Can more competition sustain an industry?

Customers relax at one of the many Brown Cafes in Central Phnom Penh earlier this year.
Customers relax at one of the many Brown Cafes in Central Phnom Penh earlier this year. Eli Meixler

Can more competition sustain an industry?

We can’t always be sure if allowing another player in will help or harm a certain industry. While business owners are known to be risk-takers, regulators often want to be on the safe side. And there might also be academics spending days and nights thinking that in order to keep an industry alive there is a need to keep the competition low so that the existing players can survive. This especially true when the industry isn’t enjoying much growth.

I see things quite differently. Both the market and the regulatory framework can be refined, each depending on the other’s development.

I’m not saying whether we should just let the market determine the regulatory framework completely or whether we should build a regulatory framework to control the market at all times. It would be naive to embrace either position. No one size fits all, and there are also other variables at play that may actually dictate the life cycle of an industry. But, leaving such debate aside, both local and international experiences seem to confirm that letting the market drive the regulatory framework appears to be the right thing to do.

Take a look at the coffee industry for a moment. Until five years ago or so, residents of Phnom Penh had very few choices for good coffee. Most would settle for black coffee or coffee with condensed milk. But today there are at least five international brand coffees going strong while more international brands are entering the market. Was the demand for international brand coffees in Phnom Penh that big in the first place? No. Had Cambodians always been coffee drinkers? Also no. Had Cambodia already had a sophisticated regulatory framework to govern the beverage industry? Most people would think not.

Why, then, has the coffee industry been expanding so much and so fast? The answer can only be this: competition. Yes, competition tends to do more good than harm in the long run.

And this is true not only in the private sector but also in the public sphere. When David Osborne and Ted Gaebler published their international bestseller Reinventing Government, I was still in high school. But now, 10 years after I received my doctorate degree, this book remains very practical and still is one of the best social science books ever written.

Among the various tools they have prescribed for government policy-makers, creating a competitive government is the right thing to do because “competition rewards innovation; monopoly stifles it”. The authors were demonstrating how the entrepreneurial spirit, so predominant in the private sector, can transform the public administration. And it has.

Applied to the Cambodian context, it is competition that has not only sustained but even expanded the coffee industry for instance. Without a doubt, innovation has been key to such expansion. If you take time to visit different outlets of coffee houses in Phnom Penh, you can readily appreciate the innovative interior design at each outlet. It is competition that has created a vibrant coffee culture in the urban towns and, in the process, has refined an ever-growing market place. competition has clearly sustained this industry; the regulators only need to ensure that competition is well managed to avoid monopolistic power. As the ASEAN economic community is entering a new stage, new industries will certainly emerge in Cambodia and stiff competition is expected to increase. In fact, although still operating at a very low penetration rate, life insurance is slowly emerging as one such new industry. But one big issue is that competition is almost nonexistent there. Only two brand name life insurers are immediately recognisable. Without high competition, it is very difficult to persuade people to buy insurance policies as these currently tend to be expensive.

On the other hand, if there were 10 life insurers in town in high competition, their insurance policies would have to be more innovative and more cost-friendly, allowing more and more people to buy them, thereby helping to sustain the industry.

Indeed, one clear piece of evidence in support of the competition-boosts-sustainability argument can be drawn from the construction arena. When we look at this industry that has been growing so fast here over the past decade, one may think that there must have been a firm construction regulatory framework in place to help generate such growth.

But no, that’s not true. actually, Cambodia does not have a construction law yet. But it was understood that regulations could be built as the industry develops, precisely because this parallel approach would allow regulators to contemplate how it would grow, to evaluate the trends, to understand the market, then, to tailor regulations for the better. this is why a comprehensive construction law is being drafted now.

Taking this lesson to heart, when we’re not sure whether allowing another player in will harm or help sustain an industry or whether we should write regulations first before allowing more competitors to enter the market, we should just remember that monopolistic power in the market place is an obstacle that must be removed.

Dr Virak Prum, LLB, LLM, received a PhD in international development in 2006 from Nagoya University.

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