Andrew Leigh: Competition is the spice we need for a more dynamic economy

This is an edited transcript of a speech to be delivered by minister Andrew Leigh on ‘Startups, Upstarts and Competition’ at the International Small Business Summit in Melbourne on September 22. 

In the early 2000s, Portugal found itself languishing as one of the least business-friendly countries in the world. Starting a business in Portugal involved filling out around 20 forms, completing more than 10 procedures and stumping up €2,000 (A$3,300 approx.). In some cases, it could take up to 78 days to jump through all the hoops to complete the business registration process.

In 2005, Portugal’s Empresa na Hora reforms – which roughly translates to ‘business on the spot’ – started turning things around for the better. One-stop shops ‘drastically’ cut business registration time to less than an hour.

Like managerial talent, economic dynamism is not an easy concept to measure. Firm entry, hiring and investment decisions depend on many variables not to mention market conditions. In other words, it’s difficult to say whether policy decisions or other economic forces trigger changes. However, in Portugal’s case, researchers from the International Monetary Fund were able to examine the impacts of the reforms as the one-stop-shops were gradually rolled out to different districts.

They found that the ‘business on the spot’ reforms increased local business entry by 25% and increased employment by 4.8% per year in its first four years. About ‘60% of the increase in employment came from incumbent firms expanding their size, with most of the rise occurring among the most productive firms’.

The researchers concluded the Portuguese reforms not only reduced entry costs for firms but increased business competition. It shows the benefits of competition apply broadly. Like Portugal’s famous peri-peri sauce, competition is the spice we need for a more dynamic economy.

Creative destruction

Joseph Schumpeter’s notion of ‘creative destruction’ captures the edgier aspect of the spice. We all love creativity, but few of us relish destruction. The challenge is that new ideas often displace old ones.

The evolution of transport in this city is a useful example. In the 1880s, in the twilight era of Marvellous Melbourne, around 20,000 horses were stabled here. This created a need for a vast horse economy consisting of blacksmiths, ironmongers, saddlers and tack or feed merchants. Alongside them, the carriage and coach industry included builders, wheelwrights, trimmers and painters.

Then the motor car drove onto the scene. Motor vehicle ownership increased after World War II and by the 1950s horse-drawn traffic was all but gone. This forced those small traders and workers who’d serviced horses and carriages to reskill and adapt. That process often places enormous strain on a society but the ‘destructive’ side of ‘creative destruction’ also creates opportunities.

New Business Creation

New businesses are vital to a dynamic economy, so we should be alert to any signs that the rate of entrepreneurship is slipping. The catch is that the data don’t always tell the full story. The Australian Bureau of Statistics reports figures on the number of new Australian Business Numbers issued each quarter, but these figures do not necessarily reflect what most of us would think of as a ‘business’. A person who starts a restaurant needs an ABN, but so does a gig worker who delivers food for that restaurant through an online app.

To address this, the Australian Treasury has used longitudinal business data to analyse only employing businesses. That research suggests that there has been a slowdown in the rate of new business formation among companies with employees. The entry rate dropped from 13% in 2005‑06 to 11% in 2018‑19. However, because of a lag in producing the data used to analyse these trends, we do not have a good picture of new business formation in the post-COVID era.

Another way to analyse the data is to look at the age of business owners themselves. While innovators can be any age, any healthy economy needs its share of new entrepreneurs. Melanie Perkins and Cliff Obrecht started Canva in their early twenties. Ruslan Kogan started Kogan at age 23. At the same age, Scott Farquhar and Mike Cannon-Brookes started Atlassian.

Yet while the stories are inspiring, the data show a different picture. In 1976, 17% of business owners were aged under 30. In 2021, the figure was just 8%. Conversely, the share of business owners who are aged over 50 has risen from 30% to 47%. True, the age profile of the whole population has shifted in that period, but not so dramatically as the age profile of business owners.

As someone who is over the age of 50, I hasten to add that there’s nothing wrong with older business owners. Age brings wisdom and insights. Plenty of studies have shown that age discrimination is a real problem. But a dynamic ecosystem needs a plethora of younger entrepreneurs, and the data suggest that there’s only half as many today as in the 1970s.

New ideas

Productivity depends not only on the creation of new ideas but also on their spread through the economy. The 2023 Intergenerational Report made the point that ‘Most Australian businesses adopt innovations created by others’. It says this underscores the importance of having ‘settings that facilitate the diffusion of new technologies and ideas throughout the economy’.

One of those settings is around startups bringing new ideas to market. It can be challenging being an upstart attempting to turn traditional processes or markets on their heads. For example, the early stages of commercialisation and business growth can be high risk and high cost, even at the best of times.

Competition is vital for small businesses

While competition is ultimately beneficial, it has to be fair competition. Sports fans intuitively know what this means. In the FIFA Women’s World Cup, teams swapped sides at halftime, so neither got the benefit of a tailwind. Likewise, economic competition needs to be fair. That’s especially true for small businesses who often count themselves as suppliers, customers and competitors of larger businesses. Let me share a few examples that demonstrate just how crucial fair competition is.

Small businesses as competitors

Say you open a small florist shop. You might market yourself as a local trader and pride yourself on selling fresh flowers. You decide to go online to see how you might improve your digital presence but notice another florist shows up in the search results for your area. You do some digging on the mystery florist and find it’s an online business with no physical presence in your area. In fact, it operates out of large warehouses and has thousands of webpages to create the impression it’s a local business in suburbs across Australia. That’s what the Australian Competition and Consumer Commission uncovered in 2022. Several national online retailers have already admitted to gilding the lily and making misleading representations about being local florists.

I mention this example because the majority of small businesses face five or more competitors, that are often larger in size. Fair competition is fine. But by giving the impression they were based in the local community these larger online businesses were unfairly diverting business away from legitimate local florists.

Small businesses as suppliers

Small businesses will often be at a significant disadvantage when negotiating to supply goods and services to bigger businesses. In June 2021, the competition watchdog recognised this by providing an exemption from competition law that enables small businesses to collectively negotiate with their customers and suppliers. After notifying the ACCC, over 70 small business collectives have now taken advantage of this exemption, in a wide range of sectors across the economy.

Small businesses as customers

In many instances, small businesses are consumers too and like the rest of us, they need larger businesses to be honest with them. In a recent Australian example, energy retailer Blue NRG drew the Australian Competition and Consumer Commission’s ire after it told around 500 business customers it had a legal right to increase electricity prices under fixed-rate contracts, when it had no such legal right. The watchdog issued a warning about making misleading or deceptive statements about prices. This was especially problematic given the cost pressures facing many small businesses.

Competition laws

In 1974, attorney general Lionel Murphy introduced the Trade Practices Act. The Act was a revolutionary piece of legislation at the time. It made cartels illegal, created offences for the misuse of market power, exclusive dealing, price discrimination, agreements that substantially lessen competition and anti-competitive mergers. As Murphy told parliament, the laws sought ‘to promote efficiency and competition in business, to reduce prices and protect all Australians against unfair practices’. The laws’ architects recognised restrictive practices not only caused ‘prices to be maintained at artificially high levels’ but also allowed ‘discriminatory action against small businesses’.

Competition changes

Half a century on, the Albanese Government has been working to improve the competition settings for small businesses.

We’ve already increased the maximum penalties for breaches of competition and consumer law – bringing Australian penalties into line with other jurisdictions.

We’ve banned unfair contract terms, protecting consumers and small businesses from clauses that allow the more powerful party to unfairly cancel a contract or arbitrarily change prices.

We’re establishing a designated complaint function which will commence in 2024. This will enable designated consumer and small business advocacy groups to bring systemic issues to the Australian Competition and Consumer Commission’s attention.

My colleague Stephen Jones is also working to address unfair trading practices.

And we’ve announced a review of the Franchising Code of Conduct to make sure it continues to work for both franchisors and franchisees.

Review of competition policy settings

Last month, Treasurer Jim Chalmers and I announced a review of competition policy settings.

History shows competition reforms can change lives for the better, delivering growth and providing new opportunities for businesses.

The Hilmer Review and the national competition policy reforms that followed in the 1990s are among Australia’s most significant economic reforms. They led to an estimated permanent 2.5% increase in Australia’s national income which equates to around $5,000 per household.

The breadth of the reforms is hard to comprehend today — from reforming government businesses to giving people a choice on their electricity and gas provider. Bakers could decide when they could bake bread and nurses and doctors were allowed to provide foot treatments which were previously the sole domain of podiatrists.

Some reforms – such as deregulating retail trading hours and bringing professions under the umbrella of competition laws for the first time – subjected small businesses to increased competition.

Despite objections at the time a final review of the reforms found: ‘…the number of small businesses and the number of people employed by them continued to grow throughout the 1990s’.

More recently, the Harper Competition Review put the spotlight on whether Australia’s competition policy, laws and institutions were fit for purpose. The Review dedicated an entire chapter to small business issues including market power, access to remedies and collective bargaining.

New challenges

The Hilmer and National Competition Policy reforms were well suited to the challenges Australia faced in the early 1990s, such as the need to reform government businesses. And in 2015 the Harper review rightly called for renewed policy effort to support growth. But in the mid-2020s we face new challenges.

Australia’s productivity growth has slowed over the past decade, and a lack of competition has contributed to this. There’s evidence that increased market concentration is linked to a rise in markups and a reduction in dynamism across many parts of the economy.

To make the most of big shifts in our economy while ensuring the most vulnerable are not left behind, we need to ensure our competition policy settings are fit for purpose. The trend towards digitalisation, the growth in services, and the net zero transformation present challenges and opportunities. Lots of potential for creativity. Some potential for destruction too.

Other countries are also considering their competition settings. The US Justice Department and the Federal Trade Commission recently released a draft update of their merger guidelines noting that ‘competition today looks different than it did 50 – or even 15 – years ago’.

Australia’s competition taskforce will conduct the review over two years and provide ongoing advice rather than a single report.

Think of this as less like Ian Harper bringing down a 550-page report, and more like Fred Hilmer identifying practical reforms that can be implemented immediately.

This approach will allow the Government to act on specific issues as advice becomes available.

The taskforce will be busy. It will consider mergers reform as a priority, including the Australian Competition and Consumer Commission’s proposals. Taking a leaf from the Hilmer reforms – where coordination across jurisdictions enabled a steady tempo of change – the Competition Taskforce will also examine options for coordinated reform with states and territories.

Among other issues, the taskforce will review the competition challenges of non-compete clauses that restrict workers from shifting to a better-paying job.

Clauses that might have been designed to prevent executives from walking out the door to a competitor are now regularly being included in the contracts of early childhood workers and hairdressers. Early evidence from research conducted by thinktank e61 suggests that 22% of Australian employees might be restricted by a non-compete clause from taking on a better job. That also affects startups, who may find it harder to get good staff if the potential candidates are all locked down by non-compete clauses.

Conclusion

If there’s anywhere in the world that appreciates how competition can drive better performance, it’s here in Melbourne in the middle of September.

With football finals in the air and a new AFLW season underway, Australians intuitively get the value of competition. We love sporting competitions where the team that ends up with a wooden spoon one year can still have a shot the next year. Or in the AFL’s case, last year’s premiers, Geelong, can miss the finals altogether (too soon, Cats fans?).

The ability of the AFL to nurture startups can be seen with the GWS Giants, which entered the league in 2012, and played in the Grand Final seven years later, going down to Richmond in what GWS fans remember as a nailbiter.

Yet if we look at our economy, we haven’t seen the same degree of dynamism as on the sporting field. More competition is one way to put downward pressure on prices, increase choice and put Australia on a faster growth trajectory in decades to come.

We need new businesses pushing established players to improve efficiency, we need startups planting the seeds of change, and we need modern competition laws playing their part to ensure a level playing field for all businesses – big or small.

Competition benefits us all – it’s great for small businesses, great for consumers, and great for the Australian economy.