“The transition to digitalization has made small and medium-sized enterprises even more vulnerable”

“The transition to digitalization has made small and medium-sized enterprises even more vulnerable”
02.04.2021 143

The BRICS Competition Law and Policy Centre has become a partner of the UNCTAD-UNECE Regional Dialogue on the Role of Competition Policy in the Economic Recovery of Micro, Small and Medium Enterprises after the COVID-19 pandemic.

The United Nations Conference on Trade and Development (UNCTAD) is the key UN General Assembly body on trade and development issues. Assessing the impact of the COVID-19 pandemic, UNCTAD is working with the European Economic Commission has launched a series of online dialogues to assess the health of micro, small and medium-sized enterprises (MSMEs). One of the first countries where the “dialogue” took place was Russia, and the HSE division – the BRICS Competition Centre– acted as the intellectual and organizational partner of the event. Especially for the Regional Dialogue, the Center's experts prepared a report “SMEs and Digitalization: Antitrust Regulation and Prospects for the CIS Region”, dedicated to the study of the opportunities provided by digitalization to small and medium-sized enterprises and the problems they face on the thorny “digital” path. The discussion was attended by the heads and representatives of competition authorities and relevant ministries of the CIS and the European Union, business associations, experts from international organizations.
Tatiana Krylova, Head of the Entrepreneurship Development Department of UNCTAD, opening the conference, noted that the online dialogue is being carried out as part of the UN framework document in response to the challenges of the COVID-19 pandemic. One of the areas of work on this document is strengthening the small business sector and improving the access of enterprises to sales markets.

Teresa Moreira, Head of Competition Policy and Consumer Protection at UNCTAD, said that helping developing countries in a pandemic can only be done by analyzing the impact of COVID-19 on the economy. Supply chains were disrupted after supply disruptions – and small and medium-sized enterprises suffered the most. The antitrust policy has all the necessary mechanisms to support MSMEs.

Alexei Ivanov, Director of the Centre and Director of the HSE-Skolkovo Institute for Law and Development, noted the transition of small businesses to the digital market. He noted that it is critical to ensure the viability of small and medium-sized enterprises, given their importance to the economy, and the transition to digitalization has made MSMEs even more vulnerable. Information and capital are concentrated in the hands of large digital platforms, which means market power too. Such processes require a response at the political level, including a radical review and addition of regulatory measures. “We are grateful to UNCTAD that they started this dialogue and attracted so many participants. Antitrust authorities today are focused on proactively promoting competition, not just retrospective protection. And mutual support and close integration of the work of antimonopoly agencies will help to maintain the dynamics of competition”, said Alexey.
Rachel Burgess, UNCTAD consultant, supported Alexey, noting a clear trend towards digitalization and an increase in the share of digital businesses. At the same time, many SMEs were unable to survive in the current conditions, even despite the support measures. “We clearly see an increase in the antitrust authorities in relation to MSMEs and we hope that this trend will not subside,” she said. In addition, it is important to receive clear recommendations and instructions from the regulators during the post-crisis economic recovery.
A number of experts and speakers talked about new trends in pricing policy – significant price fluctuations. Some countries have revised their price regulation policies in this regard. It is likely that in the post-crisis period some emergency measures will be lifted. Serik Zhumangarin, Chairman of the Agency for the Protection and Development of Competition of the Republic of Kazakhstan, said that in order to support business in the face of galloping price increases, “long” funding, access to raw materials and transport infrastructure are needed. The second important aspect is working with barriers. In this regard, the paradigm is changing: the antimonopoly body should become a body for supporting entrepreneurship in the country. From quantitative measures business support, it is necessary to move to qualitative structural changes.

According to Andrey Tsyganov, Deputy Head of FAS Russia, in 2020 the Federal Antimonopoly Service focused on overcoming competition problems caused by the coronavirus pandemic, including those related to price increases. FAS Russia has also formed a set of supporting institutional measures in addition to those announced by the President and the Government of the Russian Federation.
SMEs and digitalization: antitrust regulation
In its report, the Center noted the importance of dialogue between government officials, antitrust authorities, trade organizations and representatives of SMEs, not only to discuss the impact of COVID-19 on SMEs in the region, but also to develop interaction between institutions, exchange best practices, create a solid foundation for mutual support and harmonization approaches.
For SMEs, the presence in the market of companies with significant levels of market power can be a significant barrier to market entry. First, the activity of digital platforms in transactions of economic concentration can significantly reduce the number of startups. In a recent study, leading economists and researchers at the University of Chicago concluded that large acquisitions by digital platforms in some sectors of the digital economy resulted in significant decrease in the rate of investment in startups in the same sectors. The logical consequence of this is a decrease in the rate of innovation on the part of small companies and a general slowdown in innovation in the market.

In addition, as bargaining power in digital markets is greatly enhanced by the concentration of data in the hands of dominant gatekeeper platforms, lack of access to databases becomes an additional negative factor for digital companies with fewer resources. The autonomy of SMEs is further threatened by so-called “predatory takeovers”, which are often seen in markets relying on innovation and R&D. Large digital platforms engage in strategic acquisitions to consolidate their market power and expand into upstream and downstream markets. Quite often, these platforms buy their direct smaller competitors, which may threaten their dominant position.

The digital economy of Russia has been growing steadily in recent years, and it is developing not only due to the growth of several large digital platforms. Research conducted by RVC in 2020 lists 50 promising micro, small and medium digital companies that are working on end-to-end technologies, neurotechnology and artificial intelligence systems, big data, virtual reality, and are showing good growth rates. Large digital companies – Yandex, Sberbank and Mail.ru (as well as Tinkoff and MTS) – initially emerged in different markets, but recently they began to capture adjacent and completely new industries, competing with each other. These companies are currently in the public eye and expert attention, as they demonstrate a gradual shift towards an ecosystem model of functioning and, therefore, may pose risks to competition.

There are other vulnerabilities as well. For example, companies that own Internet search, including Google, Baidu, Yandex, are the “entry point” to the Internet search market for other entities, including SMEs. Recent antitrust cases and ongoing investigations have shown that gatekeepers who own search engines abuse their dominant position in online search markets in Europe, the United States, India, Russia and several other countries, thereby discriminating against small companies. SMEs from different countries that provide vertical search services, that is, search by specific product categories (for example, on the websites cian.ru, auto.ru, leguide.com, twenga.fr, foundem.co.uk, etc.), complained to antitrust authorities over the past decade. IT giants artificially give priority to their vertical Internet search services: companies promote only their own services through interactive responses (“sorcerers”) and do not give such an opportunity to others.

Anna Pozdnyakova, one of the report's authors, researcher at the BRICS Competition Centre, concludes: “Given the protracted crisis associated with the COVID-19 pandemic, the dialogue between competition authorities and small and medium-sized business development authorities seems to be very relevant for exchanging views on support for the most vulnerable economic entities, which are small and medium-sized enterprises. In a report prepared by the International Center for Competition Law and Policy BRICS, we note that today one of the most important challenge for small and medium-sized enterprises is digitalization. Digital platforms do not always set fair “rules of the game”, which poses a significant threat to small and medium-sized businesses. We believe that the antimonopoly and anti-monopoly authorities the development of SMEs needs to pay close attention to the unfair practices of digital giants and develop special measures aimed at supporting and developing small and medium-sized businesses.”

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