UPSC Prelims 2012·CSAT·Reading Comprehension·Passage Comprehension

Read the following passages and answer the items that follow each passage. Your answers to these items should be based on the passages only. The need for Competition Law becomes more evident when foreign direct investment (FDI) is liberalised. The impact of FDI is not always pro- competitive. Very often FDI takes the form of a foreign corporation acquiring a domestic enterprise or establishing a joint venture with one. By making such an acquisition the foreign investor may substantially lessen competition and gain a dominant position in the relevant market, thus charging higher prices. Another scenario is where the affiliates of two separate multinational companies (MNCs) have been established in competition with one another in a particular developing economy, following the liberalisation of FDI. Subsequently, the parent companies overseas merge. With the affiliates no longer remaining independent, competition in the host country may be virtually eliminated and the prices of the products may be artificially inflated. Most of these adverse consequences of mergers and acquisitions by MNCs can be avoided if an effective competition law is in place. Also, an economy that has implemented an effective competition law is in a better position to attract FDI than one that has not. This is not just because most MNCs are expected to be accustomed to the operation of such a law in their home countries and know how to deal with such concerns but also that MNCs expect competition authorities to ensure a level playing field between domestic and foreign firms. According to the passage, in which situation a foreign investor gets to dominate the relevant domestic market? 1) When multinational companies get accustomed to domestic laws. 2) By establishing joint ventures with domestic companies. 3) When affiliates in a particular market/sector lose their independence as their parent companies overseas merge. 4) When foreign companies lower the cost of their products as compared to that of products of domestic companies. Which of the statements given above are correct?

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  1. AOnly 1 and 2
  2. BOnly 2 and 3Correct
  3. COnly 1, 2 and 3
  4. D1, 2, 3 and 4

Explanation

The correct answer is B because statements 2 and 3 are directly supported by the text as scenarios where a foreign investor gains a dominant position or eliminates competition. Statement 2 is correct because the passage explicitly states that by establishing a joint venture with a domestic enterprise, a foreign investor may substantially lessen competition and gain a dominant position in the market. Statement 3 is correct because the passage describes a scenario where the merger of parent companies overseas causes their previously competing domestic affiliates to lose independence. This virtually eliminates competition and allows for artificial price inflation, effectively creating a dominant market position. Statement 1 is incorrect because the passage mentions MNCs being accustomed to competition laws as a reason why they are attracted to a country, not as a method by which they gain dominance over the market. Statement 4 is incorrect because the passage suggests that dominant foreign investors charge higher or artificially inflated prices, rather than lowering costs to compete with domestic companies.
Reading Comprehension: Read the following passages and answer the items that follow each passage. Your answers to these items should be based o
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