Strong Policies Make Businesses Grow
A central role of the state in building a market economy is to guarantee that there are benefits of competition to ensure static and dynamic efficiency. But the way that this is done varies across sectors of the economy. Those sectors that work on international markets have natural exposure to competition when trade is liberalized. Conversely, those operating on domestic markets are more dependent on public policies to encourage entry and limit the abuse of market power.
These latter produce the so-called "non-tradable" goods to satisfy special conditions, or needs, of the country. Postal and transportation services represent a valid example of non-tradable goods. Instead, the former sectors produce tradable goods. A good example of a tradable sector is the car industry: exporting worldwide and subject to fierce international competition. The institutions affecting competition policy tend to have a dissimilar effect on tradable and non-tradable sectors. There is not a "one size fits all" in competition policy.
In a research with Tim Besley and Nicola Fontana, we investigate how antitrust policies vary both across and within sectors and countries. This study combines a novel dataset on antitrust compiled by legal scholars with firm-level data from more than 10 million firms operating in twenty sectors, in ninety countries across ten years. We show evidence of systematic heterogeneity in the relationship between antitrust policies and firms' outcomes. In countries with stronger antitrust policies, the profit margins of firms operating in non-tradable sectors are significantly lower than those operating in tradable sectors.
These results are economically meaningful suggesting, for example, that if China adopted France's antitrust index, we would expect a 19% fall in the average profit margin of its companies operating in non-tradable sectors. We also find that concentration is lower in non-tradable sectors when the antitrust policy is strong.
In contrast, changes in antitrust are associated with negligible effects on tradable sectors, in line with the hypothesis that international markets serve to discipline firms in such sectors. These findings underline the limits of trade liberalization as a means of promoting competition since, in our sample, about 82% of firms operate in non-tradable sectors. So, without rigorous competition policy, there may be limited scope to introduce more competition into important sectors such as wholesale, retail, transportation, construction, and real estate.
Our results are consistent with the idea that institutions matter, in the form of competition law and enforcement, for sectors of the economy where international competition is weak. Moreover, the finding in our paper is specific to the antitrust measures; other measures of "good institutions" do not appear correlated with profitability in the non-tradable sectors of the economy. It, therefore, adds a new dimension to debates about how a strong institutional environment can be conducive to growth and development beyond the previous focus on such things as lowering the threat of expropriation, minimizing rent extraction, or securing legal protection and infrastructure.