Abstract
The main objective of this paper is to look at the effects of mandated sharing on investment in the telecommunications sector in Latin America and the Caribbean (LAC). Given the relevance of promoting suitable regulatory conditions to stimulate the huge investments required for the region to close its digital divide, this paper intends to provide inputs for the design of regulatory frameworks, particularly towards finding out the optimal levels of intervention. Our results suggest that sharing obligations have been linked with lower investment intensity in the region. Those results are robust to the addition of control variables which may also have an incidence on investment decisions, and to the treatment of possible endogeneity in the estimates. Further checks provide specific insights about the negative effect of mandated co-location obligations and mandated infrastructure sharing. As for local loop unbundling, it was found to have a negative effect on investment intensity only if introduced jointly with price regulation. As a result of the findings reported in this paper, we suggest that regulatory bodies in LAC should pursue light and flexible approaches in order to promote the much-needed investments. In particular, sharing decisions should be the result of voluntary agreements between those concerned, not because of imposed mandates.
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Notes
Aghion et al. (2005) distinguish between the “escaping competition effect”, in which competition encourage investments, and the “Schumpeterian effect” which suggests that investment will only take place if returns are sufficiently large, situation which takes place when there are no multiple competitors. As a result, the overall effect of competition on investment is expected to present the form of an inverted-U.
As stated by Blanchard and Giavazzi (2003), markups of prices over costs are affected in these scenarios.
Proposing a different scope, Gutiérrez (2003) examined the effect of regulation on telecom performance of 22 countries of Latin America during 1980–1997. His analysis did not consider the impact on investment, which is our focus, relying instead in other indicators of sector performance. He found that sound regulatory governance in telecommunications had a positive impact on network expansion and efficiency, in both the static and dynamic specifications. On the other hand, openness of markets to competition and divestment of former state-owned telecom operators also contributed positively to improve sector performance.
Argentina, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominica, Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago, Uruguay, Venezuela.
As for the Latin America region, Gutierrez (1999) proposed a regulatory framework index, however, his focus was more oriented to measure differences in the quality of the regulator (in terms of autonomy, accountability, clarity of roles) rather than in regulation intensity.
Information available in cet.la and CAF (2017).
A limitation of the available data is that does not distinguish between investment from private and public operators, which compete in some LAC countries. It is well known that investment decisions by public enterprises may respond to different objectives than those from private sector. This issue will be further discussed in Sects. 5 and 6.
Due to data availability, the time-period of the panel estimates in our sample is reduced in most cases to 5–6 years.
Differencing procedure removes the country-fixed effects. Even if theoretically is possible to include time-invariant regressors in System-GMM (in the levels equation) Roodman (2009) stipulates that it is still a mistake to introduce explicit fixed-effects dummies, for they would still effectively cause within-groups transformations which causes bias in the estimation, especially for short time-dimension panels as in our sample.
As pointed out by Arellano and Bover (1995), a weakness of the original Arellano and Bond (1991) estimator, which differentiates the equation in order to remove fixed-effects, is that lagged levels are often poor instruments for first differenced variables. For that reason, their proposed modification includes lagged levels as well as lagged differences. Their estimator augments Arellano–Bond by building a system of two equations -the original and the transformed one- is known as System-GMM.
We will follow Alesina et al. (2005), by using only second-lags as instruments.
Given that public investment decisions may respond to different objectives than that of private operators, we can suppose that it should be less sensible to regulatory obligations as those exposed in this paper. This situation does not invalidate our results. On the contrary, including in our series public-investment can be interpreted as an attenuation bias of the effect of imposing mandates on investment decisions.
We also performed further robustness checks by adding as a control the Regulatory Regime Index from ITU–ICT Regulatory Tracker, as a proxy for overall regulation, with unchanged results (available upon request).
We thank an anonymous referee for raising up this point.
Our estimation results, available upon request, denote that these instruments do not have a direct incidence on investment after controlling for the Mandated Sharing Index.
Appendix available in Jung (2019): https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455862.
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Jung, J. Mandated sharing and telecom investment in Latin America and the Caribbean. J Regul Econ 56, 85–103 (2019). https://doi.org/10.1007/s11149-019-09391-y
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DOI: https://doi.org/10.1007/s11149-019-09391-y