IAS 2012 Prelims Solved Paper II Aptitude (Part 8 of 18)

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The need for Competition Law becomes more evident when foreign direct investment (FDI) is liberalized. The impact of FDI is not always pro-competitive. Very often FDI takes the form of a foreign corporation acquiring a domestic enterprise or establishing a joint venture with one. By making such an acquisition the foreign investor may substantially lessen competition and gain a dominant position in the relevant market, thus charging higher prices. Another scenario is where the affiliates of two separate multinational companies (MNCs) have been established in competition with one another in a particular developing economy, following the liberalization of FDI.

Subsequently, the parent companies overseas merge. With the affiliates no longer remaining independent, competition in the host country may be virtually eliminated and the prices of the products may be artificially inflated. Most of these adverse consequences of mergers and acquisitions by MNCs can be avoided if an effective competition law is in place. Also, an economy that has implemented an effective competition law is in a better position to attract FDI than one that has not. This is not just because most MNCs are expected to be accustomed to the operation of such a law in their home countries and know how to deal with such concerns but also that MNCs expect competition authorities to ensure a level playing field between domestic and foreign firms.

  1. With reference to the passage, consider the following statements:

    1. It is desirable that the impact of Foreign Direct Investment should be pro-competitive.

    2. The entry of foreign investors invariably leads to the inflated prices in domestic markers.

    Which of the statements given above is/are correct?

    1. 1 only

    2. 2 only

    3. Both 1 and 2

    4. Neither 1 nor 2

    Answer: a

  2. According to the passage, how does a foreign investor dominate the relevant domestic market?

    1. Multinational companies get accustomed to domestic laws.

    2. Foreign companies establish joint ventures with domestic companies.

    3. Affiliates in a particular market/sector lose their independence as their parent companies, overseas merge.

    4. Foreign companies lower the cost of their products as compared to that of products of domestic companies.

    Which of the statements given above are correct?

    1. 1 and 2 only

    2. 2 and 3 only

    3. 1, 2 and 3 only

    4. 1, 2, 3 and 4

    Answer: b

  3. What is the inference from this passage?

    1. Foreign investors and multinational companies always dominate the domestic market.

    2. It is not in the best interests of the domestic economy to allow mergers of companies.

    3. With competition law, it is easy to ensure a level playing field between domestic and foreign firms.

    4. For countries with open economy, Foreign Direct Investment is essential for growth.

    Answer: c