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The evaluation of innovation in merger control: a comparison between china and other jurisdictions

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Abstract

There are two models with which to evaluate a merger’s potential side-effects on innovation: the exogenous model and the endogenous model. The exogenous model takes innovation as an exogenous element and independently assesses this element. The endogenous model considers innovation as a competition parameter and involves it in the analysis of the competition mechanism. The key purpose of the Anti-Monopoly Law of the PRC is the “protection of fair competition”. To achieve this legislative purpose, China applies the endogenous model, appraising the concrete harm to the innovation parameter of the competition mechanism. The Chinese competition authority determines whether to evaluate harm to innovation competition based on the relevant market, merging parties, attributes of the transaction and other factors according to the specific case. Unilateral effects in horizontal mergers and input foreclosure in vertical mergers are the main theories applicable to innovation competition harm. In practice, the Chinese competition authority may differentiate between factual competition and potential competition, as well as product innovation and industry innovation, on a case-by-case basis. This paper argues that the competition authority should properly handle the uncertainty in assessing innovation competition, and fully respect the efficiency defence raised by notifying parties.

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Notes

  1. During the Two Sessions held each year, the Premier delivers the Government Working Report to the National People’s Congress, retrospectively covering the previous year, the plan for the coming year, the construction of the government, and other matters. On 5 March 2022, Premier LI Keqiang, on behalf of the State Council, delivered the 2022 Government Working Report to the Fifth Session of the Thirteenth National People’s Congress.

  2. In this paper, merger, acquisition, M&A and transaction are used inter-changeably, to all of which merger control rules apply.

  3. Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, OJ C 31, 5.2.2004,  https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2004:031:0005:0018:EN:PDF . Accessed 6 August 2022 (EU Horizontal Merger Guidelines).

  4. Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings, OJ C 265, 18.10.2008, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52008XC1018(03)&from=DA. Accessed 6 August 2022 (EU Non-Horizontal Merger Guidelines).

  5. Horizontal Mergers Guidelines (08/19/2010), https://www.justice.gov/atr/horizontal-merger-guidelines-08192010. Accessed 6 August 2022.

  6. Merger Assessment Guidelines, CMA 129, 18 March 2021,  https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1051823/MAGs_for_publication_2021_--_.pdf. Accessed 6 August 2022.

  7. 17th ASCOLA Conference, Main topic: Competition and Innovation in Digital Market, 30 June to 2 July 2022, https://ascola.org/wp-content/uploads/2021/11/Ascola-Call-for-Papers-2022.pdf. Accessed 6 August 2022.

  8. United States Federal Trade Commission, Thoratec Corporation, and HeartWare International, Inc. ,  https://www.ftc.gov/legal-library/browse/cases-proceedings/0910064-thoratec-corporation-heartware-international-inc-matter. Accessed 6 August 2022.

    Note that the parties terminated the proposed acquisition, after which the US FTC dismissed the Administrative Complaint without filing a motion for a preliminary injunction in the federal court.

  9. Inge Graef & Francisco Costa-Cabral, To Regulate or not to Regulate Big Tech, 1 Concurrences 24, 24–29 (2020).

  10. Bundeskartellamt, Innovations—Challenges for Competition Law Practice, November 2017, https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Schriftenreihe_Digitales_II.pdf?__blob=publicationFile&v=3. Accessed 6 August 2022.

  11. Ariel Ezrachi & Maurice E. Stucke, Digitalisation and its Impact on Innovation, August 2020,  https://ec.europa.eu/info/publications/digitalisation-and-its-impact-innovation_en . Accessed 6 August 2022.

  12. BRICS Competition Law and Policy Centre, Digital Era Competition: A BRICS View, 2019, p. 318.

  13. EUROPEAN COMMISSION, Case M.7932—Dow/Dupont, MERGER PROCEDURE REGULATION (EC) 139/2004, Commission decision of 27 March 2017.

  14. United States v. Sabre Corp., No. 1:19-cv-01548-LPS (Delaware District Court).

  15. CMA, Completed acquisition by Facebook, Inc (now Meta Platforms, Inc) of Giphy, Inc.: Final report, 2021.

  16. James Niels Rosenquist, Fiona M. Scott Morton & Samuel N. Weinstein, Addictive Technology and its Implications for Antitrust Enforcement, 100 North Carolina Law Review 431, 478–479 (2022).

  17. Such as: YANG Dong, Discussion on the Re-Construction of Anti-Monopoly Law: Response to Challenges Raised by the Digital Economy, China Legal Science, Issue 3, 2020, p. 212; FANG Xiang, Discussion on the Innovation Value Purpose of Anti-Monopoly Law in the Digital Economy, Law Science, Issue 12, 2021, pp. 162–176; WANG Lei, Position and Achievement of Innovation Purpose in Anti-Monopoly Law, Journal of CUPL, Issue 1, 2022, pp. 173–185.

  18. Enacted in 2007 and effective as of 2008.

  19. National People’s Congress, Decision of the Standing Committee of the National People’s Congress to Amend the Anti-Monopoly Law of the PRC, 24 June 2022,  http://www.npc.gov.cn/npc/c30834/202206/e42c256faf7049449cdfaabf374a3595.shtml. Accessed 6 August 2022.

  20. State Administration for Market Regulation (SAMR), Notice of the SAMR to Solicit Public Opinions on the Provision on Review of Concentrations of Business Operators (Draft for Public Opinions Solicitation), 27 June 2022,  https://www.samr.gov.cn/jzxts/tzgg/zqyj/202206/t20220624_348145.html. Accessed 6 August 2022.

  21. Provisions on Review of Concentrations of Business Operators (Draft to Solicit Public Opinions), Article 14(1)(b).

  22. Ibid, Article 20(c).

  23. Ibid, Article 30(c).

  24. Ibid, Article 33(2).

  25. Seagate Technology/Hard Disk Drive Business of Samsung MOFCOM Conditional Clearance Notice [2011] No 90 of 12/12/2011.

  26. Bayer/Monsanto MOFCOM Conditional Clearance Notice [2018] No 31 of 13/03/2018.

  27. In China, systematic research into mergers’ effects on innovation is limited, such as GUO Yuxin, Research on Innovation Harm in EU Merger Control Practice, Science & Technology Progress and Policy, Issue 2, 2021, pp. 96–103. An example of mergers’ influence on innovation is WANG Jian and JIANG Houchen, Internet Platform Merger Control: Risks, Challenges, and Responses, Journal of Jiangnan University (Humanities & Social Sciences), Issue 5, 2021, pp. 89–90.

  28. Literature in English dates back to the early research of Schumpeter and Arrow, while more recent research includes but is not limited to: P. Aghion et al., Competition and Innovation: An Inverted-U Relationship, 120 Quarterly Journal of Economics 701, 701–728 (2005); and Shapiro, C., Competition and Innovation: Did Arrow Hit the Bull’s Eye?, The Rate and Direction of Inventive Activity Revisited, J. Lerner & S. Stern (eds.), University of Chicago Press (2012).

  29. Richard J. Gilbert & Hillary Greene, Merging Innovation into Antitrust Agency Enforcement of the Clayton Act, 83 The George Washington Law Review 1919, 1919–1947 (2015).

  30. Please note that monopoly agreement and abuse of dominance do not fall within the discussion scope of this paper. It is worth mentioning that the SAMR has explored analysing innovation in its investigations of abuse of dominance cases, such as the “either-or” provisions imposed by Alibaba and Meituan.

  31. Of course, innovation may also trigger negative values, such as predatory innovation. For more details, please see Thibault Schrepel, Predatory Innovation: The Definite Need for Legal Recognition, 21 SMU Science and Technology Law Review 19, 19–73 (2018). Ezrachi and Stucke categorize innovation as either positive, negative, or mixed innovation, see Ariel Ezrachi & Maurice E. Stucke, Digitalisation and its Impact on Innovation, European Commission, 2020, p.7.

  32. Paul Nihoul (ed.) & Pieter Van Cleynenbreugel (ed.), The Roles of Innovation in Competition Law Analysis (ASCOLA Competition Law series), Edward Elgar Publishing (28 December 2018).

  33. Colomo divides European competition law’s assessment of innovation, not limited to merger control, into the direct and indirect models. For more details, please see Pablo Ibáñez Colomo, Restrictions on Innovation in EU Competition Law, 41 European Law Review 201, 201–219 (2016).

  34. With regard to the relationship between competition and innovation, the opinions of Schumpeter and Arrow are the most representative. Schumpeter held that monopoly triggers innovation, while Arrow opined that competition encourages innovation. Shapiro and Aghionn put forward the “reverse U” theory, arguing that competition promotes innovation up to a certain level, after which it would obstruct innovation. For more details, please see P. Aghion et al., Competition and Innovation: An Inverted-U Relationship, 120 Quarterly Journal of Economics 701, 701–728 (2005). Nevertheless, others challenge the applicability of “reverse U” theory to merger control. Please see G. Federico, G. Langus, & T. Valletti, A Simple Model of Mergers and Innovation, 157 Economic Letters 136, 136–140 (2017).

  35. Such as CHEN Hongwen, HU Donglan, & LI Yongjian, Anti-Monopoly in the Platform Economy and Online Platform's Killer Acquisition, Journal of Dongbei University of Finance and Economics, Issue 1, 2021, p. 82.

  36. Marc Bourreau & Alexandre de Streel, Big Tech Acquisitions: Competition & Innovation Effects and EU Merger Control, Centre on Regulation in Europe, 2020.

  37. DOJ Complaint, U.S. V. HALLIBURTON CO. AND BAKER HUGHES INC., 6 April 2016.

  38. n (25).

  39. West Digital/ Hitachi MOFCOM Conditional Clearance Notice [2012] No 9 of 02/03/2012.

  40. NXP/Freescale MOFCOM Conditional Clearance Notice [2015] No 64 of 27/11/2015.

  41. Ibid.

  42. Danaher/Medical Life Science Biopharmaceutical Business of GE SAMR Conditional Clearance Notice of 28/02/2020.

  43. “Encouragement of Innovation” can also be found in patent law, and IPR-related laws and regulations.

  44. As shown in EU Horizontal Merger Guidelines.

  45. As shown in EU Non-Horizontal Merger Guidelines.

  46. A comparison of the market status post-merger and the market status had the merger not happened.

  47. Ioannis Kokkoris, Innovation Considerations in Merger Control and Unilateral Conduct Enforcement, 8 Journal of Antitrust Enforcement 56, 56–85 (2020).

  48. The Global Antitrust Institute, Report on the Digital Economy, 2020, p. 1340. World Economic Forum White Paper, Competition Policy in a Globalized, Digitalized Economy, 2019, p. 12.

  49. Merger Assessment Guidelines, 2021, p. 13.

  50. Becton, Dickinson and Company/C. R. Bard MOFCOM Conditional Clearance Notice [2017] No 92 of 27/12/2017.

  51. CMA, Completed acquisition by Facebook, Inc (now Meta Platforms, Inc) of Giphy, Inc.: Final report, 2021, pp. 125–126.

  52. Ibid.

  53. Strategic market position refers to the enduring market power enjoyed by a company over a strategic bottleneck market, which confers on the company the power to control other companies’ market entry.

  54. Furman et al., Unlocking digital competition, Report of the Digital Competition Expert Panel, 2019, p. 95.

  55. The US DOJ brought the case to the Delaware District Court, requesting the court to enjoin the acquisition. The court dismissed the complaint and held that (a) Sabre and Farelogix are not competitors; and (b) Judge Stark held that the U.S. Department of Justice failed to identify a proper relevant market. For more details, please see: United States v. Sabre Corp., 452 F. Supp. 3d 97, 148–149 (D. Del. 2020), vacated as moot, No. 20-1767, 2020 U.S. App. LEXIS 26973, at *2–3 (3d Cir. July 20, 2020).

  56. CMA, Anticipated acquisition by Sabre Corporation of Farelogix, Inc.: Final Report, 2020.

  57. n (39).

  58. For the importance of innovation in the business model, please see: Rachel S. Tennis & Alexander Baier Schwab, Business Model Innovation and Antitrust Law, 29 Yale Journal on Regulation 307, 307–351 (2012).

  59. Current merger control rules cannot effectively screen out and provide the legal basis for scrutinizing a “pre-emptive acquisition” or “killer acquisition”, and this has challenged the traditional analysis structure, application of ToHs, etc. Still, the particular attributes of the transaction should not be given undue attention, while the most basic logic of anti-monopoly law should be respected.

  60. Nevertheless, please be please note that being acquired could also bring negative incentives. More specifically, the start-up undertakes R&D to maximize the acquisition value, instead of innovative value. For more details, please see: Marc Bourreau & Alexandre de Streel, Big Tech Acquisitions: Competition & Innovation Effects and EU Merger Control, Centre on Regulation in Europe, 2020, pp. 10–11.

  61. OECD, Executive Summary of the Hearing on Competition Economics of Digital Ecosystems, 2020.

  62. Diana Moss, Gregory T. Gundlach & Riley T. Krotz, Market Power and Digital Business Ecosystems, American Antitrust Institute Paper, 2021, p. 4.

  63. USA v. Visa Inc. et al., No. 3:20-cv-07810 (California Northern Court).

  64. Sai Krishna Kamepalli, Raghuram Rajan, & Luigi Zingales, Kill Zone, National Bureau of Economic Research Working Paper No. w27146, 2020; H. Koski, O. Kässi, & F. Braesemann, Killers on the Road of Emerging Start-Ups: Implications for Market Entry and Venture Capital Financing, ETLA Working Paper No. 81, 2020.

  65. Theoretically, it is possible for the merged entity to foreclose upstream competitors through affecting rivals’ downstream sales volume, thus damaging upstream competitors’ R&D, to the detriment of upstream innovation competition.

  66. Intel/McAfee (Case COMP/M.5984) Commission Decision of 26/01/2011.

  67. Microsoft/Nokia Devices & Services Business MOFCOM Conditional Clearance Notice [2014] No 24 of 08/04/2022.

  68. Google/Motorola Mobile MOFCOM Conditional Clearance Notice [2012] No 25 of 19/05/2012.

  69. Microsoft/LinkedIn (Case COMP/M.8124) Commission Decision of 06/12/2016, sec Sect. 4.2.2—Foreclosure of competing providers of CRM software solutions.

  70. Merger Guidelines, 1982, p. 21.

  71. OECD, Concept of potential competition, OECD Competition Committee Discussion Paper, 2021, p. 9.

  72. Merger Assessment Guidelines, 2021, pp. 40–45.

  73. Such categorization is taken from the US 1982 Merger Guidelines and refers to the UK 2021 Merger Assessment Guidelines. In the Chinese context, “future potential competition” is more uncertain than “actual potential competition”.

  74. China runs a mandatory notification mechanism in merger control, different from the voluntary notification mechanism in the UK. When the SAMR reviews a transaction, the transaction has not been implemented yet. It means that the anti-competitive effect has not manifest itself, if there is any. In this regard, the transaction’s anti-competitive effect is usually called “potential” anti-competitive effects. Please be alerted that “potential” anti-competitive effect in general merger control is different from the “potential” competition in concrete merger control cases. In other words, “potential” anti-competitive effects in general merger control context consist of harm to “actual competition” and “potential competition”.

  75. n (39).

  76. United Technologies/Rockwell Collins SAMR Conditional Clearance Notice of 23/11/2018.

  77. HUYA/DouYu SAMR Block Notice of 10/07/2021.

  78. FTC Complaint, Thoratec Corp. & HeartWare Int’l, No. 9339, 30 July 2009.

  79. Department of Justice, Applied Materials Inc. and Tokyo Electron Ltd. Abandon Merger Plans After Justice Department Rejected Their Proposed Remedy, 27 April 2015.

  80. Deutsche Börse/NYSE Euronext (Case COMP/M.6166) Commission Decision of 01/02/2012.

  81. Dow/DuPont (Case COMP/M.7932) Commission Decision of 27/03/2017.

  82. Mario Todino, Geoffroy van de Walle, & Lucia Stoican, EU Merger Control and Harm to Innovation—A Long Walk to Freedom (from the Chains of Causation), 64 The Antitrust Bulletin 11, 11–30 (2019).

  83. n (25).

  84. n (39).

  85. n (40).

  86. n (26).

  87. Ariel Ezrachi & Maurice E. Stucke, Digitalisation and Its Impact on Innovation, August 2020, p. 82 , https://ec.europa.eu/info/publications/digitalisation-and-its-impact-innovation_en . Accessed 6 August 2022.

  88. Lear, Ex-post Assessment of Merger Control Decisions in Digital Markets Final report (Document prepared by Lear for the Competition and Markets Authority), 2019, paras. I.152, I.160.

  89. Nicolas Petit, Innovation Competition, Unilateral Effects and Merger Policy, 82 Antitrust Law Journal 873, 873–919 (2019).

  90. European Commission, Competition Policy for the Digital Era, 2019, p. 4.

  91. Merger Assessment Guidelines, 2021, para. 5.20.

  92. Administrative Punishment Decision Imposed by the SAMR on Tencent’s Illegal Acquisition of China Music Corporation of 24/07/2021, GUO SHI JIAN CHU [2021] NO 67.

  93. n (77).

  94. EU Horizontal Merger Guidelines, para. 78.

  95. Marc Bourreau & Alexandre de Streel, Big Tech Acquisitions: Competition & Innovation Effects and EU Merger Control, Centre on Regulation in Europe, 2020, p. 19.

  96. Louis Kaplow, Efficiencies in Merger Analysis, 83 Antitrust Law Journal, pp. 557–619 (2021).

  97. TomTom/Tele Atlas (Case COMP/M.4854) Commission Decision of 14 May 2008.

  98. Bundeskartellamt, Innovations – challenges for competition law practice, November 2017, p. 27,  https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Schriftenreihe_Digitales_II.pdf?__blob=publicationFile&v=3.  Accessed 6 August 2022.

  99. Advanced Semiconductor Engineering/Siliconware Precision Industries MOFCOM Conditional Clearance Notice [2017] No. 81 of 24/11/2017,  http://fldj.mofcom.gov.cn/article/ztxx/201711/20171102675701.shtml.Accessed 24 July 2022.

  100. In this paragraph, the original and official decision illustrated that the market power of the merged entity would be strengthened, which also reflected potential innovation-related efficiency.

  101. “Promotion of innovation” is more appropriate than “encouragement of innovation”, considering the different legal mechanisms with respect to the AML and IPR legal systems.

  102. n (19).

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  1. Competition Research Center, University of Chinese Academy of Social Sciences, Beijing, China

    Wei Han

  2. Hong Kong Competition Commission, Hong Kong, China

    Yajie Gao

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Han, W., Gao, Y. The evaluation of innovation in merger control: a comparison between china and other jurisdictions. China-EU Law J 9, 73–95 (2023). https://doi.org/10.1007/s12689-023-00103-6

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