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What Is Regulatory Competition?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 07 July 2014
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Regulatory competition represents two or more governments that attempt to offer economic environments in order to attract business. Most governments have different rules for businesses operating in various industries. Some may be highly restrictive and require companies to go through many processes in order to operate. Others may trade fewer regulations for a freer-operating environment. Regulatory competition can be between states, regions, or countries, depending on the scope of a company’s operations.

Law is often the most common way a nation creates regulatory competition. Courts and elected lawmakers are the two major groups that create or enforce a nation’s laws. Through this basic construct, corporate rules exist that govern the business environment. Most laws apply to all businesses within an area, although smaller businesses may opt out of specific rules for large organizations. Courts are usually the universal enforcer of law; lawmakers can vary by state, region, or country, giving rise to regulatory competition.

Different types of regulations come from the law. The first — corporate law — was mentioned above; this governs all business practices. Labor laws provide regulation for the employees a company hires to complete business tasks. Tax law covers the monies a business must pay on their earnings or other business activities. Environmental law typically involves the natural environment around a business; governments seek to prevent excessive damage to the environment from businesses.

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Most economic environments have different regulations for different business types. Banking, insurance, energy production, and construction are a few examples. The regulations, which are present here, attempt to achieve a normal standard for all businesses operating in a particular environment. The regulatory competition among industries often dictates where a company chooses its starting business location.

The type of economy a nation desires typically governs the level of regulatory competition inherent in the environment. The two most common bookends for national economies are command and free market. Command economies have excessive government regulations, reducing the ability for companies to do business. Free market economies are much freer in terms of personal economic activity. Many levels of regulatory competition exist in free markets as countries look to create distinct advantages for attracting businesses.

In free or mostly free markets, companies can often involve themselves in regulatory competition. Hiring lobbyists and making contributions to pro-business politicians allow for the creation of a freer market. This increases the ability for nations to achieve investment from outside sources as companies will have more opportunity for success. The reverse is also true when companies attempt to enter the regulatory environment by proxy. Companies can seek restrictive regulations that limit competition from other businesses.

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