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Subsidies, Market Closure, Cross-Border Investment, and Effects on Competition: The Case of FDI in the Telecommunications Sector

Listed author(s):
  • Edward M. Graham


    (Peterson Institute for International Economics)

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    Telecommunications long was a sector where sellers of services operated in protected local markets, where law and government regulation created and enforced barriers to entry, especially by foreign firms. In many nations, in fact, the provision of telecommunications services was reserved for state-owned monopoly suppliers. During the late 1980s and through the 1990s, however, many of these barriers have been removed while formerly state-owned firms have been partially or wholly privatized. This has in turn engendered some cross entry by telecom service providers; firms that once were purely domestic in the scope of their operations thus have become multinational. During the summer of 2000, however, US Senator Ernest Hollings, with co-sponsorship of 29 other US Senators, introduced a bill (S.2793) in the US Congress that would have effectively blocked non-US telecommunications service providers from acquiring US telecom firms if the former were state-owned, or even only partly state-owned. The bill was aimed specifically at the proposed acquisition of US mobile telecommunications service provider Voice Stream by the German firm Deutsche Telekom (DT), but the language of the bill would have served to block virtually any non-US state-owned firm in the telecom sector from buying a US firm. While the bill did not become law, it reflected a long history of efforts in Congress to prevent US firms from being acquired by state-owned non-US firms (e.g., a legislative bill to do this had been introduced by Senator Frank Murkowski during the late 1980s, and while this bill also failed to be passed into law, some provisions from the bill were incorporated into the Exon-Florio legislation that was first enacted as a temporary measure in 1988 but subsequently made part of US permanent law in 1992). The Hollings bill was doubtlessly motivated in part by xenophobia (Senator Hollings is himself of the American generation that fought Germany during World War II). But it was also motivated, as was the Murkowski bill a decade earlier, by fears that subsidies and/or monopoly profits accruing to state-owned firms in their home markets might be used to affect operations in the US market to the detriment of locally-owned competitors. The extreme case of such behavior would be predatory pricing by the state-owned firm aimed at bankrupting its competitors, where temporary losses created by below-cost pricing in the US market would be offset by subsidies or monopoly profits in the home market. The ultimate goal of the predatory firm would be to establish a monopoly in the United States. In fact, the Hollings bill was shelved in part because DT was able to establish that it was neither a recipient of significant subsidies in Germany nor a monopoly service provider in the German market (although the firm once held a statutory monopoly there, the market has been opened to competition and some new entry has occurred). Also figuring in the shelving of the bill was argumentation that competition in the US market for wireless telecom services would be enhanced by the entry of DT. However, fears have persisted about the possibly deleterious effects of subsidies or monopoly profits garnered by a firm in its home market on competition in a geographically separate market in which that firm (or a subsidiary of that firm) is a seller. Indeed, the issues raised by the Hollings bill pertain to numerous sectors in which multinational firms compete. Accordingly, the US Council of Economic Advisors was ordered by the US President following the introduction of the Hollings bill to advise on what might be the effects of such competition.

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    Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP01-2.

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    Date of creation: Feb 2001
    Handle: RePEc:iie:wpaper:wp01-2
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    1. James W. Friedman, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Oxford University Press, vol. 38(1), pages 1-12.
    2. Sidak, J. Gregory, 1997. "Foreign Investment in American Telecommunications," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226756264.
    3. Rickard, John A. & Murray, Ian W., 1978. "The dynamics of some duopoly games involving the Market Share and Nichol strategies," Journal of Economic Theory, Elsevier, vol. 17(1), pages 51-65, February.
    4. Edward M Graham, 1998. "Market Structure and the Multinational Enterprise: A Game-theoretic Approach1," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 29(1), pages 67-83, March.
    5. Dixit, Avinash & Pindyck, Robert S & Sodal, Sigbjorn, 1999. "A Markup Interpretation of Optimal Investment Rules," Economic Journal, Royal Economic Society, vol. 109(455), pages 179-189, April.
    6. Raymond Atje & Gary Clyde Hufbauer, 1996. "The Market Structure Benefits of Trade and Investment Liberalization," Working Paper Series WP96-7, Peterson Institute for International Economics.
    7. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
    8. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
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