Introduction

Chapter 4 offered the public and private interest reasons for national authorities to regulate the establishment of companies. Licensing and minimum capital requirements were discussed in Chapter 4 as two ways to regulate business establishment. Chapter 5 studies the cross-border establishment of companies in a multi-level jurisdiction and provides economic explanations for the regulation of cross-border establishment. The discussion in this chapter covers conditions of licensing for business establishment such as environmental standards and labour and safety requirements, since these conditions are of particular importance for the set-up process.

The study in Chapter 5 raises two questions. In section 2, the question is addressed whether cross-border business establishment should be regulated by rules different from the regulations of the establishment of companies. After that, sections 3 to 7 treat the issue whether the existence of the cross-border establishment is a reason to shift the regulatory competence to a higher level. More specifically, section 3 briefly introduces competitive federalism and fiscal federalism, followed by section 4 that discusses the criteria for centralization. Section 5 applies the arguments from section 4 to cross-border business establishment. Section 6 considers whether it is necessary to regulate cross-border establishment at central level, in order to deal with local protectionism. In section 7, attention is shifted to the implications of public choice theory for the centralization of the regulation of cross-border establishment. Section 8 contains a conclusion.

An Economic Analysis of the Regulation of the Cross-border Establishment of Companies

Public Interest Reasons for Regulating the Cross-border Establishment of Companies

When companies establish businesses across borders, the investment destination may impose stricter establishment requirements on these non-local companies than local enterprises. The public interest reason for greater regulation of the crossborder establishment of companies can be information asymmetry. Compared to businesses funded by local enterprises, consumers may have more difficulties to find information about companies formed by investors from other states, for example in relation to the reputation of a company. As Jeng asserts, company reputation is a signal of quality when considering buying new products or services. Nevertheless, he points out that the reputations influence customers’ assessment of the quality only before the goods or services are used.