Regulatory competition is when governments compete to attract businesses by offering different economic environments with varying levels of rules and regulations. This can be between states, regions, or countries, and is often created through law. Different types of regulations come from corporate, labor, tax, and environmental laws, and can vary across industries. The level of regulatory competition depends on the type of economy a nation desires, with free markets allowing for more competition. Companies can engage in regulatory competition by hiring lobbyists and making contributions to pro-business politicians.
Regulatory competition represents two or more governments trying to provide economic environments to attract business. Most governments have different rules for companies operating in various industries. Some can be highly restrictive and require companies to go through a lot of processes to operate. Others may negotiate less 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 for a nation to create regulatory competition. Courts and elected legislators are the two main groups that create or enforce the laws of a nation. Through this basic construct, there are corporate rules that govern the business environment. Most laws apply to all businesses in an area, although smaller businesses may opt out of specific rules for large organizations. Courts are usually the ones responsible for enforcing the law; legislators may 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 establish regulations for the employees a company hires to complete business tasks. Tax law covers the money a company must pay on its earnings or other business activities. Environmental law typically involves the natural environment around a company; governments seek to avoid excessive damage to the environment by companies.
Most economic environments have different regulations for different types of businesses. Banking, insurance, energy production and construction are some examples. The regulations, present here, try to reach a normal standard for all companies operating in a specific environment. Regulatory competition across industries often determines where a company chooses its initial place of business.
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 markets. Command economies have excessive government regulations, reducing companies’ ability to do business. Free market economies are much freer in terms of personal economic activity. There are many levels of regulatory competition in free markets as countries seek to create distinct advantages to attract business.
In free or mostly free markets, companies can often engage in regulatory competition. Hiring lobbyists and making contributions to pro-business politicians allows for the creation of a freer market. This increases the nation’s ability to secure investment from outside sources, as companies will have more opportunities to succeed. The reverse is also true when companies try to enter the regulatory environment by proxy. Businesses may pursue restrictive regulations that limit competition from other businesses.
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