4.3 Public benefits and detriments – foreign ownership
In an open economy it is important to establish the basis on which to consider benefits and detriments; in particular, should different weightings be given to domestic or foreign ownership or as between consumers and producers. We take as given the equal weighting of domestic consumers and producers, in part, since this seems most likely to promote dynamic efficiency, and consider here the ownership issues. What consideration can, or should, be given to markets (consumers or producers) outside New Zealand or foreign ownership in assessing public benefits and detriments under the Commerce Act, and if they are considered, to what extent, if any, differential weighting should be applied.
Section 3(1A) of the Act provides:
Every reference in this Act, except the reference in section 36A(1)(b) and (c) of this Act, to the term “market” is a reference to a market in New Zealand for goods or services as well as other goods or services that, as a matter of fact and commercial common sense, are substitutable for them.
This definition indicates that it is markets within New Zealand that are the primary concern when implementing the provisions of the Commerce Act. The focus is on New Zealand markets (consumers and producers) and does not differentiate between domestic and foreign owned firms. The provisions of the Commerce Act operate regardless of who is operating in the market and the ownership of those firms.
Section 4(1) of the Act provides:
This Act extends to the engaging in conduct outside New Zealand by any person resident or carrying on business in New Zealand to the extent that such conduct affects a market in New Zealand.
This clearly extends the coverage of the Act to conduct outside the borders of New Zealand provided there is an impact on a market in New Zealand. Therefore a foreign owned firm, carrying on business in New Zealand, would be subject to the Commerce Act provided the conduct had an impact in a market in New Zealand.
Section 3A of the Act provides that:
Where the Commission is required under this Act to determine whether or not, or the extent to which, conduct will result, or will be likely to result, in a benefit to the public, the Commission shall have regard to any efficiencies that the Commission considers will result, or will be likely to result.
The Commerce Commission’s publication “Guidelines to the Analysis of public benefits and detriments” (1994) provided that the “public” is the public of New Zealand and that benefits to foreigners are to be counted only to the extent that they also involve benefits to New Zealanders. This publication (revised in 1997) no longer accurately records the Commission's view and is currently being updated to reflect the changes in the Commerce Amendment Act 2001.
The revocation of those Guidelines leaves the comments by the High Court in the Amps-A decision as the leading authority on whether benefits to foreign firms should be considered and to what extent they should be discounted.
The High Court in that case stated:
“We reject any view that profits earned by overseas investment in this country are necessarily to be regarded as a drain on New Zealand. New Zealand seeks to be a member of a liberal multilateral trading and investment community. Consistent with this stance, we observe that improvements in international efficiency create gains from trade and investment which, from a long-run perspective, benefit the New Zealand public.”
and went on
“On the other hand, if there are circumstances in which the exercise of market power gives rise to functionless monopoly rents, supra-normal profits that arise neither from cost savings nor innovation, and which accrue to overseas shareholders, we think it right to regard these as exploitation of the New Zealand community and to be counted as a detriment to the public.”
Given that the public in Section 3A of the Act is the New Zealand public, whether the Court is suggesting that an efficiency defense of a merger or commercial practice may differ according to whether or not the relevant firm is foreign owned depends upon the interpretation of functionless monopoly rents. If functionless refers to rents that have no implications for behaviour that is to the long term benefit of consumers there will be only very limited possibilities of appeal to discrimination on grounds of ownership in efficiency calculations. As mentioned in Sections 3.1.3 and 5.1, absent regulatory barriers to entry, profits are the catalyst to competition, entry and innovation that enhances dynamic efficiency. If this function of profit is admitted under competition law there will be very few instances where ownership discrimination is applicable. Alternatively, if the rents are statically treated as functionless, and their effect on competition and innovation ignored, there will be many examples of efficiency computations potentially materially affected by the Court’s caveat. For example, the rent transfer of Figure 1 in the text would be treated as a detriment leaving it plus the triangle as the cost of the price rise to the public of New Zealand: accordingly the test of Williamson (1968) would have to be modified for actions involving price rises because of such non-neutral transfers.
Even if profits were considered functionless there are a number of obvious direct issues that should be considered before application of discrimination. The direct issues include the fact the New Zealand public may own some proportion of relevant foreign firms, and these firms would generally pay some domestic tax on any surplus: thus the dichotomy between foreign and domestic firms is not necessarily a dichotomy that represents the incidence of benefits and costs. Although the criterion in principle would apply to both foreign-owned producers and foreign consumers it is unlikely that these producers and consumers should be treated symmetrically. The tax and locational-ownership issues cited differ as between foreign ownership and consumption, and foreign consumers are, presumably, much more passive in the determination of the dynamic performance of the New Zealand economy. Because of this asymmetry it will generally be in the interest of dynamic efficiency for foreign consumers to be discriminated against by ignoring benefits and detriments that lie with them in efficiency calculations, but to generally ignore the ownership of firms.
Since competition law is a constraint on institutions of trade, including those of contracting, its neutral application is required if the availability, enforceability and uptake of contracts is to be neutral as between domestic and foreign-owned firms. Indeed, the argument for the treatment of efficiencies is the same as the rationale for sanctity of contracts. Unless contracts are impartially enforced transactions and investment will be affected; in particular if foreign-owned firms perceive that contracts are not enforceable in New Zealand they will either not transact in New Zealand or they will write into New Zealand contracts that they be enforceable in other jurisdictions. To treat firms within the same (New Zealand) market differently—under competition and/or contract law—according to domestic or foreign ownership would hinder dynamic efficiency because it would imply that existing foreign-owned firms in New Zealand would be discriminated against in administrative decisions of commerce. If firms were fully informed of the discriminatory policy before they entered, fewer foreign-owner firms would enter and thereby competition and concomitantly the dynamic efficiency of New Zealand markets would be reduced. Where this inhibits the uptake and development of innovations the loss in welfare would be very large.
The argument for enforcement of contracts—despite the existence of ex post outcomes that could be more efficient on a static efficiency basis—is that the limitation of opportunistic behaviour that is proscribed under enforceable contracts enhances dynamic efficiency. This is exactly the rationale for neutral treatment of domestically and foreign owned firms in efficiency tests under competition law.
