RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTCP/W/107
22 October 1998
(98-4115)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  Spanish
COMMUNICATION FROM VENEZUELA
The following communication, dated 28 September 1998, has been received from the
Permanent Mission of Venezuela with the request that it be circulated to Members.
_______________
OBSERVATIONS ON THE POSSIBILITY OF APPLYING THE PRINCIPLES OF
ANTI-TRUST POLICY TO THE REGULATION OF INVESTMENT FLOWS
I. INTRODUCTION
The aim of this paper is to describe Venezuela's position on the relationship between
competition policy and the regulation of foreign investment flows.  A set of guidelines which couldprovide a frame of reference for drafting foreign investment controls is also proposed.
In particular, it is argued that it is necessary to establish a set of basic principles to guide the
drafting and implementation of the rules governing merchandise and capital transactions, both within
an economy and between different countries.  Thus, it  is maintained that the basic principles of the
rules governing anti-trust policy are inadequate as mechanisms for ensuring the promotion of foreign
investment.  Accordingly, emphasis is placed on the need to establish a clear, stable and predictableframework of rules in order to reduce the uncertainty facing investors in their cross-border operations.
This calls for control over the discretionary powers of the State in regulating markets, including those
exercised by the anti-trust authorities in controlling anti-competitive practices.
The paper is structured as follows.  Section II gives an historical account of the development
of public policy on the regulation of trade and investment flows, with special reference to the case of
developing countries.  This Section traces the evolution from ex ante  regulation to the present
proposals for applying the principles of anti-trust policy to foreign investment flows.  In Section III,
the advantages of applying these principles to the case of foreign investment are discussed. Section IV
is devoted to a consideration of the factors that determine foreign investment flows.  This Section isbroken down into three parts in which the causes an d consequences of investment, the elements which
determine capital flows and the influence of the institutional framework on investment are separately
analysed.  Finally, Section V offers certain conclusions.
II. HISTORICAL EVOLUTION OF THE REGULATION OF FOREIGN INVESTMENT:
FROM EX ANTE  TO EX POST FACTO  CONTROLS
1. Prior control of foreign investment through performance and ownership requirements
During the 1940s and 1950s the principal economic activities of the underdeveloped and
developing countries were closely linked with the exploitation of the primary products of the miningWT/WGTCP/W/107
Page 2
and agricultural sectors.  As production had not been sufficiently diversified, exports from these
countries were concentrated on a limited number of items.
Since commodity prices are highly volatile, in the course of time these countries came to be
seen as especially dependent on the behaviour of the international markets.
Under the influence of these ideas, the public policy makers in the developing countries
applied a set of policies aimed at import substitution.  Typically, the implementation of these policies
involved the imposition of various controls:  active monetary and foreign-exchange policies and local-
industry promotion policies based on soft loans and other promotion measures.
Thus, there is a clear intellectual connection between import substitution as public policy, on
the one hand, and the theories of dependency and infant industry and the distrust of trade born of the
volatility of international markets, on the other.  This paradigm visualizes economic growth as an
evolutionary process beginning with agricultural activities, passing through an industrial stage and
culminating in a services stage.  In this process,  investment and technological transfer are seen as
crucial factors in the transition from one stage to th e other.  Thus, the advantages of specialization in
the production of manufactured goods can be attributed to the existence of economies of scale
(especially in heavy industry), externalities and technical progress.1  The reduction of the
disadvantages in international trade inherent in the raw materials sector2 and the growing demand for
manufactured goods3 both emerged as alternative explanations in favour of the processes of structural
transformation to industrial production.  Thus, Kuznets4, rather than making empirical findings, links
the increases in factor productivity with the reallo cation of resources from the raw materials sectors to
the production of manufactured goods and, moreover, stresses the greater capacity of industrial
production to absorb new technology.
Under the influence of this conceptual paradigm, investment flows were seen as a valid target
for regulatory controls similar to those applied to tr ade flows.  In fact, as in the case of merchandise
trade, it was considered that investment and technology were a form of dependency on foreign
interests and needed to be appropriated by the recipient country for the purpose of promoting its
economic development and transition from an agricultural to an industrial and service economy.  With
a view to avoiding this relationship of dependency, various regulatory conditions related to the degree
of foreign ownership of local enterprises were imposed, together with restrictions on the economic
behaviour of the companies.  These controls were pr eventative in nature, that is to say, they were
designed as ex ante  controls on foreign investment flows.
                                                     
1 Rosenstein - Rodan, P. "Problems of Industrialization in Eastern and South - Eastern Europe".
Economic Journal, 53.  June - September, 1943.  Also:  Rosenstein - Rodan, P.  "Notes on the Theory of 'Big
Push'" in Economic Development for Latin America.  Ellis, H.S. and Wallich, H.C. (Eds.), MacMillan, London,
1961.
2 Prebisch, R.  The Economic Development of Latin America and its Principal Problems.  United
Nations Economic Commission for Latin Amercia.  New York, 1950.  Also:  Singer, H.W.  "The Distribution of
Gains Between Investing and Borrowing Countries".  American Economic Review 40, May, 1950.
3 Viner, J. International Trade and Economic Development.  Free Press.  Glencoe, I11., 1952.  Also:
Fleming, M. "External Economies and the Doctrine of Balanced Growth", Economic Journal 65, June, 1955.
4 Kuznets, S. "Quantitative Aspects of the Economic Growth of Nations:  II.  Industrial Distribution of
the National Product and Labour Force".  Economic Development and Cultural Change, 5.  July, 1957;  also
Kuznets, S. "Modern Economic Growth". Yale University Press.  New Haven, Conn., 1966.WT/WGTCP/W/107
Page 3
The following tables illustrate the measures most frequently applied to regulate investment
flows.
Conditions relating to the degree of foreign ownership
1. Exclusively foreign ownership.
2. Cooperation agreements between local operators and foreign partners.
3. Conditions on the negotiation of licensing agreements.
4. Conditions on the negotiation of technical cooperation agreements.
5. Imposition of conditions on industrial cooperation.
6. Exclusion in sectors considered to be strategic, such as power, communications, defence, etc.
7. Domestic content requirements.
Conditions relating to the behaviour of multinationals
1. Types of know-how acquired.
2. Establishment of research and development.
3. Purchase of local inputs.
4. Unionization of the workforce, right to strike, etc.
5. Obligation to train local personnel.
6. Credit provided by local bank, rather than foreign sources.
7. Repatriation of profits and capital.
8. Levels of employment.
9. Payment of royalties, etc.
10. Local participation in senior management.
11. Credit policies.
12. Tax exemptions.
13. Degree of competition and forms of competition.
14. Transfer prices.
15. Export of end-products and control of exports.
The introduction of these regulatory measures for the purpose of restricting the freedom of
action of foreign investors and enterprises, together with other protective measures, especially those
relating to tariff and non-tariff barriers to trade, meant reducing the exposure of the local operators to
foreign competition.
The reduced exposure to foreign competition, together with the general overvaluation of local
currencies, as a form of incentive to invest, accompanied by a series of protectionist measures to
encourage industrial activity, gave rise to enterprises with an excess of installed capacity and,
accordingly, more concentrated industries.  Local companies grew not as a result of their productive
efficiency but as a result of political measures.  The programmes based on import substitution and the
promotion of "inward-oriented" industrial activity operated relatively well during the years following
their implementation and up to the mid-70s, but from then on began to show signs of exhaustion.
The industrial development derived from "inward-oriented" policy measures and the
insufficient exposure of local firms to competition gave rise to relatively inefficient industries.  To
compensate for these effects, consumer welfare measures were implemented, either through price
controls or by subsidizing the demand.
As a result, economic activity was strongly influenced by political measures, so that excessive
Government intervention led to the establishment of an incentive system which encouraged political
action on the part of the economic operators for the purpose of procuring themselves advantages at the
expense of control.  The greater the influence of State entities on economic activity, the greater theWT/WGTCP/W/107
Page 4
incentives for the economic operators to organize their interests with a view to pressuring the
regulatory bodies into taking their side.
2. Liberalization of trade and investment flows
Starting in the 80s, due to the collapse of the "inward-oriented" development policy and the
need to promote the development of efficient industries, a new paradigm was introduced into the
thinking which guided the framing of policy.  As before, sectoral development was considered
indispensable but through the growth of sectors based on economic efficiency and market competition
rather than through targeted policy measures.  Accordingly, a series of measures was developed with a
view to reducing State intervention in the economy and its long-term effects.
The policies of economic opening included a variety of measures.  Special emphasis was
placed on the need to promote competition in the markets.  To this end, measures were introduced
which sought to increase the sources of supply, both local and foreign.  As regards the former, laws
for the protection of competition were introduced for the purpose of circumventing various measures
considered anti-competitive;  as regards the latter, the participation of foreign operators was promoted
in two ways.  Firstly, measures were taken with a vi ew to lowering barriers to trade, whether tariff or
non-tariff, so that imports could function as a source of competition.  Secondly, the establishment of
foreign operators in local markets through direct investment was encouraged so as to promote both an
increase in the number of market participants and the transfer of technology and know-how in the
case of joint ventures.
The measures to promote foreign investment include not only direct investment but also
portfolio investment, so that the former exchange controls and restrictions on capital flows are being
abandoned.  Essentially, this is the regulatory policy which now prevails.
3. Ex post facto  control:  application of the principles of anti-trust policy to the regulation
of foreign investment flows
Although there is a general consensus concerning the need to encourage the action of market
forces as a mechanism for promoting the efficient production and distribution of goods, which has
guided the processes of deregulation  of trade and investment flows, the idea that it is necessary to
establish a series of measures to prevent possible abuses of the economic power of the multinationals
in those countries in which they operate through subsidiaries is also widespread.
The rationale underlying this idea is that multinationals have characteristics which tend to
generate anti-competitive behaviour when they compete with underdeveloped country enterprises.  It
is assumed that the optimum plant size is greater in developed than in underdeveloped economies and
that, in general, these enterprises have a higher degree of vertical integration, so that their
establishment in developing economies, where the demand is on a smaller scale, tends to generatepositions of market dominance.  Furthermore, it is argued that the multinationals have easier access to
raw materials and sources of financing, as well as greater opportunities for making use of cross
subsidization.
5
From this there follows the existence of two partly contradictory trends.  On the one hand,
there is the tendency to frame policy so as to promote the action of market forces while, on the other
hand, it is considered necessary to establish a system of rules to offset the competitive advantages of
the multinationals and prevent the emergence of enterprises that could abuse their market position.
                                                     
5 The arguments in favour of the use of anti-trust measures for controlling investment are set out in
detail in the UNCTAD Report on World Investment (1997).WT/WGTCP/W/107
Page 5
As a suitable means of removing this contradiction, at the same time as the traffic in goods
and capital is being deregulated to encourage competition in the market-place, a set of investment
control rules based on the same principles as those governing the design of systems to protect
competition is being developed.  In this way, the benefits of the free market are being combined with
a mechanism to prevent the restrictive business practices generated by abuse of the system.  The basicidea is that trade, investment and competition policies are independent arms of policy with different
objectives which seek to solve different problems.  The introduction of anti-trust principles into the
design of a system of rules would be intended to make the objectives of those rules more
complementary.  In this connection, it is often argued, for example, that the regulation of international
trade has a protectionist bias, whereas the regulation of competition is oriented towards the free
market.  A similar argument has generally been employed to justify anti-dumping regulations.
III. THE DISADVANTAGES OF APPLYING AN ANTI-TRUST REGIME AS
INVESTMENT PROMOTION POLICY
Contrary to the view that policies are tools for solving specific problems, Venezuela
maintains that policies do not have intrinsic objectives but are institutional arrangements designed to
achieve socially desirable ends.  Disregarding this and treating policies as tools for solving particularproblems leads to two types of inconsistency.  Firstly, if policies are designed on this basis there is a
possibility of their effects being contradictory and, accordingly, of the success of a particular policy
being jeopardized by the application of another.  Secondly, this conception of public policy makes the
regulatory bodies liable to political or technical manipulation by pressure groups, since as there are no
predetermined objectives the regulatory bodies are more susceptible to the influence of organizedlobbies.
As opposed to this, Venezuela argues that it is necessary clearly to establish a set of guiding
principles to be followed in designing policy (for example, the maximization of wealth, the
maximization of consumer welfare or the minimization of restrictions on trade in goods and capital).Only by having clear objectives is it possible to develop an internally consistent set of policies.
What matters, then, is to establish a set of objectives and basic guiding principles for the
design of various policies.  These principles would form a basis for policy development, thus making
it possible to avoid distortions resulting from the application of rules with contradictory
consequences.
Having established the prior need for a set of guiding principles, it is necessary to consider the
extent to which the rules and objectives of anti-trust policy could be used as a broad basis for the
framing of trade policy and foreign investment controls.
The main underlying objective of anti-trust policy is to seek efficiency through competition.
To this end, it makes use of a conceptual apparatus derived from modern economic theory.  This
makes it possible to deduce the behaviour of economic agents from the structural characteristics of a
market such as:  the size of the demand, the characteristics of the technology, the number of
competitors, the level of concentration in the relevant market, and barriers to entry.  In this sense, a
negative relation is established between the level of concentration and the intensity of competition inthe markets concerned.
As follows from the above, emphasis is placed on the type of competition which faces sellers
of the same or like goods.  A first step in determining whether a particular practice is competitive or
anti-competitive is to establish the relevant market, that is to say, which goods are competing for the
same market.  Once this has been determined, the participants, the level of concentration and the
barriers to entry are established.  Thus, the determination of the market is widely recognized as having
an important influence on the rest of the analysis.WT/WGTCP/W/107
Page 6
Insofar as two goods are very similar they will be included in the same market.  The opposite
will be the case if the goods have different characteri stics.  Accordingly, the anti-trust analysis relies
on the study of substitutability, that is, whether the consumers are able or whether it is feasible for
them to substitute one good for another.
However, this gives rise to a problem.  The possibility of substituting one good for another
depends on how the consumers value each good, but these valuations are subjective judgements which
depend on the individual, that is, vary from one cons umer to another.  A criterion generally employed
in defining markets is the use of aggregated information, from which it is possible to draw
conclusions considered to be valid "on average", although no individual consumer behaves as the
aggregated information would lead one to assume.  In any case, the market analysis on which
anti-trust policy is based requires the analyst to value factors such as consumer taste, which are totallysubjective and personal.  Consequently, these analyses are not based on "real" information but on the
assessment by a third party (the analyst) of variables which, are ultimately subjective in nature.
The emphasis placed by traditional anti-trust analysis on competition between competitors in
the same market raises an additional problem.  The information for defining the markets comes fromdata gathered ex post facto , that is, historical data on past events.  This type of analysis, however,
overlooks another form of competition which is much more intense and real:  that which aims to
discover new information, not previously appreciated, concerning business opportunities.  Thus,
although companies can, of course, compete by sellin g like products at a lower price or with improved
characteristics, they can also compete by offering new products.
The creation of new products  is an inherent characteristic of the entrepreneurial function.  In
this sense, competition is important because it gives rise to new products which may eventually
displace existing ones.  However, to define a market on the basis of products which are already  on the
market, as in traditional anti-trust analysis, is to overlook the important role of entrepreneurialcreativity.   Nevertheless, as distinct from competition based on prices, entrepreneurial creativity is,
by definition, unpredictable.
The introduction of a new product could automatically change the definition of a market,
because it introduces a new element to be considered by the consumers, which affects their
assessment of the substitutability of goods, thereby modifying the entire subsequent analysis.
The above is intended to show how the analys t, confronted with the need to define the
relevant market "objectively", finds himself obliged to take a decision based on ad hoc  elements.  This
problem is not confined to the question of market definition.  The same applies to the determination of
market concentration, barriers to entry or the effi ciencies derived from a particular conduct.  As a
result, it is impossible to try to measure objectively the influence of the structural factors on a market,since each entrepreneur faces different circumstances which inevitably lead to different behaviour and
strategies.
In short, the anti-trust analysis is based on a conception of the process of competition which is
incomplete, since it stresses the predictability of competition between products on the same market,disregarding the importance of new discoveries which, by definition, are unpredictable.  Again, this
limitation is due to the fact that the anti-trust analysis is  ex post facto , that is, based on historical
market information as regards both the characteristics of the market and the behaviour of the market
participants.
The application of the principles of anti-trust analysis presupposes that the regulatory body is
seeking competitive results , with the consumers benefiting from lower prices, while endeavouring to
avoid situations in which this is not the case.  However, there is an incentive to create new
opportunities as a result of the entrepreneurial function insofar as the benefits which can be obtained
are greater.  Thus, protecting or defending competition in the market may have a discouraging effectWT/WGTCP/W/107
Page 7
on the processes of creative competition which, in the last analysis, are the source of economic
development for the developing countries and, no doubt, for any other country.
On the other hand, the attempt to make an "objective" analysis of behaviour necessarily
presupposes the introduction of ad hoc  elements, which ultimately implies an increase in the
discretionality of the officials responsible for applying the rules of competition, which may have
adverse effects on investment flows, as will be explained below.
IV. PROMOTION OF FOREIGN INVESTMENT IN THE LESS-DEVELOPED
COUNTRIES
1. Importance of investment for economic growth
There is general agreement concerning the importance of the role of investment in
development processes.  It is widely recognized that the rate of economic growth of an economy is
closely linked with the level of investment.  Thus, attracting foreign investment has become a priority
policy objective, especially in the developing countries.
Accordingly, for the purpose of framing an investment promotion policy, it is necessary to
understand what are its determining elements, so that it can be used for developing appropriate
institutional mechanisms.
The latest economic models designed to explain the causes and consequences of economic
growth show that growth is intimately linked with levels of investment.6  In these models, investment
is important because it leads to the generation of new products and is determined by investment in
human resources and research and development costs.  Since the return on research and development
expenditure is uncertain, businessmen only have an incentive to carry out R&D when there is a good
prospect of an economic return.
Accordingly, the principal advantage of promoting foreign investment is not just, as is usually
argued, that it subjects local industry to greater competitive pressure, but that the new investment
tends to develop industry and previously unexploited business opportunities.
2. The causes of capital movements and investment
A characteristic of the latest models which attempt to explain economic growth as an
endogenous process is that they assign a preponderant role to international trade in both goods andcapital, because this enables countries to avoid duplicating research and to reallocate R&D resources
so as to increase the rate of technological change and thus obtain greater long-term growth.
7  T h e
lesson for developing countries is that attractin g investment from developed countries means being
able to obtain the advantages of capital accumulation within a relatively short period.  The
mobilization of foreign investment also allows less-developed countries to obtain access to moreadvanced technologies, enabling them to expl oit new industries which otherwise could not be
developed owing to the impossibility of competing with superior technologies.
For its part, the theory of international trade tries to explain the flows of goods and capital
between different economies.  In its simplest vers ion, it argues that these flows are a consequence of
                                                     
6 See, for example, Romer, Paul.  "Endogenous Technological Change".  Journal of Political Economy,
volume 98, 1990.  For an extensive and detailed review of all the economic growth literature, see Ochoa,
Orlando.  "Growth, Trade and Endogenous Technology", MacMillan Press, 1996.
7 In this connection, see, for example, Rivera-Batiz, L. and Paul Romer.  "International Trade with
Endogenous Technological Change", European Economic Review, volume 35, pages 971-1004.  See alsoOchoa, O. Ibid.WT/WGTCP/W/107
Page 8
differences in factor endowment between the different economies.  Thus, countries which possess
relatively more capital than labour will tend to import goods whose production is based on the use of
labour and to invest in industries which use capital.
Although the influence of factor endowment on the determination of capital flows is
undeniable, it is obvious that the decisions on how and where to invest involve a much broader set of
factors.  In particular, it is crucial for entrepreneurs to take into account the risk inherent in a
particular investment plan, especially when that investment involves a long-term decision, as is the
case of investment in plants or branches in a foreign country.  The reason is that once an enterprise
installs a plant or a branch its mobility is restrict ed, so that if the situation deteriorates, withdrawing
from the deal or reallocating resources will be a costly process.  Clearly, if the return is the same,
entrepreneurs prefer a lower to a higher risk.
In terms of policy design this is a very important consideration.  It is more feasible for the
policy-maker to control the investment risk than to  modify the available factor endowment.  In this
connection, it is important to stress the role played by the stability of the regulatory system, which is
examined below.
3. The impact of the institutional framework on investment flows
Due to the long-term nature of direct investment, entrepreneurs have an incentive to choose
those countries with a more stable institutional environment.  A stable policy framework introduces an
element of certainty into investment decisions.  This explains why the developed countries, despitedifferences in factor costs, receive most foreig n investment (208,000 million dollars of DFI in 1996 as
compared with 129,000 million dollars for the developing countries
8).  In its turn, the increasing
number of initiatives to reform and liberalize the developing economies explains why foreign
investment in the non-industrialized world is incr easing (DFI inputs increased by 37 per cent during
19969).
This shows that the economic reforms undertaken by the developing countries since the
mid-80s have given rise to an increase in the volume of inward investment, that is, it demonstrates the
need to establish a set of rules which promote the entrepreneurial function, remain stable over time
and tend to reduce the uncertainty with regard to the future inherent in any investment decision.
The evidence is also conclusive in the case of Latin America, as shown by the graph.
                                                     
8See UNCTAD, I bid, page 21.
9See UNCTAD, I bid, page 22.WT/WGTCP/W/107
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FIGURE 1
Direct Foreign Investment In Latin America  (1987-1996)
0.005,000.0010,000.0015,000.0020,000.0025,000.0030,000.0035,000.0040,000.00
           Investment
Source:  Inter-American Development Bank 1997 Report.
These data illustrate the beneficial effects of deregulation of the barriers to capital flows.
This becomes more obvious when compared with the inherent volatility of portfolio investment flows
(see figure 2), which reflect a deep recession in Latin America as a consequence of the Mexican pesocrisis in 1994 (the "Tequila effect") and whose deterioration also contributed to the Asian crisis of
1997.  For its part, direct foreign investment in the region has been steadily increasing, which shows
that long-term investment depends, above all, on how the investors perceive the institutional
environment and not on the short-term opportunities resulting from exchange rate disparities.WT/WGTCP/W/107
Page 10
FIGURE 2
Portfolio Investment in Latin America (1987-1995)
-10,000.000.0010,000.0020,000.0030,000.0040,000.0050,000.0060,000.0070,000.0080,000.00
1987 1988 1989 1990 1991 1992 1993 1994 1995
         Investment
Source:  Inter-American Development Bank 1997 Report.
The evidence shows that institutional stability, which gives entrepreneurs greater certainty
about the future, is a determining factor in en couraging foreign investment flows into the less-
developed countries.  A more stable and predictable and less discretional institutional environment
means greater certainty for investors and hence an incentive to invest.
However, the application of the principles of anti-trust analysis as a foreign investment
regulatory mechanism involves an element of administrative discretionality which, in the eyes of
investors, makes the institutional system less predicta ble.  To the extent that it is less predictable the
risk will be greater and the incentive to invest correspondingly weaker.
As pointed out above, the economic analysis underlying anti-trust policy only offers a partial
view of the competitive process, since it emphasises competition in a particular market rather than
competition in the creation of new products and business opportunities, that is precisely those
elements to which the new theories of economic growth assign greater importance.  This is because
the information available to the analyst concerns the past behaviour of the economic agents, that is,
information ex post facto .  Secondly, anti-trust analysis ultimately requires the analyst to assess
elements which are subjective and different for each market participant, so that he must inevitably
resort to analysis of the ad hoc type which results in a degree of discretionality being placed in the
hands of those entrusted with its application.
More discretionality in the hands of the officials means greater opportunities for organized
groups to exert pressure in order to amass benefits, which makes the institutional framework a less
predictable system.  This is especially true in the context of the regulations on trade and investmentcontrol, since the local officials find themselves in situations of the "prisoner's dilemma" type which
create incentives to take action that favours local industry.WT/WGTCP/W/107
Page 11
Therefore, the application of anti-trust policy leads inherently to greater discretionality for the
officials which, in its turn, means an institutional framework that is less stable and predictable and,
accordingly, less attractive for foreign investors, particularly when one considers the bias in favour of
price reductions under anti-trust policy, which reduces the expected return on investment.
V. CONCLUSIONS
In this paper the advantages of applying the principles of anti-trust policy to direct foreign
investment flows are examined from various angles, with special reference to the developing
countries.  Evidence is produced to show that inve stors value a stable institutional framework and
rules that stress the liberalization of trade.  In fact, investment is determined by two main factors,
namely, the expected return and the anticipated risks.  The former has a positive effect on investment
and the latter a negative effect.
Taking the above into account, it is shown that  applying anti-trust policy produces an effect
exactly opposite to that required to promote investment, that is, it increases uncertainty and tends to
reduce profitability.
The application of anti-trust policy as a means of controlling foreign investment means
introducing greater discretionality for the regulators which, in its turn, means less predictability and
ultimately, has an adverse effect on the perception of the anticipated risks and the flow of investment.
It is pointed out that the regulator's knowledge of the markets is necessarily obtained  ex post facto , so
that it cannot take into account the main feature of markets, namely the entrepreneurial function,which by definition is characterized by the creation of new business opportunities.  It being
impossible to predict future innovations, the anti-trust analysis is necessarily incomplete.  Thus,
anti-trust policy is necessarily an ex post facto policy which, as a result of the inclusion of elements
which make it discretional, lowers the expectations and increases the transaction costs of market
participants.
On the other hand, anti-trust policy is fundamentally geared to preventing the formation of
monopolies and monopolistic behaviour, i.e. behaviour which raises prices and reduces the supply or,
in other words, behaviour which generates "monopoly income".  However, it is clear that the
promotion of investment requires some profits and, accordingly, some high prices to provide an
economic justification for the outlay.  At the same time, the concept of monopoly and competition
normally involved in anti-trust analysis is a static one, which ignores the principal and most importantcharacteristic of markets, namely the creative function of the entrepreneur.  Including this element in
the analysis presupposes that all monopoly power not derived from mandatory regulations is therefore
transitory.
In designing capital flow regu lations, two very closely related elements should be taken
simultaneously into account.  Firstly, a system of incentives tuned to the promotion of investment is
required.  This means removing any legal barriers to the free flow of investment.  Secondly, there is a
need for a stable and predictable system of property rights.  In order for a right to be stable and/or
predictable it must necessarily be defined ex ante.   This latter condition is not sufficient in itself alone,
since a system or rights can be defined ex ante  and create an incentive structure that impedes the free
circulation of capital.
An institutional framework in keeping with these objectives should also include clear rules
concerning the transfer of rights and should be supplemented by an ex post facto  intervention
mechanism aimed at settling disputes and defining the scope of individual rights, wherever problems
may arise between individuals.
__________