Tuesday, December 18, 2007

Regulation and investment in telecommunications

Analysing the Relationship Between Regulation and Investment in the Telecom Sector

ESMT: Dr. Hans W. Friederiszick, Prof. Michał Grajek & Tseveen Gantumur

This expert report has been initiated and supported by Deutsche Telekom AG.

This report analyses the relationship between entry regulation and infrastructure investment in the telecommunication sector, contributing to the ongoing debate on how to reshape the regulatory framework for eCommunications. The empirical analysis is based on a comprehensive data set of investment data covering 180 fixed-line and mobile operators in 25 European countries over 10 years and employs a newly created indicator measuring regulatory intensity in the various countries.

Overall, the results of this report highlight the importance of using a robust empirical approach if econometric evidence is used for policy advice. Opposite to what is derived from simplified assessments we do not find any indications that entry regulation has a positive impact on investment. On the contrary and in line with the theoretical literature, in the fixed-line sector regulators are faced with an important trade-off, where we find a significant negative effect of entry regulation on the incentives of entrants to invest. Promoting market entry by means of regulated access might have the desired short-term effect of lower prices and more consumer surplus, but at the same time undermines the incentives of entrants to invest in their own infrastructure thereby compromising on the long-term goal to establish facilities-based competition.

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