Introduction

The governments of most Pacific islands countries (PICs) have embraced private sector development as central to their strategies for economic development. Competitive markets are perceived as essential to such private sector development. Accordingly, the governments of several PICs are taking steps toward implementing competition policies or reviewing their regulatory institutions (ADB 2014a). Economic activity in most PICs is dominated by state-owned enterprises (SOEs) and a handful of multinationals or large privately-owned domestic enterprises. In several PICs, policymakers have been pursuing the corporatization and privatization of SOEs. Typically, there is little competition in the major infrastructure-based industries (telecommunications is an exception) but active competition, at least in urban areas, occurs among smaller scale businesses with lower capital requirements.

Policymakers in PICs, as in other developing economies, are therefore looking to micro, small and medium enterprises (MSMEs) as major drivers of the private sector development that is needed to generate economic growth, create jobs, and alleviate poverty (McIntyre 2001). MSMEs are pivotal to the emergence of competitive markets in PICs but face significant constraints on their ability to compete. While MSMEs in the Pacific bear the substantial weight of development expectations, they are poorly equipped to apprehend the implications of competition laws, obtain independent legal advice, enforce their rights, participate in the policy process, or otherwise advance their legal interests.

Introduction

Chinese family companies are a major influence in Southeast Asian economies. While family-owned companies dominate small business, as they do in other countries, what is unusual about Southeast Asia is that family companies also dominate big business. Big enterprises in Asia are not the large-scale firms run along Western lines, but rather a conglomeration of small and medium-scale enterprises in a variety of markets that are often not even remotely related (see, for example, Gomez and Jomo 1999). In a (now dated) survey of corporate ownership by the World Bank following the Asian Financial Crisis in 1997, Claessens et al. (2000) examined the ownership of almost 3,000 Asian companies and found that a high proportion were family controlled; these firms, in turn, controlled a large part of many Asian economies. For example, the top ten families in Thailand controlled about 46 per cent of assets, whilst their counterparts in Indonesia control an even larger proportion — about 58 per cent (see Table 10.1).

What is perhaps surprising is the high concentration of top family assets irrespective of the level of a country's development or its legal or political system. One likely explanation is the importance of elite patronage networks that not only connect businesses but also link businesses and governments, which are then used to obtain monopoly and other competition-restricting concessions. Business goals and firm characteristics are also important. Family-owned businesses, big or small, may put the interests of the family ahead of profitability, which can have implications for competitive conduct — a family business may be more concerned with preserving the business (to employ family members and to ensure proper succession) and so sustain losses for extended periods of time which may drive even more efficient competitors out of business. Or networks can be used to prevent new entry.

Introduction

As small and medium-sized enterprises (SMEs) face an increasingly globalized business world, their ability to remain competitive is essential. In many countries around the world, SMEs make up more than 90 per cent of the number of businesses with the majority of that 90 per cent being micro-businesses (Schaper 2010). Faced with increased regulation, globalization, and competition, many SMEs will need increased guidance and support. Trade associations are well-placed to offer assistance. As competition laws become increasingly widespread and important around the world, this is one area where help is needed.

The number of economies with competition laws has increased dramatically in recent years, with established regulatory frameworks now in place in more than 120 jurisdictions (Dabbah 2010), and several others in the process of introducing their own statutes. Of particular note is the introduction of competition law in ASEAN (Association of Southeast Asian Nations) member countries, which is a target of the ASEAN Economic Community Blueprint.

The complexities of competition law are thus being faced by SMEs around the world. Trade associations provide a forum for SMEs to work collectively rather than face these challenges individually. Ironically, however, such bodies can also provide a forum for competition laws to be breached when competitors meet regularly to discuss business issues. Competition authorities are therefore often understandably suspicious of trade association activities.

Introduction

The Hong Kong Special Administrative Region (HKSAR) is a small jurisdiction whose economy is currently in transition from an entrepôt trade to a service-based economy. Since China's accession to the World Trade Organization (WTO) in 2001, Hong Kong's role as an international trade and services centre has increased. The SAR's economy is largely supported by low taxes, an educated workforce, and the rule of law. Major groups in the shipping, logistics, transportation, energy, telecoms, and retail markets have secured dominant positions through massive infrastructure investments and government deals. Yet 98 per cent of Hong Kong companies are small and medium-sized enterprises (SMEs) and serve the local market, which consists of some 7 million people population with a gross domestic product (GDP) per capita comparable to the United Kingdom or Japan. In 2014, Hong Kong's SMEs (defined by the government as a manufacturing business which employs fewer than one hundred persons in Hong Kong; or a nonmanufacturing business which employs fewer than fifty persons in Hong Kong) employed 48 per cent of the local workforce (Trade and Industry Council 2014).

Over the years, businesses have played a significant role in shaping the governance of Hong Kong. In Hong Kong's political system, the Chief Executive is the head of the Executive Council, which comprises of members of government as well as non-official members. The Chief Executive is elected by a 1,200-strong election committee, of which a majority is returned by selective categories of professions. This system favours the business community, as the election committee is heavily influenced by pro-Beijing business people and long-established business interests. Among the Executive Council, a substantial number of people have extensive business experience.

The legislative branch, known as the Legislative Council, consists of a single chamber.

Introduction

Small and medium-sized enterprises (SMEs) are the heartbeat of the modern economy. Despite increasing corporatization and globalization, they remain responsible for most economic growth and innovation — indeed former U.S. President Ronald Reagan observed, “Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States” (Reagan 1988). For all their economic significance, however, SMEs tend to be treated as the “exception” rather than the rule when it comes to competition laws.

In this chapter, the appropriateness of per se laws for SMEs is examined, remembering that:

Japanese SME Policy

Japan, an island country with a population of approximately 126 million, has a political system similar to that of many Western nations, but has evolved its own unique set of competition laws and small and medium-sized enterprise (SME) policy responses.

Some institutional structures are very similar to those in most other developed nations. For example, the nation is a constitutional monarchy with a parliamentary system of government. Japan's elected legislature, the Diet, consists of two elected chambers: the House of Representatives and the House of Councillors. The head of the executive branch of the Japanese government, the Prime Minister, holds office with the approval of the Diet. Of all the nation's administrative organizations, the Ministry of Economy, Trade and Industry (METI) is the most significant body in terms of its influence on the nation's economic and industrial policies. Japan also has a Small and Medium Enterprise Agency (the SME Agency), which was established under METI, and is responsible for SME policy. The courts operate independently of the executive branch and are largely corruption-free.

In Japan, a SME is defined in one of several ways under Article 2 of the Small and Medium-sized Enterprise Basic Act. In the manufacturing, construction, or transportation sectors, it is a firm whose capital does not exceed 300 million yen, or whose number of employees does not exceed 300.

Introduction

Singapore is a recent entrant to the fold of countries subscribing to competition law. It has been ten years since the Singapore Competition Act was introduced and it is timely to review its introduction and implementation. How was competition law received by the small and medium-sized enterprises (SMEs)? What steps have been taken by the Competition Commission of Singapore (CCS) — established in 2005 to administer and enforce the Act — to address SME concerns, especially as they are the ones least able to adapt to changes in regulation?

Singapore is a small and open economy. Its nominal gross domestic product (GDP) in 2014 was S$390 billion1 (Statistics Singapore 2014) and its trade to GDP ratio was 351 per cent (World Bank 2016), one of the highest in the world. SPRING Singapore (2014), the government agency responsible for SMEs, reported in 2014 that 99 per cent of businesses in the country were considered to be SMEs, contributing almost 50 per cent of GDP. SMEs are defined as:

1. • Enterprises with annual sales turnover of not more than S$100 million; or

2. • Enterprises with an employment size of not more than 200 workers.

This chapter begins by introducing the rationale for competition law in Singapore. As a small and open economy, Singapore does not quite fit the “typical profile” of a country that needs competition law. We next describe how Singapore prepared the business community for the implementation of the Act.

Introduction

As part of its commitment to become a self-sufficient industrialized nation by the year 2020 (Vision 2020), Malaysia has recently adopted a competition law regime. The Competition Act (CA) was passed by the Federal Parliament in April 2010, and came into force on 1 January 2012. Being new is not all bad — there is a plethora of case law and experience available from all around the world from which the Malaysia Competition Commission (MyCC) can learn. However, there are also significant challenges for a new, inexperienced competition authority to meet the expectations of the business and government communities in enforcing the new legislation.

The MyCC is an independent statutory body created by the Competition Commission Act 2010 with responsibility for enforcing the Act. Its main role is to protect the competitive process for the benefit of consumers and businesses.

Introduction

Numerous small and medium-sized enterprises (SMEs) throughout the twenty-one Asia-Pacific Economic Cooperation (APEC) economies are operated as business format franchises. Two forms of franchising are widely recognized. In product franchising, a franchisor supplies branded products or services to a franchisee (seller), but does not control all aspects of how the franchisee conducts the retail business. The other form, business format franchising, is more allencompassing. It involves a franchisor creating a retail business, testing it, and resolving any problems, then documenting every aspect of the business and, finally, advertising for franchisees to purchase and operate franchised clones. The franchisor sells its franchisees a licence, typically for a fixed term. Franchisees then invest their own time and finances in establishing legally independent, but functionally dependent businesses, under the franchisor's brand while following the rules set out by the franchisor. The focus of this chapter is on business format franchising.

This model of franchising is increasingly popular, and has become ever more versatile and sophisticated since the mid-twentieth century. Franchising currently exists along a spectrum, from being a widely studied, highly regulated, and pervasive business model in countries such as Australia and the United States, to an unregulated, data-poor, fledgling activity in countries such as Papua New Guinea.

Introduction

Despite a plethora of inquiries into regulatory burdens, good regulatory design, and the regulatory circumstances in many industries and across a wide range of countries, little attention has been paid to how regulators interact with businesses, especially small ones. Yet this is critical, as the Queensland Chamber of Commerce and Industry of Australia noted:

The characteristics of small businesses can warrant a different approach to engagement by regulators, including by agencies tasked with promoting competition and consumer protection. As noted by the Council of Small Business Organisations of Australia (COSBOA):

Although the competition law obligations of businesses vary between countries, the scope of matters that can attract the attention of competition regulators is always narrower for small businesses.

Introduction

The concept of “competition” has a near mythical status in economics. Economists have often used Adam Smith's “invisible hand” to illustrate the point that competition amongst buyers and sellers seeking to maximize their gains also benefits society. Less attention has been paid to Smith's cognizance that sellers can collude to the detriment of consumers. Likewise, Joseph Schumpeter has argued that the prospects of market power is also a key driver of innovation. Such contradictory perspectives on the role of competition have continued to perpetuate themselves in modern post-war theories of economic growth as well as the attendant empirical studies. Thus, the role of competition in economic growth is far from clear. To add to the predicament of policymakers and regulators seeking more direct answers, the nature and role of SMEs in economic growth is likely to be inconclusive and possibly even elusive as well.

Despite the existing knowledge gap, competition laws — legislation promoting market competition — have been implemented in many countries. To date, more than 130 jurisdictions around the world have implemented competition statutes in one form or another. It is thus useful to reassess what we know about SMEs, competition law, and how both are related to economic growth.

The purpose of this chapter is to provide a brief synthesis of what is known in the research literature, by examining the theoretical and empirical relationships between SMEs, competition law, and economic growth. The chapter will attempt to critically reflect on a few key questions. First, what is the nature and role of SMEs in the economy? Second, what role do SMEs play in economic growth? Finally, how does competition law affect this role?

To examine the above issues, this chapter begins with a discussion of the nature and role of SMEs in national economies.

Overview

In the process of Korea's rapid and successful economic development, small and medium-sized enterprises (SMEs) have played a major role. This is the result of both specific stipulations in the Constitution, and due to various SME promotion and support policies that have been successfully implemented. But against a backdrop of government-led economic policies that have traditionally prioritized large conglomerate (chaebol) growth, Korean SME policies may be considered relatively lacking, especially when considering the earlier stages of Korea's economic development.

For much of the last few decades, Korean SME policies had been focused on protection policies or on policies in which SMEs played a supplemental role to large conglomerates. More recently, the Korean government has succeeded in amending its policies in response to internal and external changes in national economic circumstances. It has been moving towards reorganizing its legal system to promote and support SMEs so that the economic roles and competitiveness of small firms can be strengthened.

The significance and value of SMEs can vary in different ways, depending on the stage of economic development of the nation involved. SMEs can be considered to have major significance for a rapidly developing country, since promoting them may help build an industrial base, expand employment opportunities, balance development in different regions of the country, and establish a stable social infrastructure.

Introduction

The small and medium-sized enterprise (SME) sector has not traditionally been a priority concern for most competition agencies globally, for the trite reason that small enterprises generally do not possess market power and, therefore, cannot exercise it to distort competition. Only in the narrowest of markets, or where the small enterprises combine with other enterprises to engage in collaborative anti-competitive acts (usually through the agency of a trade association) (Këllezi et al. 2014), do small enterprises register on a competition agency's “radar” screen.

Small enterprises are more often considered to be the victims of the aggressive use of market power. Upstream sellers with market power (input suppliers), or downstream distributors who have monopsony power or who control access to the ultimate customers (for example, supermarkets), are often seen as more likely targets of antitrust enforcement than SMEs. Moreover small retail enterprises may be required to enter into vertical arrangements with manufacturers or wholesalers that might be disadvantageous to them.

However, as mentioned above, it is usually through hard-core cartel-like practices on price, quantities, or market division (often coordinated by a trade association or through bid-rigging agreements) that the SME sector is likely to receive the attention of antitrust agencies.

In China, due to its particular history and political economy since 1949, the private SME sector was negligible until the reform and opening process began in 1978. Since that time, however, there has been an explosion in the SME sector, and the nation has seen the creation of millions of small businesses.

In many Asia-Pacific economies, competition law and regulation has been in operation for decades, setting the rules of the game for business. Typically the law covers the behaviours of dominant firms (i.e. vertical arrangements) and anti-competitive practices in markets (i.e. horizontal arrangements). But while such regulation is designed as a general framework for firm behaviour, those frameworks have not always kept pace with modern developments.

Competition law was traditionally seen as something to guide the behaviour of large or dominant firms. But the role of Asia-Pacific Economic Cooperation (APEC) small and medium-sized enterprises (SMEs) is changing as they become more connected to the international economy. Electronic commerce and global supply chains are encouraging them to become more globalized. New technologies are acting as disruptive forces to existing markets, and international supply chains are altering the traditional nature of vertical arrangements.

These changing realities have implications for modern competition law and regulation. Regulatory authorities need to understand the new roles of SMEs, and communicate their legal obligations.

Policymakers need to design systems that encourage harmonized or similar commercial standards across borders, and there needs to be common views about how to enforce behaviours across borders with appropriate cross-border judicial resolutions. Public and private dispute resolution systems need to be accessible to SMEs.

My own experience in competition law in the 1990s was that competition laws were not particularly well designed for SMEs, and that SMEs were not particularly well informed about them. It is very pleasing to see so much progress since then, as this book spells out.

Congratulations to the ISEAS – Yusof Ishak Institute and the authors for drawing our attention to these issues. This book and the seminar that it is based on are important steps in remedying the gaps in knowledge and policy in the Asia-Pacific.

The economic, political, strategic and cultural dynamism in Southeast Asia has gained added relevance in recent years with the spectacular rise of giant economies in East and South Asia. This has drawn greater attention to the region and to the enhanced role it now plays in international relations and global economics.

The sustained effort made by Southeast Asian nations since 1967 towards a peaceful and gradual integration of their economies has had indubitable success, and perhaps as a consequence of this, most of these countries are undergoing deep political and social changes domestically and are constructing innovative solutions to meet new international challenges. Big Power tensions continue to be played out in the neighbourhood despite the tradition of neutrality exercised by the Association of Southeast Asian Nations (ASEAN).

The Trends in Southeast Asia series acts as a platform for serious analyses by selected authors who are experts in their fields. It is aimed at encouraging policy makers and scholars to contemplate the diversity and dynamism of this exciting region.

Not long after the Cold War, Aaron Friedberg, a prominent American representative of the realist outlook on international security, argued that a “new multipolar sub-system” was beginning to emerge in East Asia after the Cold War, making that region “ripe for rivalry”. Among other impediments to regional stability, he argued that the Association of Southeast Asian Nations (ASEAN) was no more than a “loose collection of the region's less powerful states” with no real legacy of cultural identity or institutional collaboration. Friedberg concluded that, unlike in Europe, the type of institutionalism ASEAN designed to mitigate Asian tensions comprised “a very thin gruel indeed”. This relatively dour outlook was contested at the time, not only within ASEAN but also by those who credited that organization as representing a more promising trend in Asian stability and order-building.

The ASEAN Regional Forum (ARF) convened its inaugural meeting in July 1994 as an extension of the ten ASEAN members’ annual dialogue with ten external powers, including those pan-regional “great powers” nominally recognized as shaping Asia's balance of power: the United States (U.S.), the People's Republic of China (PRC), Japan, and India.

ASEAN's initiation of the ARF constituted an effort to diversify rather than completely negate the U.S. postwar bilateral alliance network. The latter had long dominated Asia-Pacific security politics but Washington was gradually realizing the value of supporting new multilateral security initiatives as an effective supplement to its bilateral alliances. The ARF embodied, soon after it was created, an effort to impose a distinct ‘Asia-Pacific Way’ as the preferred avenue for pursuing overall regional-order building, as Amitav Acharya noted. He further observed that Southeast Asia's cultivation of pan-Asian regionalist discourses in the 1950s — with their emphasis on sovereign inviolability and their rejection of formal NATO-like regional collective defence arrangements — was a uniquely Southeast Asian sub-regional pathway for shaping Asian security politics. Northeast Asia — constrained by great power geopolitics — could not replicate this approach. Over time, and for their own diverse reasons, the region's great powers gradually came to accept the principle of “ASEAN centrality” for underpinning Southeast Asian security.

More than twenty years after the ARF's founding, the ASEAN centrality approach as the best means for pursuing regional order-building is being seriously questioned. Realist critics have reiterated Friedberg's original assertion that growing strategic competition emanating from an increasingly multipolar Asia-Pacific security environment and especially