WORLD TRADE
ORGANIZATIONWT/WGTCP/W/109
WT/WGTI/W/57
22 October 1998
(98-4116)
Working Group on the Interaction
between Trade and Competition Policy
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM THE REPUBLIC OF KOREA
The following communication, dated 29 September 1998, has been received from the
Permanent Mission of the Republic of Korea with the request that it be circulated to Members.
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Relationship between Investment and Competition Policy
1. Introduction
1. In recent years, foreign direct investment has become one of the primary engines of
globalization.  FDI (Foreign Direct Investment) is  now a fundamental means by which multinational
companies provide goods and services on a global basis.  As the rapid growth of FDI contributes to
the integration of the world economy, it is increasingly recognized that investment provides benefitsto host countries' economic growth by way of increased productivity, additional employment and
effective competition.  The Korean Government attaches a strategic importance to FDI.  Mindful of
this importance and in the light of a recent financial crisis, the Korean Government is actively
pursuing across-the-board deregulation and economic reform to facilitate FDI.
2. As national economies become more integrated, the distinction between policies dealing with
business practices of companies operating in the domestic market and policies dealing withinducement of foreign companies' capital to the domestic economy is increasingly blurred.  In other
words, investment policy and competition po licy are becoming more interdependent.  FDI
liberalization is now seen as a critical element of domestic competition policy.  Together with FDI
policy, trade policy also interacts with competition policy.  For example, if foreign direct investment
is liberalized while trade policy restricts imports, foreign affiliates and domestic producers will beinclined to limit competition through collusion.
3. In the past, competition laws have focused mostly on protecting competition among domestic
firms within the local market.  However, as FDI has acquired a greater importance in delivering goods
and services to foreign markets, competition effects of FDI have taken significant international policyimplications.WT/WGTCP/W/109
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2. Foreign Direct Investment and Competition
Globalization of Business and FDI
4. Foreign direct investment is ownership that carries with it actual control over what is invested
overseas.  This distinguishes FDI from portfolio investment, which is simply the establishment of a
claim on an asset for the purpose of realizing some return.
5. As businesses become global, the nationality of a firm involved in FDI becomes harder to
define.  The very notion of a nationality of a firm comes into question when profits of the firm are
gained from various countries.  However, a multinational firm has, by and large, a different center of
gravity, which results in association of each multinational company with a particular nation.
6. Also, as global economic integration proceeds, trade and investment increasingly play
complementary roles in corporate business plans.  Manufacturing companies need to set up foreign
distribution networks in order to successfully market their products and provide services after the sale
of a product.  Multinational manufacturing companies invest in developing countries to producecomponents or final products for the world market.
7. Another characteristic of globalization is the increasing importance of trade in services.  Since
services usually require establishment of business operations close to where the services are to be
provided, competition in the services market cannot be enhanced unless direct investment is allowed.
FDI liberalization usually promotes competition in the host country's market and results in welfare
benefits to consumers.  The benefit of competition is maximized as the foreign firms bringing FDI are
allowed to compete fairly with domestic firms in the host market.
8. A transnational corporation that establishes its operations in a market where there is a high
degree of concentration will bring further competition to the market.  As the entry and exit from the
market by foreign firms is freely allowed, the criterion of the degree of concentration traditionally
regarded as a measure of competitive environmen t in the market becomes less relevant.  FDI and
imports are the two major sources of new competition in the increasingly globalized market.
FDI and Competition
9. Competition brings efficiency to an economy.  Traditionally, competition policy has been
concerned with static economic efficiency.  While static efficiency looks at the best performance of a
firm given inputs and the best allocation of resources in a market, dynamic efficiency is the process of
discovering the best processes and products to meet the changing economic environment.  When
countries go through economic restructuring, it is important to focus on dynamic efficiency to analyze
the effect of private and governmental measures on competition.
10. In judging the benefits of FDI in the domestic market, it is important to look at the effects of
actual as well as potential competition on economic efficiency.  Potential competition, sometimes
defined as "contestability", emphasizes that if entry and exit are free, potential competitors will bring
pressure to incumbent firms to behave more comp etitively.  According to contestability theory
proposed by Baumol (1982), highly concentrated markets would function as if they were competitiveif entry and exit are free enough that the potential entry of competitors will force incumbents to
behave as if they were price takers in a highly competitive market.1  Since potential competition can
                                                     
1 Baumol, W. J., J. Panzar and R. Willig, Contestable Markets and the Theory of Industrial Structure,
New York; Harcourt Brace Jovanovich, 1982.WT/WGTCP/W/109
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bring economic efficiency, the degree of actual concentration in the market should not be the sole
criterion in judging the competitive conditions of the market.
Anti-Competitive Business Practices and FDI
11. FDI barriers may be brought down, but there could be other competition-related barriers in
the form of vertical and horizontal restraints by firms already established in the market.  Competition
authorities of an individual country deal with anti-competitive business practices in the domestic
market.  However, the degree to which the competition laws are enforced varies from country to
country.  Weak enforcement of competition laws tends to protect the incumbent firms in the market
and deter entry of new firms.  Also, the difference in the degree of enforcement of competition lawscan generate inherent barriers to FDI.
12. The possibility of anti-competitive use of vertical restraints is more than a theoretical
possibility.  In the case of telecommunications services, the monopoly ownership of a local telephone
network may be used to deter or delay the entr y of competitors in information and communications
services that rely on access to and use of the local network for the provision of services.
13. To effectively guard against anti-competitive use of vertical restraints, competition authorities
resort to the use of safeguards:  ex ante  and ex post  safeguards.  The telecommunications service
sector is rich in the examples of different approaches to safeguards.  Typically, a local network isexclusively owned and hence monopolized by a comp any.  This company provides both local call
service and long distance call service.  With technological progress, new companies start entering the
long distance call market.  These new companies need to interconnect to the local network, which is
owned by the incumbent.  An incumbent monopoly, f acing competitive provision of long distance call
service, has both an incentive and a means to abuse its local network monopoly so that new entrantsare disadvantaged.
14. A competition authority could deal with this situation directly by divesting the incumbent
monopoly into two companies: one local call company and another long distance call company.  Also,
the competition authority could make use of non-structural safeguards by imposing accounting
separation of local call operation and long distance call operation of a company.  This would prevent
the monopoly profit from local calls from subsidizing long distance call operation, where competitionwith other suppliers is occurring.
15. There is no universal and time-honoured solution favouring one form of  ex ante  safeguard
against another; the preference of a particular form of safeguard depends on the market dynamics.
16. Most countries, including Korea, have relied on non-structural safeguards from the onset of
competition in telecommunications.  It needs to be emphasized that ex ante  safeguards imposed prior
to the onset of competition needs to be complemented by ex post  safeguards to promote competition.
In Korea, the Fair Trade Commission periodically announces a list of market dominant companies in
each sector as a first step in ex pos t corrective measures.WT/WGTCP/W/109
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Mergers and Acquisitions and FDI
17. The main interface between competition laws and FDI occurs when a foreign affiliate is
established by means of merger, acquisition or joint venture.  Competition issues are raised before as
well as after the firms' merge.  In many countries, when a domestic firm and a foreign firm merge,
national interest issues are included in the consideration of merger approval.2
• Inward FDI would create competition issues if it took the form of acquisition of a
firm in which the firm subject to acquisition was competing with the acquiring firm
prior to the M&A.
• When two foreign firms merge, and as a result, affiliates of the two merged firms in
the host country merge, the outcome will reduce competition.
18. After a foreign company enters the market through FDI, a foreign multinational could engage
in anti-competitive practices.  For example, intern ational franchisors might require local franchisees
to buy certain inputs from specific sources they control.  In another example, two foreign firms
established in a market might merge to establish dominant control over a market.  Countries with
established competition laws could review the merger according to competition criteria applied to
domestic firms.
3. WTO Rules on Investment with Competition Policy Implications
TRIMs
19. The Uruguay Round Agreement on Trade-Related Investment Measures (TRIMs) is an
affirmation of the global trend toward the more op en investment policies that emerged in the 1980s.
The agreement prohibits investment measures that violate the obligations of  "national treatment" and
the "general elimination of quantitative measures" of GA TT Articles III and XI.  However, the
agreement does not cover issues such as right of establishment, which are key to FDI liberalization.
The TRIMs provides an illustrative list of trade-related investment measures which violate GA TTArticles III and XI, such as local-content requirements, export performance requirements, local-
manufacturing requirements, trade balancing requirements, production mandates, and foreign
exchange restrictions.  However, the agreement acknowledges that developing countries may deviate
from these obligations, if they are taking measures consistent with GA TT safeguards for balance-of-
payment purposes.
20.  The TRIMs Agreement deals with governmental measures restricting investment but it fails
to cover business practices that restrict competition.  Article 9 of TRIMs recognizes this deficiency by
stating that "the Council for Trade in Goods shall consider whether the Agreement should be
complemented with provisions on investment policy and competition policy".
GATS
21. The General Agreement on Trade in Services (GA TS) provides a framework of rights and
obligations to guide the formulation of national laws, policies, and regulations affecting services and
to ensure that foreign suppliers of services have access to markets and receive national treatment.  The
GATS is a very important step in establishing an international framework for trade in services,including FDI.  It treats the supply of a market by foreign subsidiaries through a local "commercial
                                                     
2 World Investment Report 1997, UNCTAD.WT/WGTCP/W/109
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presence" as a form of trade in services.  The co re obligation of the GA TS is the MFN treatment in
Article II.  A temporary derogation from the MFN obligation is permitted but must be listed in the
Annex on Article II Exemptions and is subject to review every five years.  Obligations regarding
national treatment and market access apply only to services that are listed in a country's scheduleaccording to Articles XVI and XVII.
22. With regard to private businesses' anti-compe titive activities, Article VIII requires countries
to ensure that any monopoly supplier of services doe s not act in a manner inconsistent with the most-
favoured-nation requirement in Article II.  In addition, it requires that countries ensure that a
monopoly supplier in the supply of a service outside the scope of its monopoly rights does not abuse
its monopoly position to act in a manner inconsistent with the individual country's commitment tonational treatment and market access.  The above clause in GATS applies to monopolies and a small
number of exclusive suppliers whose rights have been given by the government.  Anti-competitive
behaviours of incumbent firms, other than those falling under Article VIII, could pose serious
investment barriers.  If these occur, Article IX of the GA TS can be invoked for consultation between
Members with a view to eliminating such practices.
23. The GATS is rather silent on the issue of ex ante  competition safeguards; it leaves room for
further elaboration in the future.  In this regard, the experience of the recently concluded basic
telecommunications negotiations deserves a look.  The WTO Negotiations on Basic
Telecommunication Services developed a Reference Paper with a view to ensuring effective access toand use of a local network owned by a dominan t market player.  The regulatory commitments
contained in the Reference Paper include competition safeguards, interconnection guarantees,
licensing and independence of regulators.  Not all of the principles as laid out in the Reference Paper
are legally binding by themselves; only those principles committed to by WTO Members become
legally binding.
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TRIPS
24. Intellectual property rights are increasingly treated as a form of investment.  The Agreement
on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provides for protection of
investment by adopting principles of national trea tment and MFN treatment.  "National treatment", as
defined in Article 3, is treatment no less favourable than that a Member accords to its own nationalswith regard to the protection of intellectual property.  The MFN clause defined in Article 4 provides
that any advantage a country gives to a national of any other country automatically applies to the
nationals of all other Members.  The intellectual property rights protection provides a legal
environment that can attract foreign investment es pecially when the investment accompanies transfer
of sophisticated technology or when the investment leads to new products with sophisticated
technology.
25. In relation to competition, the TRIPS Agreement takes an important step by including
provisions on the control of anti-competitive prac tices in contractual licences.  The provision
acknowledges that abuses of intellectual property rights can have an adverse effect on competition.
Examples of such practices are exclusive grantback conditions, conditions preventing challenges to
validity, and coercive package licensing.  In the case of a grantback, a licensee grants an exclusiveright to a licensor for any new invention obtained during the use of the original patent.  The
grantback condition, which provides additional market power to a licensor while disadvantaging
competitors in the market, is an anti-competitive practice against which countries can take measures.
                                                     
3 Sixty-three of sixty-nine governments which submitted national schedules of specific commitments
on the basic telecommunications by the deadline of 15 February 1997, adopted commitments on regulatory
principles.  Of these, fifty-seven committed to the Reference Paper in whole or with few modifications.WT/WGTCP/W/109
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4. Recent Investment Liberalization in Korea and Competition Concerns
26. In the case of Korea, since the economic crisis erupted at the end of 1997, the government has
engaged in dramatic efforts to liberalize FDI as part of economic restructuring.  Because the FDI
liberalization accompanied general economic restructuring, the pain of adjustment to competition has
been severe.
27. The economic crisis is attributed in part to over-investment in some industries.  As part of the
restructuring of an industry, failing firms are open to acquisition by foreign firms through a
competitive bidding process.  The restructuring of an industry, for example, may lead to acquisition of
failing or bankrupt firms by healthier firms, th ereby resulting in higher concentration in these
industries.
28. Mergers between domestic firms and acquisition of firms by foreign multinationals will be
subject to domestic competition laws that restrain industry concentration.  The Korean MonopolyRegulation and Fair Trade Act restricts mergers that undermine competition.  However, the law has
yet to incorporate the possible effect on internatio nal competitive conditions resulting from the merger
of domestic companies that have large international market shares.
5. Conclusion
29.  A few conclusions can be drawn from the discussion.  When considering the relationship
between competition policy and investment policy, the role of trade policy must be considered as well.
At the risk of over-simplification, one can generalize that trade policy determines the relevant market
for competition policy, and investment policy determines the relevant players in the market.Therefore, investment policy cannot attain its competition objective unless the effect of trade policy in
determining the relevant market is carefully considered.  As markets become more open, countries
will tend to extend their competition law or policy outside their usual national jurisdictions.
30.  Competition policy has traditionally addressed "behind-the-border" issues, while investment
policy and trade policy have dealt with "at-the-border" governmental measures.  However, investment
policy and trade policy increasingly have to deal with "behind-the-border" measures that are both
governmental and private measures.  This is where the interface occurs between competition policy on
the one hand and trade policy and investment policy on the other.  However, the existing WTO rules
dealing with the interface are limited at best as they stand now.
31. The objective of trade policy and investment policy ultimately lies in promoting economic
efficiency.  Competition is a key criterion by which economic efficiency is usually gauged.  In turn,
competition policy is an important tool in comple menting trade policy and investment policy to the
efficiency objective.
32. In judging the efficiency effect of investment policy on the economy, balance should be given
to both dimensions of efficiency:  static efficiency and dynamic efficiency.  For instance, the concept
of static efficiency may not be sufficient to account for efficiency gains when the industry is going
through rapid economic restructuring, as is the case in Asian countries in the process of overcoming
the financial crisis.
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