Interjurisdictional Competition and Regulatory Advantage

As formal trade and investment barriers fall, government regulations -- what once were domestic policy matters -- become issues of international concern. International commerce creates the potential for competition among regulatory jurisdictions. This article explains why there is variation in these regulatory trends. Three general 'trajectories' are: (a) convergence among countries toward less stringent regulations in some cases, (b) convergence toward more stringent regulations in others, while in still other cases (c) differences persist among countries. I offer three (related) propositions which explain the different regulatory trajectories: #1) Regulations on production processes tend toward laxity; whereas product market-access regulations tend toward stringency. #2) Industrial structure affects the strength of the process/market-access distinction. Powerful firms in concentrated markets facilitate collective action and regulatory capture. Dominant producers push for process and market-access regulations which reflect their interests, giving them a competitive regulatory advantage in world markets. #3) The asset specificity of investments affects regulatory convergence. Low asset specificity leads to a competition-in-laxity; high multinational asset specificity leads to convergence among jurisdictions (as firms seek to lower their transaction costs); and domestic asset specificity leads to differences among jurisdictions. Detailed case studies (on offshore banking, capital requirements, and infant formula) suggest the propositions are necessary to understand general outcomes, although not sufficient to fully explain individual cases. Copyright 2005, Oxford University Press.