofforexamplestringentemploymentprotectionlegislationhasbeenfoundtohaveasmallnegativeimpactonlong‐runproductivitygrowth,potentiallybyrestrictingmovementoflabourintoemerging,high‐productivityfirms(OECD,2007).AnotherstudybytheOECDshowsthatfiringrestrictionsarecostlierinindustriescharacterisedbyrapidtechnologicalchange,suchasICT,andthatcountrieswhereregulationsaremorestringentthereforetendtospecialiseinindustrieswheretherateoftechnologicalchangeisslower(OECD,2013).Similarly,GustandMarquez(2002)showthatburdensomeregulatoryenvironments,inparticularregulationsaffectinglabourmarketpractices,hinderedtheadoptionofinformationtechnologiesandslowedproductivitygrowthinanumberofindustrialcountriesinthe1990s(GustandMarquez,2002).Labourmarketregulationhasalsobeenarguedtoreducetheproductivitygrowthratebyslowingdownthereallocationfromoldanddecliningsectorstonewanddynamicones(Rincon‐Aznaretal,2010).Whatismore,rigiditiesinlabourmarkets,employmentprotectionlegislationinparticular,whichaddstothecostoflabour,havebeenshowntodiscouragefirmsfromexportingthroughreducedcompetitivenessasaresultfromareductioninfirms’operatingprofits(HelpmanandItshoki,2010).However,althoughthenegativeeffectsofstringentlabourmarketregulationappeartobemoreextensivelydocumentedintheliterature,toolaxlabourmarketregulationcouldalsohaveadverseeffectsonfirmproductivity(Bjuggren,2013).Thiscouldforexamplebethecaseifworkersarenotallowedtotakesickleaveorhavetoworklonghourswithnoweeklyrestdays.Inaddition,employmentprotectionlegislationcanhaveimportanteffectsonworkerbehaviourasitmightincreasetheincentiveofemployeestoacquiremorefirmspecificskills.Itmayalsopreventsignificantcostsassociatedwithjobdisplacement,suchasearinglosses,lossofjob‐specificskillsandexperienceandvarioussocialcostsarisingfromhealthproblemswhichmaystemfromjoblessness(Bjuggren,2013;OECD,2013).Thus,itappearstobeimportantthatpolicymakersstrikeabalancebetweenallowinganefficientreallocationoflabourresourcesandtheneedtoprotectemployees(OECD,2013).

18/24

Measures of regulation Thereareanumberofinternationalindicesmeasuringcompetitivenessavailable,allowingforcomparisonsbetweencountries.Twooftenquotedexamplesofsuchmeasureswhereregulationplaysabigrolearedescribedbelow;OECD’sProductMarketRegulation(PMR)indexandtheWorldBank’sDoingBusiness(DB)index.

OECD Product Market Regulation index In1998,theOECDdevelopedaneconomy‐wideindicatorofproductmarketregulation(PMR).ThePMRindicatoriscomplementedbyasetofindicatorsthatmeasureregulationatthesectorlevel.Theindicatorisanattempttoturnqualitativedataonlawsandregulationintoquantitativeindicators.ThePMRdataiscollectedthroughaquestionnairesenttogovernmentsinOECDandnon‐OECDcountries,andisupdatedeveryfiveyears.TheaggregatePMRindicatoristhesimpleaverageacrossthethreehigh‐levelindicatorsstatecontrol,barrierstoentrepreneurshipandbarrierstotradeandinvestment,underwhichthereare18low‐levelindicators.Asmentioned,OECDcountrieshaveconsiderablyliberalisedtheirproductmarketsoverthepast15years,withreformstypicallybeinglargeratthebeginningoftheperiod.Countrieswhohaveloweredbarrierstoentrepreneurshiphavedonesoinparticularbystreamliningadministrativeproceduresforstart‐ups,generallysimplifyingrulesandproceduresandimprovingaccesstoinformationaboutregulation.Examplesofmeasurestoreducethelevelofstatecontrolthatcountrieshavetakenincludeabolishingpricecontrolsorimprovingthedesignofpricecontrolschemes.Intermsofsectors,progresshasslowedinairandroadtransportwhilethepaceofreforminprofessionalserviceshasacceleratedsomewhat.In2013,Swedenranked26thoutof33countriesontheeconomy‐widePMR,fairlyclosetotheOECDaverage(Koskeetal,2015).DuetoanumberofOECDcountrieshavingcontinuedtostreamlineregulations,incombinationwithSweden’sPMRbarelychangingoverthepastdecade,Sweden’srankinghasmovedfrom9thin2003to26thin2013(OECD,2015b).Swedenispointedoutashavingrelativelycomplexproceduresrelatedtolicensesandpermits,aswellashavingarelativelyhighrateofpublicownershipofcompanies(OECD,2015b).TheindexshowsthattheNetherlandsandtheUKhavesignificantlymorecompetition‐friendlyproductmarketregulationthantheaverageOECDcountry,whilePMRissignificantlylesscompetitionfriendlythantheOECDaverageinPoland,Greece,Korea,Mexico,IsraelandTurkey(Koskeetal,2015).AmongthecountrieswhoseregulatorystanceisclosetotheOECDaverage,includingSweden,therankingisarguednottohaveanyrealsignificanceastheregulatorypracticesinthisgroupareconsideredtobesoclosetoeachother.DecompositionoftheoverallPMRindicatorfortheOECDasawholeintothethreehigh‐levelcomponentssuggeststhatcompetition‐unfriendlyregulationsarehigherintheareasofstatecontrolandbarrierstoentrepreneurshipthanintheareaofbarrierstotradeandinvestment.Withinthestatecontrolcomponent,highscoresareprimarilydrivenbypublicownershipoffirmsinbusinesssectorsandthepoorgovernanceofthesefirms.Highscoresonthebarrierstoentrepreneurshipcomponentaretypicallydrivenbyastrongprotectionofincumbentsinnetworksectorsandhighadministrativeburdensonspecificfirmssuchasretailshopsandroadfreightcompanies.

19/24

World Bank – Doing Business  Foroveradecade,theWorldBankhaspublishedanannualreport,DoingBusiness(DB),withquantitativedataonthemainregulatoryconstraintsaffectingdomesticsmallandmedium‐sizedbusinessesthroughouttheirlifecycles.The2016reportpresentsdatafor189economieswithinformationfromtenareasofbusinessregulationandfocusesonregulationsandregulatoryprocessesinvolvedinsettingupandoperatingabusiness(WorldBank,2016).Thetenareas(startingabusiness,dealingwithconstructionpermits,gettingelectricity,registeringproperty,gettingcredit,protectingminorityinvestors,payingtaxes,tradingacrossborders,enforcingcontractsandresolvinginsolvency)areincludedinadistancetoafrontierscoreandeaseofdoingbusinessranking.Thedistancetofrontierscorecapturesthegapbetweenaneconomy’sperformanceandameasureofbestpracticeacrosstheentiresample.100isthefrontierand0isfurthestawayfromthefrontier.Theindexconsistsof36indicators.Thelatestversionoftheindexcontainsimprovementstosomeoftheindicatorsbyexpandingthefocusonefficiencyofatransactionoraservicetoalsoincludeaspectsofthequalityofthatservice(WorldBank,2016).Forexample,theregisteringpropertyindicatorsetassessestheefficiencyoflandadministrationsystems.Inthe2016versionoftheindex,theindicatoralsoencompassesaspectsofthequalityofthesystems,includingmeasuringthereliability,transparencyandgeographiccoverageoflandadministrationsystems,aswellasaspectsofdisputeresolutionforlandissues.Inthecaseofindicatorsthatalreadycoveraspectsofquality,thefocushasbeenexpandedtoincludeadditionalgoodpracticescovered,asisthecasewiththeindicatorprotectingminorityinvestors.DoingBusiness2016resultsshowthatthe30bestperformingcountriesarenotthosewiththeleastregulation,butratherthosewithgoodrulesthatallowefficientandtransparentfunctioningofbusinessesandmarketswhileprotectingthepublicinterest.OECDhigh‐incomeeconomiesareamongthosewiththebestscoresonaverage,withSingapore(scoring87.34),NewZealand(86.79)andDenmark(84.40)atthetopofthelist.Swedenranks8th,withascoreof81.72.Swedenismentionedashavingconsiderablyreducedthetimerequiredtoregisteracompanysincethelastreport.

Comparing the two indices TheOECD’sPMRturnsqualitativedataintoaquantitativemeasureofthedegreetowhichpoliciespromoteorinhibitcompetitioninareasoftheproductmarketwherecompetitionisthoughttobeviable:TheDoingBusinessindexisaquantitativemeasure,whichindicatestheregulatorycostsassociatedwithdoingbusiness.Thetwoindicescanbeviewedascomplementarytooneanother.Indeed,thetwoindiceshavebeenshowntobecorrelated(Jacobzoneetal,2010).Thiscorrelationindicatesthatwhenacountryhasahighqualityregulatorymanagementsystemitisalsolikelytobeperformingwellintermsofthegeneralbusinessfriendlinessandcompetitionenvironments(Jacobzoneetal,2010).

20/24

Conclusion Regulationand,importantly,regulatoryqualityiscrucialforthefunctioningofmarkets,economicgrowthandconsumerwelfare.Onestrandoftheoriesofregulation,socalledpublicinteresttheories,posethatregulationisputinplaceasaresponsetomarketfailures.Theexistenceoftheexcessiveregulatoryburdenisexplainedbythefactthattheregulatoryinterventioncreatesdistortionsinthemarket,requiringfurtherregulatorymeasuresinanever‐endingspiral.Theotherstrandoftheories,socalledprivateinteresttheories,arguethatregulationistheresultofvariouspowerfulinterestgroupsinsocietywhobenefitfromcertainrulesandwhogettheirregulatoryneedssatisfiedbypoliticiansandbureaucrats,whoactintheirownself‐interest,aimingforre‐electionorcareeradvances.Whileempiricalevidencetestingthevarioustheoriesisrelativelyscarce,atleastonestudyfindsevidencetosupporttheprivateinteresttheoryratherthanpublicinteresttheory.Still,noonetheoryislikelytobeabletoprovideasatisfactoryexplanationfortheexistenceofregulationingeneral.Instead,theyprovideahelpfulstartingpointforunderstandingregulatoryinterventionandcanprovidepotentialexplanationsastowhythelevelofregulationisoftenlikelytoexceedthelevelwhichwouldbeoptimalforsociety.Howeverwellintendedandjustified,itisclearfromtheliteraturethatrulesandregulationcanbringsignificantdirectandindirectcoststoindividuals,businessesandtheeconomyasawhole,notleastthroughnegativeimpactsoncompetition.Competitioncanbenegativelyaffectedbyregulationwhichcreatesentrybarriersandlimitsthenumberofsuppliersinthemarket,orregulationwhichlimitstheincentivesorabilityoffirmstocompete.Regulationwhichrestrictstheamountofinformationavailabletoconsumers,inhibitingthemfrommakingwellinformedchoiceswithregardstoconsumptioncanalsohampercompetition.Particularlywelldocumentedintheliteratureistheimpactofregulationonfirmentry.Entrepreneurshipandfirmentryisregardedasoneofthekeydriversofcompetition,innovation,jobcreationandeconomicgrowth,andderegulationenablingnewfirmcreationhasbeenshowntohaveimportanteffectsoncountries’productivity.Theimpactoflabourmarketregulationoncompetitionandbusinessactivityisanotherareawhereextensiveresearchhasbeendone.Generally,theempiricalevidenceappearstoindicatethattoostrictlabourmarketregulationcanhamperfirmentryanddiscouragebusinessesfromexpanding.However,tooflexiblelabourmarketregulationcanaffectemployeebehaviournegatively,asemployeesmayfeeldiscouragedfrominvestingintheirownskills,hamperingfirmproductivity.Fromtheliteratureitcanbeconcludedthat,whilegovernments’focusonreducingtheregulatoryburdenintermsofadministrationanddirectcompliancecostsinrecentyearsispositiveforbusinesses,someofthemostsignificantimpactsofregulationmayindeedtaketheformofindirecteffectssuchasinhibitingcompetitioninthemarketandhinderingordiscouragingtheformationofnewfirms.Thereappearstobeadelicatebalancebetweenprovidinganinstitutionalenvironmentthatisconducivetobusinessentryandgrowthandpassingthepointwhereoverregulationcurbsthepotentialwelfareeffectsrelatedtoentrepreneurshipandgrowingfirms.Consideringindirectimpactswhenproposingnewandamendedrulescouldultimatelycontributetobetterqualityregulationwhichencouragescompetition,ultimatelyboostingeconomicgrowthandincreasingconsumerwelfare.

21/24

Sources Aghion,P.,C.Harris,P.HowittandJ.Vickers,(2006)“TheeffectsofentryonIncumbentInnovationandProductivity”,NBERWorkingPaperNo.12027Alberto,A.,S.Ardagna,G.NicolettiandF.Schiantarelli(2005)“Regulationandinvestment”,JournaloftheEuropeanEconomicAssociation3(4):791‐825Bjuggren,C‐M.(2013)“Theeffectofemploymentprotectionrulesonfirmproductivity–Anaturalexperiment”,No.82,TheSwedishRetailInstitute(HUI),StockholmBrandt,N.(2004)“BusinessDynamicsandPolicies”,OECDEconomicStudies,No.38,2004/1Braunerhjelm,P.,andJ.E.Eklund(2013)“Taxes,taxadministrativeburdensandnewfirmformation”,CentreofExcellenceforScienceandInnovationStudies,ElectronicWorkingPaperSeries,No.312Buccirossi,P.,L.Ciari,T.Duso,G.Spagnolo,andC.Vitale,(2011)“CompetitionPolicyandProductivityGrowth:AnEmpiricalAssessment”,DüsseldorfInstituteforCompetitionEconomics,DICEDiscussionPaper,No.22Burdett,K.andS.Fölster(1994)“Analyzingtheeffectsoftaxicabderegulation:Anewempiricalapproach”,TheIndustrialInstituteforEconomicandSocialResearch,WorkingPaperNo.410,StockholmChen,J.(2011)“Howdoswitchingcostsaffectmarketconcentrationandpricesinnetworkindustries”,WorkingPaper,DepartmentofEconomics,UniversityofCalifornia,IrvineCiccone,A.,andE.Papaioannou(2007)“RedTapeandDelayedEntry”,JournalofEuropeanEconomicAssociation,5(2‐3):444‐458Crafts,N.(2006)“Regulationandproductivityperformance”,OxfordReviewofEconomicPolicy,vol.22(2),pp.182‐202,OxfordUniversityPressdenHertog,J.(1999)“Generaltheoriesofregulation”,UtrechtUniversitydenHertog,J.(2003)“Publicandprivateinterestsinregulation”,EssaysintheLaw&EconomicsofRegulationdenHertog,J.(2010)“ReviewofEconomicTheoriesofRegulation”,DiscussionPaperSeries10‐18,TjallingC.KoopmansResearchInstitute,UtrechtDjankov,S.,R.LaPorta,F.Lopez‐de‐Silanes,andA.Shleifer(2002)“TheRegulationofEntry”,QuarterlyJournalofEconomics,vol.CXVII,issue1

22/24

EuropeanCommission(2013)“Assessingthecostsandbenefitsofregulation”,CentreforEuropeanPolicyStudiesandEconomistiAssociati,BrusselsGaffard,J‐L.(2006)“Innovation,competitionandgrowth:SchumpeterianideaswithinaHicksianframework”,PresidentialAddressdeliveredattheInternationalSchumpeterSocietymeetinginSophiaAntipolis,June2006Gelauff,G.andA.M.Lejour(2006)“FiveLisbonhighlights–Theeconomicimpactofreachingthesetargets”,CPDDocumentNo.104,CPBNetherlandsBureauforEconomicPolicyAnalysis,TheHagueGomaa,M.M.(2014)“CompetitionandEconomicGrowth:AnEmpiricalAnalysiswithSpecialReferencetoMENACountries”,TopicsinMiddleEasternandAfricanEconomies,vol.16,No.2GrowthAnalysis(2010)”Regelbördansekonomiskaeffekter–Enteoretiskochempiriskanalys”,ÖstersundGust,C.andJ.Marquez,(2002)“Internationalcomparisonsofproductivitygrowth:theroleofinformationtechnologyandregulatorypractices”,InternationalFinanceDiscussionPapers,No.727,BoardofGovernorsoftheFederalReserveSystem,WashingtonDCHeyman,F.,P‐J.NorbäckandL.Persson(2015)“TheTurnaroundoftheSwedishEconomy:LessonsfromBusinessSectorReforms”,IFNPolicyPaperNo.13,ResearchInstituteofIndustrialEconomicsJacobzone,S.,F.Steiner,E.L.PontonandE.Job(2010)“Assessingtheimpactofregulatorymanagementsystems:preliminarystatisticalandeconometricestimates”,OECDWorkingPapersonPublicGovernance,No.17,OECDPublishingKatsoulacos,Y.,C.GenakosandG.Houpis(2015)“ProductMarketRegulationandCompetitiveness:TowardsaNationalCompetitionandCompetitivenessPolicyforGreece”,AthensUniversityofEconomics,AthensKlapper,L.,L.Laeven,andR.Rajan(2006)“Entryregulationasabarriertoentrepreneurship”,JournalofFinancialEconomics,82,591‐629Helpman,E.andO.Itskhoki,(2010)“Labourmarketrigidities,tradeandunemployment”,ReviewofEconomicsStudies,77(3),pp.1100‐1137Nicoletti,G.andS.Scarpetta(2003)“Regulation,Productivityandgrowth:OECDevidence”,WorldBankPolicyResearchWorkingPaper2944NordicCompetitionAuthorities(2013)“AVisionforCompetition–CompetitionPolicytowards2020”,No.1/2013

23/24

NordREG(2006)“TheintegratedNordicend‐userelectricitymarket–Feasibilityandidentifiedobstacles”,Report2/2006OECD(1998)“CompetitionandRelatedRegulationIssuesintheInsuranceIndustry”,OECDDirectorateforFinancial,FiscalandEnterpriseAffairs,CommitteeonCompetitionLawandPolicy,DAFFE/CLP(98)20OECD(2003)“Regulation,Productivityandgrowth:OECDevidence”,OECDEconomicsDepartmentWorkingPaperNo.374OECD(2005a)“Competitionandregulationinagriculture:Monopsonybuyingandjointselling”,DirectorateforFinancialandEnterpriseAffairs,CompetitionCommittee,DAF/COMP(2005)44OECD(2005b)“TheBenefitsofLiberalisingProductMarketsandReducingBarrierstoInternationalTradeandInvestment:TheCaseoftheUnitedStatesandtheEuropeanUnion”,EconomicsDepartment,WorkingPaperNo.432OECD(2007)“OECDEmploymentOutlook2007”,OECDPublishing,ParisOECD(2009)“ImprovingtheQualityofRegulations”,OECDObserver,PolicyBriefOECD(2010)“CompetitionAssessmentChecklist”,VolumeII:Guidance,Version2.0,OECDPublishing,ParisOECD(2014)“Chapter2:Reducingregulatorybarrierstocompetition”,OECDGoingforGrowthInterimReport,OECDPublishing,ParisOECD(2015a)“EconomicSurveysSWEDEN”,OECDPublishing,ParisOECD(2015b)“OECDRegulatoryPolicyOutlook2015”,OECDPublishing,ParisOECD(2016)“CompetitionAssessmentChecklist”,VolumeIII:Guidance,Version3.0,OECDPublishing,ParisPosner,R.A.(1974)“TheoriesofEconomicRegulation”,NBERWorkingPaperSeries,WorkingPaperNo.41ReformInstitute(2014)“TwentyfiveyearsofSwedishreforms”,StockholmRincon‐Aznar,A.,G.Nikolaus,I.Paterson,W.Schwarzbauer,R.Sellner,S.SiebertandC.Yildirim(2010)“Regulationandeconomicperformance:literaturereview”,ServicegapReviewPaper4

24/24

Scarpetta,S.andT.Tressel(2002)“ProductivityandconvergenceinapanelofOECDindustries:Doregulationsandinstitutionsmatter?”OECDEconomicsDepartment,WorkingPapersNo.342,OECDPublishing,ParisSFS2010:1622.Alkohollag.Stockholm:DepartmentofHealthandSocialAffairsSFS2003:389.Lagomelektroniskkommunikation.Stockholm:DepartmentofEnterpriseandInnovationStucke,M.E.(2013)“Iscompetitionalwaysgood?”JournalofAntitrustEnforcement,1(1):162‐197SwedishEntrepreneurshipForum(2015)“Regulation,FirmDynamicsandEntrepreneurship”,WorkingPaper2015:33SwedishCompetitionAuthority,http://www.konkurrensverket.se/konkurrens/om‐konkurrensreglerna/‐‐ovrigt‐‐/konkurrenslagen‐i‐korthet/SwedishMinistryofEnterpriseandInnovation(2013)”Lättbyte–Enklareattväljanyleverantöravelektroniskakommunikationstjänster”,Ds.2013:9SwedishMinistryofEnterpriseandInnovation(2005)”Liberalisering,reglerochmarknader”,SOU2005:4,StockholmTang,H.(2012)“Labourmarketinstitutions,firm‐specificskillsandtradepatterns”,JournalofInternationalEconomics,87pp.337‐351UKCompetition&MarketsAuthority(2015a)“Competitionimpactassessment–Part1:Overview”,LondonUKCompetition&MarketsAuthority(2015b)“EnergyMarketInvestigation–Analysisofthepotentialgainsfromswitching”,LondonUKCompetition&MarketsAuthority(2016)“Energymarketinvestigation–Finalreport”,LondonUKDepartmentforBusinessEnterprise&RegulatoryReform(2008)“Impactofregulationonproductivity”,BERROccasionalpaperno.3,LondonUKGovernment(2015)“BetterRegulationFrameworkManual–PracticalGuidanceforUKGovernmentOfficials”,LondonvanStel,A.,D.J.StoreyandA.R.Thurik,(2007)“Theeffectofbusinessregulationsonnascentandyoungbusinessentrepreneurship”,SmallBusinessEconomics28:171‐186

25/24

WorldBank(2010)“RegulatoryQualityandCompetitionPolicy”,InvestmentClimateAdvisoryServicesoftheWorldBankGroupWorldBank(2016)“DoingBusiness2016–Measuringregulatoryqualityandefficiency”,13thed,WashingtonDC

TillväxtverketSwedish Agency for Economic and Regional Growth

Tel +46 8-681 91 00tillvaxtverket.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.