INTERNATIONAL BUSINESS MANAGEMENT
LESSON 12:
LIBRELIZATION
Learning Objectives
• To understand the concepts of Liberalization
• To analyze the reasons of State involvement in a country
• To understand the Economic Motives of Liberalization
• To understand the various other motives involved in
Liberalization
• To understand the results of Liberalization
• To understand the cautions the country needs to go for
while promoting Liberalization
Interaction
Liberalisation has been the dominant force in international
business in the developed world over the past two decades. It is
likely to remain important and developing countries will
increasingly feel its effects. Although the mechanisms and
motivations involved can be complex, the consequences are
straightforward - more competition, more opportunities for
strong firms and fewer places to hide for weak ones.
Spread of Liberalisation
On May 1, 1975 US financial markets were subjected to a burst
of deregulation which triggered a price war in the market for
financial services. In the two decades since then, liberalisation
has spread to many other sectors of the economy, while the
theme crossed the Atlantic into Western Europe and has since
traveled, with increasing speed, across the globe.
In the second half of the 1990s, there are very few states which
impose a higher degree of regulation on economic activity than
was the case two decades previously. Some have travelled further
down the path than others, but in terms of direction it has
been one-way traffic.
Some Definitions
First to define the key terms:
Liberalization
The act of reducing government-imposed constraints on the
behaviour of actors in the economy. The two ways that this is
achieved are by privatisation and deregulation.
Privatisation
Several aspects exist, with the theme being the exposure of the
public sector production process to free market forces. The
most commonly understood meaning is the sale of state-
owned enterprises, but it can also refer to the contracting out of
a serv
Deregulation
Easing the rules under which a firm or an industry operates,
allowing expansion within the sector or diversification into
other sectors, as well as opening the sector to other entrants.
Fewer restrictions on price is another recurring theme.
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Background
Before considering how privatization and deregulation have
changed the global environment for business, first it is necessary
to place the issues in an historical perspective. It is worth ending
a moment looking at the reasons why industries were national-
ized and markets were regulated in the post-war world.
The consequence of public sector involvement is that the profit
motive - which typically dominates the operations of a private
sector company - can be replaced by other objectives defined by
the state. There were four main reasons for the direct involve-
ment of the state in a country’s industrial structure in the past
fifty years.
i. Strategic. Some industries were seen as key to the military
strength of a nation. Steel, transport, communications,
energy and aerospace are examples of industries which were
frequently brought under public ownership for reasons of
national security.
ii. Market failure. If the market is not allocating resources
efficiently, then there may be a case for the government to
step in. One example of market failure are externalities
(which is an economist’s word for side effects). In some
sectors profit maxi
iii. Ideology. State ownership was firmly embedded in the
political ideology of the left wing parties of many countries.
The concept was that the benefits from the efficient
operation of the enterprise would be felt by the whole
population and not just the
iv. Technology. Many industries were seen as “natural”
monopolies and it appeared impractical to have competition
in some sectors. Utilities such as water, gas and electricity
supply and telecommunications are common examples. To
prevent abuse of monopoly
Problems with State Ownership
By the 1970s it was becoming apparent that there were funda-
mental problems with some nationalized or heavily regulated
industries. In a diluted form, the problems were similar to
those, which eventually proved fatal to the former Eastern Bloc.
Without the discipline of market forces, nationalized industries
were often inefficient and were a burden on the public purse.
Labor militancy and restrictive working practices added to the
problems, as did management which was more bureaucratic
than entrepreneurial. The quality of the product or the service
provided by a nationalized industry was frequently poor and as
it was often a monopoly supplier the consumer suffered.
Heavily regulated industries lacked innovation and dynamism.
Projected across the whole economy, heavy state involvement
meant slow growth and stagnant incomes. In addition,
objectives of economic efficiency (such as setting prices equal to
marginal costs) were often overridden by political factors such as
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favoring certain interest groups or supporting macroeconomic
objectives like low inflation.
The Economic Case for Liberalization
The rise of right-of-centre parties in several developed democra-
cies in the 1980s meant a shift away from left-wing attitudes and
towards a stronger belief in the merits of free markets and a
more limited role for the government. This was largely predi-
cated on the “Chicago school” argument that the state did not
have enough information to be able to direct resources as
efficiently as the market. (Friedman and Stigler are two of the
better known Chicago academics.) By exposing firms to greater
competition it was anticipated that stronger, more productive
enterprises would be the result. If the process is a success, the
end result should be that the consumer receives a better service
and a wider choice at a lower price.
The most extreme example of a change in attitude was seen in
Eastern Europe after 1989 when there was a radical reappraisal
of the role of the state in the economy. Prior to that the price
mechanism had not functioned to link the wishes of consum-
ers with the responses of producers. The system had also failed
to instil in companies any sense that their survival was depen-
dent on providing a certain level of quality or on achieving
some level of efficiency.
Transfer of ownership from the public to the private sector
leads to a change in the objectives of the firm. It will move
from acting in a way prescribed by the government to being
primarily governed by the search for profits. It is this search that
brings the benefits to the economy in the form of more
efficient use of resources, improved quality and more innova-
tive behaviour, as firms try to make better products at lower
costs.
Increased competition is usually most apparent in the product
market, with privatised airlines or telecommunications provid-
ers more eager to improve service and cut prices to generate new
business. It also occurs in the market for inputs - for example
privatising and splitting up a national electricity generator will
create pressure on prices of inputs such as coal. Note that the
British coal mining industry collapsed after the privatisation of
electricity utilities, as one result was a search for the lowest price
input (which was either gas or foreign coal), which meant the
removal of the underlying subsidy to coal producers that had
resulted from the nationalised electricity generator buying
British coal at above market prices.
Inefficiency aspects of state control are more complex than
simply noting the fact that a nationalised car company makes
unreliable cars and loses money, or that a state-owned telecom-
munications company takes months to install a new phone.
The car company will be soaking up government revenues
which, looking across the whole economy in what is labelled
“general equilibrium analysis” must be generated by raising
taxes on other efficient private sector producers. This inevitably
places them at a disadvantage against foreign competition.
Similarly, a poor telecommunications network has a negative
impact on all users of telecoms, handicapping all business users
in the economy.
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11.625.1
Efficiency arguments stretch further than just the increased
INTERNATIONAL BUSINESS MANAGEMENT
competition in the input and output markets of the formerly
state-owned company. A private sector firm is also exposed to
the competitive forces of the capital markets. This allows it to
draw on private sector capital to finance investments in a way
that may not have been possible when funding was provided
by the state. It also enforces a stronger financial discipline as
there is no longer the assumption that the state will bail the
firm out of any financial difficulties. Moreover, poorly perform-
ing firms will see their share price fall and will be exposed to
take-over bids, a move which generally causes upper level
management to lose their jobs. For example, in the UK water
industry a national public monopoly has been split up and
several private regional monopolies created. Competition comes
not in the product markets, but in capital markets and from the
possibility of take-overs which creates the pressure for each
company to be run more efficiently.
Other Motives for Liberalisation
Electoral success of right-of-centre parties in many countries in
the early 1980s opened the way for a surge of liberalisation. This
occurred not just in the traditional “welfare” states such as New
Zealand and the United Kingdom, but also in more strongly
free market countries such as the USA and Japan. The main
aims of the process were to promote competition and to
increase efficiency.
Apart from the economic argument already discussed, it is
possible to identify three other driving forces behind
liberalisation: ideology, technological change and competitive-
ness. The weight given to each of these factors will vary over
time as well as across countries.
i. Ideology. Liberalisation can be seen as an explicitly political
move, with the main motivation being one of vote-seeking,
rather than trying to improve overall economic efficiency.
Creating a shareholding middle class by selling off
nationalised industries inevitably creates conservative voters,
whose loyalty is ensured by using the revenues to cut taxes,
rather than by paying down outstanding government debt.
(A more positive interpretation is that by sharing in the
ownership of a company, the workers are likely to be less
militant.) The sale at a discount of state-owned housing can
be seen as based on similar motivations. Privatisation is also
seen as weakening the power base of trade unions, which is
also high on the “New Right” agenda.
More cynically, some observers point to the large fees earned
by financial institutions advising governments on
privatisations and the subsequent appointment of relevant
ministers to the boards of the investment banks or the
newly privatised companies themselves and question the
ethics of the entire process.
ii. Technological change. There are three elements to the advance
in technology. Firstly, it reduces the number of “natural”
monopolies, where competition is limited. Secondly, it
reduces the ability of the state to regulate activity in some
sectors. Thirdly, it has raised the optimum size for some
industries.
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 Taking each of these points in turn, technological advance
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has allowed competition to be introduced in several sectors
which were previously assumed to be monopoly suppliers.
One method is for the owner of the infrastructure to be
forced to distribute the product of other suppliers, as in the
gas, electricity and telecommunications sectors, which is a
process made possible by technological advance.
Alternatively, in the telecommunications sector, land-line
based systems are now open to competition from both
mobile phones and from cable companies. This makes
regulation or state ownership of the former monopolist less
necessary.
In the financial services sector, the ability of the state to
regulate activity has been reduced by technological change.
Financial flows are now so fluid that any attempt by the state
to regulate financial activity more heavily than in other
financial centres would simply result in the business being
conducted elsewhere. Periodically the German government
proposes levying a withholding tax on interest income on
government bonds, but is forced to abandon the idea when
faced with the loss of all bond trading to other financial
centres. In addition, technological advances have resulted in
an increased complexity of financial instruments such as
swaps and derivatives, where the degree of understanding
required by regulators is so high that it makes the process
impractical.
In some cases technological change has made state
ownership impractical because the minimum efficient market
size is now larger than is available in a single economy.
Industries such as airlines and telecommunications are
finding it too costly being an independent operator. The
high cost of research and development and other capital
investments mean that joint ventures, strategic alliances and
mergers and acquisitions are necessary to achieve an efficient
scale of production.
iii.Competitive forces. In the past, while there may have been
negative side effects of heavy-handed regulation of “meta-
industries” such as telecommunications or finance, they were
limited in scope. However, with the intensification of
competition which is a result of the globalisation of
business in the past few decades, the costs of regulation have
increased. Over-regulation which produces a stagnant
telecom or financial sector will reduce the international
competitiveness of all the domestic firms which rely on
those services.
The flip side of this argument is that by liberalising in
advance of other countries, it is possible to gain an enduring
competitive advantage. Note the cases of the US financial
sector (May Day liberalisation in 1975), US airlines (liberalised
in 1978) and US telecoms (liberalised in 1984). It is no
coincidence that these are three of the most internationally
competitive US industries, as liberalisation produced
dynamic and efficient firms which were then in a strong
position to compete with regulated or more recently
liberalised firms abroad.
The result is that as a country’s competitors begin to
liberalise, the pressure on its rivals to follow suit increases. If
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they delay, then they will not only damage the
competitiveness of the domestic customers of the protected
firm, but once liberalisation does arrive, the international
arena will be that bit more difficult to compete in.
A Word of Caution
When caught up in the wave of enthusiasm for deregulation
and privatisation, it is important to retain a degree of perspec-
tive. Just as few would argue that state control over every sphere
of economic activity is desirable, there is also only an extreme
minority who argue that the state has no part to play. Even
Adam Smith, the father of free market economics, acknowl-
edged the need for the state to act to preserve the integrity of
markets and to prevent collusion among producers.
A more realistic approach is to ask how much the state should
become involved in the economy, rather than whether it should
be involved or not. The past two decades have seen a move
along the regulatory spectrum, provoking questions such as
what are the consequences for business of such a trend? and is
this trend going to continue or will it head into reverse?
Note that some of the earlier rationale for state ownership and
regulation still applies. Externalities are still an issue for the
government to consider and monopolies still exist in some
areas. Some liberalisation has involved turning a public sector
monopoly into a private sector monopoly and then introducing
statutory regulation.
Some Key Events
As is shown by Table 2.1, while privatisation and deregulation
may have begun in the USA and UK, the trend quickly spread
to other developed and developing countries. It also spread to
other sectors in the countries which were first to embrace
liberalisation. The UK did not stop after achieving “obvious”
targets such as financial markets deregulation and the sale of
public monopolies such as telecommunications, airlines and
steel. By the mid-1990s it had sold water, electricity and gas
utilities and was considering privatising postal services and
railways. The United States, having broken up AT&T in 1984,
instigated another round of telecommunications deregulation
in 1996 aimed at increasing competition between all service
providers.
The Economist article “Private profit, public service” on pages
10 to 11 of “The abuse of economics” (full reference is
provided at the beginning of Chapter 3) provides a useful list
of which utilities are still under full or partial state ownership.
Perhaps the surprising feature is, even after more than two
decades of privatisation, just how many utilities remain under
state control.
Results of Privatisation
In any social science assessing results is always difficult, but the
experience with liberalisation seems in general to be positive.
One indication of this is that few of the left-of-centre political
parties which expressed opposition to the process now aim to
reverse the tide. Many resist further privatisation, but the option
of bringing the telecommunications sector, say, back under state
ownership is rarely even raised. Note that some left wing
governments have also pursed a policy of liberalisation, such as
the Labour Party in Australia.
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Another anecdotal piece of evidence to suggest that company. There is frequently government / union conflict prior

INTERNATIONAL BUSINESS MANAGEMENT

liberalisation produces a rise in competitiveness is that of the to privatisation. The union knows that its members will be

Table 2.1. Calendar of Key Steps in Liberalisation

1975 US May Day deregulation of financial services.

1978 US Domestic aviation deregulation.

1979 UK Elimination of exchange controls.

1984 US Deregulation of AT&T, break-up of monopoly.

UK Privatisation of British Telecom.

1985 Japan Start of deregulation of financial markets.

Malaysia Sale of shares in Malaysian Airlines System.

1986 UK Financial services "Big Bang".

1987 Japan Sale of first tranche of NTT.

Japan Japan National Railways split up and privatised.

1988 Chile Sale of 50% of state telecom company.

1992 Russia Voucher based privatisation begins.

1993 France Sale of state-owned financial and industrial companies.

1996 US Deregulation of telecommunications.

Egypt Announces plans to sell 80 state-owned companies.

WTO Information Technology Agreement

1997 WTO Global telecommunications pact

“first mover advantage”. British Airways, US financial institu-
tions and US telecommunications companies are all leaders in
their fields and, not coincidentally, all were among the first to
feel the stimulus of liberalisation. Having been forced into
efficiency gains early on, they were in a strong position to
expand globally and to achieve a dominant industry position.
Of course, some interested parties lose through the process.
Many of the efficiency gains come at the expense of the labour
force and large scale job losses are a frequent corollary to
privatisation. Union power is usually weakened in the process
and so wage gains are more limited than in a state-owned
damaged by a shift to the private sector, while the government
knows that it will gain a better price when selling an industry if
the union has been forced to back down from a strike. In Brazil
in 1995 the government and the unions became locked in a
fierce dispute over plans to privatise the state-owned petroleum
company, Petrobras.
Moreover, it was noted above that there was a social dimension
to many of the services provided by the state. If such services
end, with no compensatory benefit elsewhere, then the
vulnerable groups in society will suffer.

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 Privatisation & Regulation Overlap
INTERNATIONAL BUSINESS MANAGEMENT
The previous section noted some of the reasons why
nationalisation and regulation took place in the past, noting
that some still apply. It is important to realise that privatisation
does not just involve the state disposing of state assets and
then washing its hands of the whole business, as some of the
initial concerns that motivated state ownership will often still
apply. For example, simply turning a public monopoly into a
private monopoly is hardly likely to be in the interest of
consumers unless the monopoly is regulated to ensure it does
not abuse its position.
For this reason, the privatisation of a state enterprise is usually
accompanied by the establishing of a regulatory body to oversee
the industry. The regulator can be given statutory power to set
price structures, oversee quality of service, control the access of
competition and generally means that the industry does not
make the move from public control to private market forces in a
single leap. A typical regulatory approach is that the restrictions
will be relatively tight in the early days as a private enterprise, but
will be gradually loosened as more competition begins to
emerge. Essentially, the market is encouraged to take over the
role of regulator from the government appointed body.
Relations between a privatised monopoly and its regulator are
likely to be sensitive. If the regulator is seen as too lax, then it
will provoke public concerns that the monopoly is abusing its
position and the regulator is “in its pocket”. Too tight regula-
tion will cause the firm to record below market rates of profit
and could damage investment or produce a sub-optimal level
of output. The problem is generally one of information: once
the firm becomes a private enterprise, the access of the regulator
to the necessary information is not guaranteed. Note, for
example, the debate between the UK telecommunications
regulator OFTEL and BT over the likely cost of BT’s long-term
investment programme. BT clearly has an interest in inflating
any estimates as it will make the regulator more sympathetic to
future price rises. On the other hand, if the regulator mistakenly
underestimates the cost, then the result could be under-
investment which would be to the detriment of BT’s
customers.
The government often recognises the continuing strategic
importance of certain industries by retaining a “Golden Share”
in the privatised company, or by restricting the allowable
proportion of foreign ownership. In 1988, the Kuwait
Investment Office (KIO) was obliged to sell shares in the
privatised BP after it emerged that KIO had acquired a 22%
stake in the company, in excess of the 15% limit on foreign
ownership. A “Golden Share” allows the government to block
the take-over of a privatised company which is not seen to be in
the national interest. Similarly, in Japan foreign ownership of
NTT is not allowed to exceed 20%. Note however, that the
United States operates a similar system via the Exon-Florio
Amendment (1988) which gives the Committee on Foreign
Investment in the United States (CFIUS) the power to block
take-overs of any American company if it is seen to pose a
threat to national security.
There is also the question of moral hazard. A central bank can
undermine the banking system if it offers an implicit or explicit
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promise to bail out any troubled bank (as it provides no
sanction on imprudent lending) and a similar argument can
apply to a privatised industry. If the company is seen as too
large or too strategically important to fail (a national telecom-
munications company, for example) then the company might
have a natural bias to pursue a high risk strategy, where the
potential rewards are great, but where the government is
guaranteed to step in and re-nationalise if bankruptcy is
threatened. The continuing financial difficulties of Eurotunnel
raise the question of whether either the French of British
governments would be prepared to nationalise the project if it
cannot service its debts.
Investment Flows
In the search for new firms to bring increased competition to
their markets governments are also tempted to look to foreign
companies. In order to attract new entrants, previous restric-
tions on trade or foreign direct investment inflows need to be
lifted and this is sometimes accompanies by FDI incentives.
The attractions to a state are sometimes more ambiguous when
the increased competition is provided by foreign-owner
subsidiaries, as there is concern over repatriation of profits, or
the incomplete transfer of relevant technology. Nevertheless, the
entry or foreign firms (or even just the threat of entry) can
provide an additional resource to a government seeking to
enliven a domestic market.
Summary
Liberalisation has been the dominant force in international
business in the developed world over the past two decades. It is
likely to remain important and developing countries will
increasingly feel its effects. Although the mechanisms and
motivations involved can be complex, the consequences are
straightforward - more competition, more opportunities for
strong firms and fewer places to hide for weak ones.
Liberalization: Case Studies in Telecommunications.
Introduction
Telecommunications is often referred to as a “meta-technol-
ogy”, meaning that it is important not just in its own right, but
also because of the effect that it has on a whole range of other
industries. As a result, progressive states have always been
concerned to ensure that they had a healthy telecommunications
sector. Until the 1980s this usually meant the existence of a
state-owned telecommunications monopoly. As a stream of
countries jumped on the liberalisation bandwagon, the telecom
provider was usually among the first to be privatised. In spite
of the size and importance of the industry, in the UK, Japan,
Mexico and many others, the telecom operator was usually the
first major privatisation.
Why has the state telecommunications monopoly often been the
first target of a liberalising government?
Until the past decade or so, telecommunications was always
thought of as a natural monopoly. However, the advent of
fibre-optics has brought service providers into the market (see
The Economist survey “Death of Distance”, pp.10-12 & 25-33,
cited at beginning of Chapter 3) reducing the concern that
privatisation would simply mean a public monopoly would be
replaced by a private one. Privatization and liberalization is often
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portrayed as a tool of right-of-centre governments. However,
there are also instances - notably in Australia and New Zealand -
where the more left-wing party also favored liberalization. This
was also the case in the United States in the late 1970s, when
President Carter’s Democrat administration initiated the
restructuring of the US telecommunications sector. Similarly,
the second round of US telecom deregulation occurred in 1996
under another Democrat President, Bill Clinton.
This raises the question of whether liberalization of telecommu-
nications has been due to technological imperatives, or whether
it reflects political ideology?
The development of the telephone marked a qualitative
improvement over previous forms of communication, while the
development of mobile phones and the Internet is merely a
quantitative change. Discuss.
What are some of the main effects of telecommunications
reform?
Routes to Telecom Liberalization
Inevitably there have been diverse approaches to the
privatization of telecommunications. This section discusses the
experience in the major economies, although it concentrates on
the US where the changes have been most dramatic. USA The
US is unusual in that the telecommunications network has
never been a state-owned operation. However, it has been
heavily regulated. In the decades before 1996 communications
policy - including ownership and service restrictions that
maintained protected monopolies at both the state and federal
levels - had been set largely by the Federal Communications
Commission, state public utility commissions, and the federal
courts’ enforcement of the 1984 antitrust consent decree that
dismantled the Bell System. The complexity of the system
meant that there was little potential for a national telecommuni-
cations policy. Indeed, jurisdictional disputes had led to
analogies with two different people trying to drive one car.
However, with the 1996 Telecommunications Act, Congress
reasserted primacy in setting US communications policy, and has
set a course that clearly adopts competition as the basic principle
in all telecommunications markets. In an antitrust decree in
1984, Judge Greene ordered the break-up of AT&T from its
local telephone monopolies, the Bell Companies. He also
required the seven “Baby Bells” (also called ?RBOCs? or
Regional Bell Operating Companies) to offer all long distance
companies and information providers equal access to local
telephone networks. Because of the Bells’ continued market
power, they were prohibited from participating in the long
distance and information services markets and from manufac-
turing telecommunications equipment. Congress also enacted
legislation to prohibit local telephone companies from provid-
ing video programming to subscribers in their respective
telephone service areas in competition with local cable television
systems. The 1984 changes meant that the US led the way on
liberalisation of telecommunications. Competition with the
other two main long distance providers, Sprint and MCI, meant
that AT&T could not develop a monopoly position, but there
was some concern about the local dominance of the Baby Bells.
The 1996 Telecommunications Act
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Another major change in US telecommunications is likely to
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result from the Telecommunications Act of 1996 - billed as the
biggest shake-up since the Communications Act of 1934 -
which implements further deregulation. The thrust of the Act
is to remove the statutory and court-ordered barriers to
competition between segments of the telecommunications
industry, enabling Baby Bells, long distance carriers, cable
companies, broadcasters, and others to compete head-to-head.
The aim of the new law is straightforward: increase competition
and reduce regulation, thereby spurring innovation, more
consumer choice, lower prices, and increased US competitive-
ness. Implicit in the old law was an assumption that
communications was a natural monopoly. In contrast, the 1996
law assumes that all parts of the communications marketplace
can be made competitive. The new system is intended to end
government intervention in communications and to begin an
era of genuine competition. An interesting component is that
the Federal Communications Commission (FCC) has the
freedom to deregulate further as markets become competitive,
if regulation is not necessary to ensure reasonable rates and to
protect consumers. In Henry IV, Part I, Glendower says, “I can
call spirits from the vasty deep.” To which Hotspur replies,
“Why, so can I, or so can any man; but will they come when you
do call for them?” The same applies to competition: politicians
and regulators may call for it, but whether it emerges or not is
another question.
How can the US authorities ensure a spate of mergers does not
mean that local monopolies are just replaced by nationwide
monopolies?
What the Act means
Under the 1996 Telecommunication Act, the Baby Bells are freed
to provide long-distance services outside their regions immedi-
ately, and inside their regions once completing a series of steps
to remove entry barriers for local telephone competition. New
“universal service” rules continue the subsidisation of tele-
phone services for rural and low-income subscribers, and assist
schools, libraries and other public institutions in becoming
connected to sophisticated telecommunications services. The
1984 antitrust consent decrees are repealed, but their require-
ments for “equal access” to all long-distance carriers are
maintained. The Baby Bells are also to be allowed to manufac-
ture telephone equipment. The Act also relaxes the rules
governing cable television. Rate regulations will be removed by
end March 1999 on all cable services except the “basic tier” that
includes over-the-air channels and public and educational
channels. Telephone companies are permitted to offer either
cable television services or to carry video programming. The
new law deliberately blurs lines between formerly discrete sectors
of the telecommunications industry. Bell Atlantic may become
your long distance company, or your video service provider.
MCI or AT&T may become your local telephone company, or
your source for wireless services. Cox or Comcast may offer you
broadband Internet access, or wireless local loop. Congress has
tried to limit the discretion of federal and state regulators,
specifying many of the procedures they are to follow and the
conclusions they may reach. The bill’s breadth also reflects
efforts to win broad-based support for the bill by offering
rewards to industries in a position to help slow or thwart the
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 bill. For example, broadcasters receive relaxed licensing and
INTERNATIONAL BUSINESS MANAGEMENT
media concentration requirements allowing any single company
or network to own TV stations that reach as many as 35% of
the nation’s television households (the previous limit was
25%). For the first time networks are allowed to own cable
television systems, but no network can acquire another network.
All nationwide limits on radio station ownership are repealed,
and local limits on concentration are relaxed. The bill reverses
some of the earlier divisions, in that it ends segregation
between the Baby Bells and the long-distance carriers. It also
allows competition between the traditional telecom utilities and
cable companies. Technological advances have meant that little
differentiation exists between the provision to the home of a
telephone link and films, interactive video games or other
entertainment services.
Why did the US see it beneficial to go back on some of the
measures in the 1984 telecommunications bill in new legislation
in 1996?
Attitudes towards the Act
The 1996 Reform Bill met with bipartisan support as well as the
backing of related companies. In Congress the voting was 414
to 16, while in the Senate, it was 91 to 5. President Clinton
described it as “truly revolutionary legislation that will bring the
future to our doorstep”. Even more enthusiastically,
technophile Vice-President Gore saw the bill as “an historic
event that will change forever the way every American lives,
works, learns, and communicates” and he claimed that the
“Berlin Walls” of the telecommunications industry have
crumbled. The enthusiasm evident in Bell Atlantic?s press
release on the legislation is typical of the response of partici-
pants in the telecommunications industry. The financial
community also saw the potential benefits, with the expected
bout of mergers and acquisitions set to generate large fee
incomes.
If Bell Atlantic “is at the forefront of the new communications,
entertainment and information industry” why might it have
announced a merger with Nynex less than three months after the
Telecommunications Act was passed? And why has AT&T
deemed it necessary to begin exploring merger possibilities with
SBC Communications?
Unsurprisingly, some consumer groups were suspicious of any
legislation that received such strong backing from the industry
and both parties. As the contrary view notes, Senator Paul
Simon of Illinois claimed the Act will “permit greater concentra-
tion in radio-license ownership, permit undue escalation of
cable rates, and immediately remove protection altogether for
consumers in some cable systems of 50,000 households or
fewer.” Consumer groups fear that the end result will not be
stronger competition, but a concentration of monopoly power
in the hands of the few. Some even see it as a threat the
American democratic tradition. Landay?s Liberty Tree article cited
in chapter 3 represents the polemical view of those opposed the
Act. How justified are these concerns?
Consequences of the Act
Theory says that the Act should produce significant economic
gains. Thus the WEFA Group has estimated that the results of
the 1996 Telecommunication Act will raise US economic growth
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76
by 0.5% a year for the next ten years. An additional 3.4 million
jobs will be created across all states and all major industry
groups as the benefits of lower prices, enhanced services, and
newer technologies boost economic activity throughout the
economy. In terms of lower costs for consumers, WEFA
estimates savings of nearly $550 billion in cumulative consumer
savings over the next ten years (annual US GDP is around $6.7
trillion). They will come in four main areas:
i) Lower long distance rates yield $333 billion in consumer
savings.
ii) Lower cellular rates generate over $107 billion in consumer
savings.
iii) Lower cable TV rates yield nearly $78 billion in consumer
savings.
iv)Lower local rates create another $32 billion in consumer
savings. In practice, though, US consumers have yet to see
significant gains. In early 1997, long-distance telephone rates
have risen, cable TV rates have remained high, and there is
little new telephone competition in most residential markets.
On the other hand, the Act has actually created some new
forms of regulatory red tape, in the form of new efforts to
control pornography within cyberspace and violence on TV.
The immediate business reaction to the 1996 bill was a bout
of consolidation in the telecommunications industry. In
March 1996, two Baby Bells, SBC Communications and
Pacific Telesis, announced plans for a $45bn merger, while on
the US east coast, Nynex and Bell Atlantic made a similar
move worth $51bn in April. Britain?s BT put in a $20 billion
bid to take control of MCI, the country?s second largest
long-distance competitor to AT&T. That merger is now
problematic due to MCI?s recent (1997) steep drop in
earnings.Other firms have approached the deregulatory
implications from a different direction and, taking into
account the cross-sector implications, with US West
becoming involved with Time Warner, while Disney bought
ABC/Capital Cities.
Why did an AT&T spokesman say of the proposed merger
between Nynex and Bell Atlantic “it?s hard to see how new
competition .... can be attained if existing monopolies simply
combine into larger ones”?
However, it is probably too soon to see the beneficial results.
For instance it took the Federal Communications Commission
much of 1996 to establish the ground rules for local telephone
competition Some sectors (like the cable industry) which were
expected to take advantage of the Act, held back for a variety of
reasons.
On the other hand, the main short-term weakness of the Act
may well be that it has no provision to control prices of the
established, oligopolistic companies until true competition
develops. The recent dominance of AT&T in long-distance
markets and the Baby Bells in local ones is still marked enough
to make them daunting competitors. The recent discussions
between SBC and AT&T may bring even this observation into
question, however. Other countries, such as the UK, have
temporarily limited the freedom of giants like BT in order to
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give new competitors a window of opportunity to establish
themselves.
The US 1996 Telecommunication Act is important not just for
the US, but also bearing in mind the trend that where the US
leads, others will follow.
Japan
Nippon Telegraph and Telephone (NTT) had been a state-
owned enterprise since its formation in 1952. It had a
monopoly on domestic provision of both telecommunications
services and equipment, with the result that when it was
privatised on April 1, 1985, it was Japan?s largest company.
Foreign service provision was granted to Kokusai Denshin
Denwa (KDD), while NTT was (and still is) explicitly excluded.
While there were domestic motives for privatisation, along the
lines for other developed economies, there was the added
impetus of pressure from the US government. This was based
on attempts to open the Japanese market to American firms in
an area where they were felt to have a competitive edge. There
was also support inside the Japanese bureaucracy: the Ministry
of Trade and Industry (MITI) saw telecom deregulation as a
way of raising efficiency in the service sector, while the Ministry
of Finance viewed the receipts from privatisation as a means of
reducing the budget deficit. The private sector also favoured
deregulation, on the basis of receiving a better and cheaper
service, as well as providing new opportunities for producers of
telecommunications equipment. Moreover, NTT itself was not
opposed (aside from the unions which had limited power) as it
felt it had achieved technological equivalence with the United
States and felt able to compete in world markets.
Although it was turned into a private corporation in April 1985,
the first shares were not sold to private investors until February
1987. At that time foreigners were not allowed to buy NTT
shares. From its initial offer price of 1.197 million yen, the NTT
stock price to over 1.7 million yen before a single share was
traded and then rose to a high of 3.18 million yen by May 1987,
provoking complaints from foreign investors. However, by the
time the government came to sell the third tranche of stocks in
1989 the price was back down below 2 million yen. Understand-
ably, domestic investors were wary of the issue and the
government magnanimously liberalised the earlier restrictions
which prevented foreigners from holding the stock. Poor
stockmarket conditions mean that no further tranches have
been sold since 1989. Even now, foreign ownership is restricted
to 20%. The government?s ownership is now down to two-
thirds of outstanding stock and in the medium term its share is
due to fall to one third.
Post-privatisation, the Ministry of Posts and Telecommunica-
tions (MPT) retained control over several areas of NTT?s
business, most notably in pricing and the sphere of its business
activities. Moreover, in the Japanese world of government/
business symbiosis, the MPT?s informal control is stronger
than it appears on paper. However, NTT did have freedom in
terms of financing, capital spending and formation of strategic
alliances, while its management committee is appointed by
shareholders rather than the government (although the Ministry
of Finance is still the majority shareholder).
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11.625.1
At the time of privatisation, the government did not respond
INTERNATIONAL BUSINESS MANAGEMENT
to pressure to break up NTT both regionally and by function.
However, with increased competition in the Japanese market
since then, it is now firmly on the agenda. The likely result is
that NTT will be split into two regional service provider
companies, with the equipment business being separated (See
the Ministry of Posts and Telegraph report on the “Status of
Nippon Telegraph and Telephone Corporation”). The data
communications business, NTT Data, has already become a
separate entity and was listed on the Japanese stockmarket in
1995.
Competition has gradually increased in Japanese markets, but
even with the gradual introduction of mobile phones in the
1990s, NTT still has greater dominance in domestic telecommu-
nications than, say, BT in the UK. However, newcomers are less
tightly regulated by the MPT, which feels it needs to compensate
for NTT?s size and power.
At first sight, the proposed break-up of NTT looks like a repeat
of 1984 action in the US which saw the segregation of local
suppliers. However, it also combines elements of the 1996 US
Telecommunications Act, in that it provides for greater competi-
tion from other suppliers of telecommunications services.
Compare the relative merits of the structure of the American
and Japanese telecommunications industry.
Japan?s situation also demonstrates how political concerns can
govern the fate of liberalisation. In early 1996 a decision on the
break-up of NTT was delayed for at least a year, even though an
exhaustive study by the Ministry of Posts and Telecommunica-
tions had been completed. The reason was one of political
expediency, as one of the three parties in the ruling coalition
came under pressure from the postal workers? union. Already
facing a disaster in the next elections, the Social Democratic Party
of Japan could not afford to alienate one of its traditional
backers, which was afraid of job losses if NTT was split up.
UK
The first Thatcher administration of 1979-83 laid the basis for
the mass privatisations which were to come and “tested the
waters” with some minor steps. Included in these was the sell-
off of Cable and Wireless, a publicly-owned
telecommunications company which mainly operated abroad.
During Prime Minister Thatcher?s second administration (1983-
87) the state-owned telecommunications utility, British
Telecom, was privatised. In part this was because heavy
investment was needed and the government wanted to take the
spending out of public finances to avoid swelling the budget
deficit - and of course selling 51% of its stake in the company
reduced the deficit by raising £3.9 billion. Other motivations
included the ideological belief that a privately owned company
is more efficient and dynamic than a publicly owned one. No
explicit cost-benefit analysis was undertaken.
BT was privatised in November 1984 and demand for shares
from individual investors was strong, with the issue massively
oversubscribed (by a factor of almost ten). Institutional
investors were not allocated any shares and had to buy in the
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INTERNATIONAL BUSINESS MANAGEMENT
ate rise of around 90%.
Does it really matter if a state-owned company is sold at a price
below its real market price?
The British authorities have played a complex game with BT.
Firstly, in core telecommunications markets, only one major
competitor was initially allowed, a Cable and Wireless subsidiary
named Mercury. On the other hand, the government deliber-
ately blocked BT from using its monopoly power to move into
important related areas, such as the provision of Cable TV. This
temporary ban was aimed at allowing new competitors to
establish themselves in related sectors, before having to face the
full weight of competition from BT. As a result, the Cable TV
companies have found an interesting niche market in offering
telephone services over their fibre networks. There has been no
limitation on the nationality of companies allowed to bid to
enter these new niches. American companies have been to the
fore in entering Cable TV. Singapore Telecom won the right to
offer specialist services in one regional centre (Interactive
television in Cambridge?).
In addition, the government accepted that BT would need quite
tough regulating during the period that new competitors were
being fostered. The regulator (OFTEL) therefore created a
distinctive regulatory approach. Instead of going for an
extremely detailed approach as is found in the USA, he created
what has become the “RPI minus X” formula (where RPI
stands for the Retail Price Inflation). Under this approach, the
regulator tells BT that its average prices must fall by a certain
percentage below inflation (The price formula for rises until
1997 were to be held to the rate of inflation minus 7.5%). Such
a formula forces BT to worry about its efficiency, but gives it the
freedom to decide how best to meet the pricing targets set it.
Thus, it has been cutting prices heavily in sectors where there is
lots of competition (international services and the corporate
market) while, on occasion, even raising them in areas which
have called for heavy subsidies in the past (such as supplying
lines to homes).
The general impression is that BT has responded positively to
these new challenges. First of all it offered $21 billion to buy
80% of MCI, the number 2 in the US long-distance telephonic
market. This deal should be approved around August 1987 and
will lead to the creation of a company called Concert Plc. They
have then strengthened themselves in Southern Europe and
Latin America by adding an alliance with Portugal Telecomto
and Spain?s Telefonica (which pulled out of AT&T?s Unisource
alliance). The aim of this new alliance is to put together a “pan-
American” phone network stretching from Canada down to
Argentina and Chile. On top of this, they would add a marine
link between South America and Spain. Their ultimate aim is to
cut costs and offer greater flexibility and more innovative
products to their business clients.
To what extent has BT created a global network of alliances as a
result of the British decision to liberalise telecommunications
earlier rather than later?
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Germany
Deutsche Telekom is the world?s third largest carrier in terms of
sales and was partially privatised in late 1996. In spite of a right-
of-centre government throughout the 1980s, Germany has been
slower to embrace Anglo-American free market ideology and in
the November sale the government distributed only one-sixth
of the shares in the company. Another one-sixth tranche will be
sold within three years of the first.
The government has been forced to shake up the structure of
the domestic market in advance of privatisation, with radical
changes to tariff rates in early 1996. European Union legislation
means that the telecom markets of all member countries must
be fully liberalised by January 1, 1988. In Germany, rapid
restructuring and efficiency improvements are essential if
Deutsche Telekom is to be in a position to compete with
foreign rivals. Painful cost-cutting measures, such as reductions
in the labour force, are likely to be achieved more easily by a
private company than one in the state sector.
France
France was unusual among major industrialised countries in
that it had a socialist president between 1981 and 1995. The
result was a much less enthusiastic approach to privatisation
and in the early part of Mitterrand?s period in office several
companies were nationalised.
In 1995 a right of centre president was elected and soon began
to replicate the attitudes of the UK a decade earlier. Resistance
to liberalisation was fierce and threats to the welfare state
resulted in widespread strikes in late 1995. The national
telecommunications operator, France Télécom, remains in
public ownership. Proposals to turn it into a regular state
company in preparation for selling off 49% of the shares have
been met with threats of strikes from trades unions.
State ownership has not prevented France Télécom from
becoming involved in strategic alliances with other carriers. A
joint venture, called Atlas, with Deutsche Telekom and Sprint
of the US makes France Télécom a major player in world
telecommunications markets.
Why have continental European governments been slower to
privatise their telecommunications providers?
Telecommunications and the WTO
Liberalisation does not just mean privatising or deregulating
domestic markets. It can also mean allowing foreign competi-
tion into the market. In 1994 the world telecom market was
worth $513bn (of which 10% is international), and typically, no
government wants to allow foreign telecom companies into its
market unless its firms also have the opportunity to enter the
markets of its competitors. For that reason, the liberalisation of
telecommunications markets has moved to the world stage
under the auspices of the World Trade Organization (WTO),
which is co-ordinating proposals from 53 countries.
Negotiations were due for conclusion at the end of April 1996,
but the deadline was extended until mid-February 1997, when a
deal was finally concluded. The stakes are high: the Institute for
International Economics estimates that a global telecom accord
would save world consumers some $1,000bn over the next 12
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INTERNATIONAL BUSINESS MANAGEMENT

service.
The US is the largest player with revenues around one third of
the world total, and a global accord could not be reached
without it. The main US complaint has been that its offers of
opening the US market were not matched by other countries,
which would put its telecom companies at a disadvantage. For
example, the US wanted to be able to restrict international
services provided by foreign operators which enjoy a monopoly
in their home market, along with a similar complaint about lack
of reciprocity in the satellite market.
The deal, which was eventually struck, by 69 countries had the
following key points:
It gives U.S. and foreign companies market access to offer a
variety of telecommunications services; it ensures that these
companies can acquire stakes in foreign telecommunications
firms; and it adopts regulations to promote competition.
This new accord should be seen as a companion to the 1996
Information Technology Agreement which committed a similar
group of countries to an emphatic liberalization of the IT
industry. In the case of telecoms, this 1997 deal meant that the
access of US companies to the top 20 telecom markets in the
world went up from 17% to virtually 100%. In particular, this
deal opened up potentially lucrative, fast-growing markets in
Southeast Asia, Latin America and Africa, while also and
providing some enforcement teeth.
Singapore is one of the few countries in Asia which fully accepts
that its future as a world trading centre will depend on the
efficiency of its telecommunications and IT sectors. Singapore
Telecom is probably strong enough a company to survive in
this more competitive world. However, it is clear that a number
of other countries in the region have signed up rather less
enthusiastically. Almost certainly their citizens will benefit from
a speeding of price declines in telecommunications costs and
from a greater variety of services which would have come to
them through established telecoms monopolies. On the other
hand it is going to be difficult for many of the smaller and less
entrepreneurial regional telecommunications companies to
maintain their independence.
Some of them will be swept away, but many of them could be
included in the three broad alliances which are developing:
Notes:

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