Effect of Competition Law on Inflation and FDI: A Panel Data Analysis

Abstract

Competition laws are adopted by countries for three main purposes. Firstly, to augment the state of competition in specific markets ensuring efficient allocation of resources and efficient production, i.e. bring prices closer to marginal cost; secondly, to reduce and control anti-competitive behavior of existing businesses through an incentive/disincentive mechanism; thirdly, to provide incentive for innovation. Inflation rate will decrease and foreign direct investment (FDI) will rise in a country that adopts competition law; however, the direction of causality is not clear. This paper explores the impact of adopting competition law on inflation rate and on FDI. To examine the impact of competition law, this study uses panel regression analysis with random effect for inflation and for FDI for 86 countries from 2005 to 2008. Of the 86 countries, 62 countries had passed competition law. The results indicate that adoption of a competition law has no impact on a country's inflation rate but has a positive impact on FDI. This implies that competition laws will not be effective in controlling the general inflation rate of a country but it works as an incentive for foreign investors who see the law as a shield that protects their investment from anti-competitive practices in a country.