Global Policy Forum

By Gustavo Capdevila

The boom in cross-border mergers and acquisitions that marks the current world economy harkens back to the process that radically transformed the industrial structure of the United States in the late 1800s, says a United Nations Conference on Trade and Development (UNCTAD)report published Tuesday.

Similar to the phenomenon in the United States, which favoured the development of a national market and production system, the current dynamic could be a foretaste of a global market of enterprises and the birth of an international system of production, says the UN agency. This potential market in which companies are bought and sold would complement the growing regional or global markets for goods and services - such is the diagnosis UNCTAD has formulated in its ''World Investment Report 2000: Cross-Border Mergers and Acquisitions and Development.''

The UNCTAD study concludes that, given this similarity, the international community must ensure fair play in competition and prevent the formation of monopolies, as the United States did in 1890 with the Sherman Anti-Trust Act. One of the largest and most significant waves of mergers and acquisitions (M&As) in history occurred in the late 19th century in the United States, reaching its peak between 1989 and 1902. A group of US companies - representing half of the country's productive capacity - led the M&A process, giving rise to the new firms that would represents big business in the 20th century, such as National Biscuit (Nabisco), US Steel and International Harvester.

Many of the conditions that favoured the US dynamic in the 19th century are evident today worldwide, says the UNCTAD report. In the technological arena, the US experience took place after crossing the threshold of a transformation highlighted by the development of steam engines, railroads and the telegraph, as well as a peak in electrical engineering and heavy manufacturing. These innovations reduced the costs of information and of transportation, with positive consequences for production processes through economies of scale.

This runs parallel to the events of the 1980s and 1990s, which were also characterised by major technological changes. Declining transportation and communications costs, along with improved telecommunications and the arrival of the Internet, are driving the market expansion and the creation of international production systems, according to UNCTAD. As far as financial markets, the late 1800s saw the arrival of new forms of financing investments. Investment banks, especially those dedicated to funding railroads, committed themselves to promoting industrial development.

At the same time, stock markets turned into important institutions for providing financial backing for industrial development projects. In the current era, the radical liberalisation of capital flow has been fundamental for the international financing of mergers and acquisitions. With respect to government regulations, the Sherman Anti-Trust Act was passed in response to widespread anti-competitive collusion between manufacturers in many industries in the last quarter of the 19th century.

The complicity among companies occurred first through informal agreements on prices and output, and then were formalised as trade association cartels. The UNCTAD report does not mention any such anti-competitive wave in reference to the current financial dynamic. The recent boom in M&As was made possible by the liberalisation around the world of foreign direct investment and of trade regimens, says the document. Deregulation and privatisation have also played a key role in creating the current circumstances as they created more space for M&A's and facilitated the organisation of international systems of production.

Rubens Ricupero, UNCTAD Secretary-General, affirmed that the most important political instrument in the current process is competition policy because mergers and acquisitions can pose serious threats to free and fair competition. The search for greater market share and market domination is a central characteristic of current business behaviour, according to UNCTAD.

''In the new knowledge-based economy, the search for market power - or even monopoly - is accentuated by the nature of the costs of knowledge-based production,'' says the UN agency. UNCTAD backs up this observation by citing Lawrence Summers, Deputy Secretary of the United States Treasury Department, who said ''the constant pursuit of monopoly power becomes the central driving thrust of the new economy.''

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