Markets where possible, regulation where necessary: discuss.

Or, what do the current economic conditions mean for your global expansion plans?

I was recently on a British trade delegation to India. Peter Mandelson, the British Secretary of State for the Department of Business, Enterprise and Regulatory Reform, was leading. The title of this post is a sound-bite from his speech at a televised debate with Minister Kamal Nath, his Indian counterpart, and entrepreneurs Sunil Mittal and Shiv Nadar.

Markets where possible, regulation where necessary‘. These are powerful words, articulating succinctly an ideological position, especially worthy of attention at a  time when leaders of countries are scrambling to find a way out of a global financial and economic abyss. World leaders at the recently concluded Davos summit have also made noises registering caution against a wave of protectionism, as it rises. It is worth remembering that all this is applicable only to liberal democracies.

The bad times can, of course, be good times for those companies that offer relevant products and services for industrial customers and consumers. Despite downgraded growth projections, some geographical markets are still buoyant and offer opportunities for such companies.

For these companies to realise their plans, it may be necessary to parse the innocuous adjectives ‘possible‘ and ‘necessary‘.

In theory, regulation is deemed necessary where there is a real or anticipated market failure, i.e. where free market forces fail to deliver benefits efficiently or equitably to society, or where free market forces do not see a reason or a profitable way to deliver a service or goods. Laws that outlaw discrimination in the workplace or hiring practices, regulation that aims to control pollution or environmental destruction, or state-controlled utilities in natural monopolies are illustrative examples of where regulation may be deemed ‘necessary’. Additionally, regulation may be the preferred tool for a government to enable its developmental priorities or in economics-speak, endogenous preferences.

For companies, a deep understanding of the markets they seek to enter is therefore essential. If they are sensitive to the policy agenda in a country, they could choose appropriate strategies to enter, deliver services in and derive profits in a market.

In India, for instance, infrastructure and social infrastructure (health, education, employment opportunities and poverty alleviation) are developmental priorities. Companies that can offer competitive goods and services in these areas can be certain of a welcome in the market. In the UK, we may be seeking investment, skills and partnership in crucial areas, where the government’s flawed policy decisions from 15-20 years ago have now rendered us uncompetitive, but where the changed circumstances are forcing us to review our approach.

However one must also seek to understand how the actual mechanics of regulation may work. Let’s say the policy agenda requires that a new bank must provide rural banking. But if the central bank will only ever issue 2 branch-opening licences in a year, the cost and profit projections may need substantial adjustment.

In a liberal democracy, especially an evolving one, it is worth understanding the trajectory of regulatory change so as to know which sectors may have nascent or true free markets. For instance, India’s legal sector liberalisation has been of interest to British law firms for a while. It was a major theme for the recent trade delegation too as they met ministers and law firms to press their point. Possible is often a negotiated agreement, arrived at after protracted lobbying and negotiations. It may not necessarily always be a universal consensus amongst conflicting publics which means that companies must remain aware of the market dynamics. However, in liberal democracies, political expediency generally prevents governments from taking back the goodies they give away.

What does all this mean for a company seeking to tide over the tough times by not cutting back but by seeking greener pastures? Well, they would do well to remember that in international expansion, strategy and investment decisions are rarely divorced from the regulation and the regulatory trajectories in their target markets. To understand them would be the first step towards being better prepared to benefit from those opportunities.

Related reading:

Paul Krugman’s interesting take on Lemon Socialism (NYTimes may require registration)

My post on Language: A challenge in becoming a global business

4 thoughts on “Markets where possible, regulation where necessary: discuss.

  1. from your post … “In India, for instance, infrastructure and social infrastructure (health, education, employment opportunities and poverty alleviation) are developmental priorities.”

    are you sure about this? priorities? what is the evidence?

    needs, of course, no one doubts that, but priorities?

    priorities only for permission-granting agenices, meaning, the bribes you have to pay in advance to have any hope of getting a road contract in any state … the bribes you have to pay, in advance, merely to start a local school in any small town …

    i would love to see these things as priorities, much of the country would too, but …

    @GregoryLent: Thanks for your comment and your question.

    Budgetary allocations are usually the best indicators, or evidence, of policy priorities. @Nikhil Narayanan’s comment demonstrates my point quite well.

    Issues related to corruption that you raise are policy enforcement related problems. This is not an excuse but corruption is a bigger issue than something that can be legislated out of existence.

    As you may know, I explore and research institutional dynamics and legislative processes in several national and supra-national contexts. All I can say is that just because the man taking the brown envelope is wearing a dhoti makes him no more corrupt than a man wearing a Saville Row suit.

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  2. @gregorylent
    Since you asked for evidence,I thought of being kind enough to answer that.
    Please check the table at the link below:

    (Source: Table 3.13 of https://planningcommission.nic.in/plans/planrel/fiveyr/11th/11_v1/11v1_ch3.pdf)

    So,close to 20% of the amount goes to Education,over 13% to Rural Development,over 9% to infrastructure,over 8% to Health/Family Welfare and a similar amount to Agriculture/Irrigation and so on.

    -Nikhil

    @Nikhil Narayanan: Thanks for taking the time to answer Gregory’s question (and for doing my work for me!).

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  3. Shefaly, isn’t it ironic that the very aspects of our economy that were seen as undesirable two years ago are suddenly seen as the panacea for the current crop of economic woes – and not just by us?

    And, of course, since we are all human, the realisation that weak regulatory oversight was at least partly responsible for the current mess means we have the pendulum now swinging to the other end!

    The truth, as you have rightly pointed out, lies somewhere in the middle.

    Quirky Indian

    @Quirky Indian: Thanks. Just goes to show that as humans, as a society, balance and moderation are things we find difficult to achieve. The pendulum indeed is swinging to the other extreme now which is not clever either, esp given the globalised state of the world’s trade, blame quickly flies as protectionism and anti-immigration policies raise their heads, making a bad situation worse. We need global leadership to act collectively, decisively and swiftly and that is exactly what they are not capable of doing it seems…

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  4. Infrastructure and social infrastructure are very definitely priorities in India.

    The rapid mushrooming of SEZs and the development of MIHAN is a suitable indicator of this. Add to this, the metro rail construction at Mumbai and the rapid advances in communication technology and you know that infrastructure is gearing up.

    Education is also looking up. Whereas a lot still needs to be done for basic education, higher education is doing well. Conversion of RECs to NITs, conversion of Roorkee to an IIT, use of video conferencing and VOIP are some of the steps that have ensured that our engineering institutes compete with the best in the business.

    The IIMs continue to hold the pride of place, particularly IIM-A, and they have increased their number too. Howver, it is interesting to see that other management institutes are also doing very well. XLRI, Symbiosis, FMS etc are doing very well too. The only challenge is going to be providing worthwhile jobs, on account of the recession.

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