How Does the Investment Climate Affect Competition in Transition Economies?

Recent studies have emphasize how important role competition is for enterprise productivity in Eastern Europe and Central Asia. This paper looks at the effectiveness of government policy in promoting competition in these countries. Improving enforcement of competition law and reducing barriers to trade increase competition. Firms are considerably less likely to say that they could increase prices without losing many customers when competition policy is better enforced and when tariffs are lower. Access to finance is also important - competition is greater in countries where access to finance is easier. In contrast, there is little evidence that privatization increases competition in of itself. State-owned enterprises face no less competition than other enterprises. Although privatization might have other benefits, there is little evidence that it will increase competition unless governments take complementary actions such as reducing trade barriers or enforcing competition laws