The Impact Of Competition On Mobile Network Investment And Efficiency In China’s State-Owned Telecommunications Industry

Telecommunications is an infrastructure industry. The network investment and performance play decisive roles in the market competition. Previous research suggests that monopoly may result in network underinvestment and inefficiency. Telecommunications reform in global area has demonstrated that privatization and liberalization can facilitate network investment and enhance efficiency. Although China’s telecommunications industry has been partial share-issue privatized and liberalized, competition has happened among the operators belonging to the same state-owned investor. This kind of liberalization reform is unique in global telecommunications market. Reform undeniably boosts rapid development of China’s telecommunications, especially mobile market; however, the issues of "lopsided competition structure"and "network overinvestment" in mobile sector have become obvious. However, the relationship between competition and network investment, network efficiency has never been explored in China’s mobile market-the largest one in the world, especially the potential impact of ownership (all the competitors belonging to the same state-owned investor) has never been considered before.Based on the industrial organization theory S-C-P paradigm (Market Structure, Market Conduct and Market Performance) this paper constructs the research framework considering the impact of ownership. And then, this paper constructs empirical models using Chinese regional panel data between2003-2010to analyze the relationship among competition structure, network investment and network efficiency in mobile sector, deeply explores the impact of ownership on the relationship.Firstly, based on the soft budget constraint (SBC) theory and previous empirical research about the relationship between competition and investment in telecommunications, this paper initially presents the theoretical assumption of the relationship between competition structure and network investment under the same state-owned investor in telecommunications sector. The panel data fixed effect (FE) models and dynamic panel data models based on GMM (Generalized Method of Moments) verify the above assumption. The results show the positive relationship between competition structure and network investment in China’s mobile sector. The assumption has been verified, that is when competition happens inside the same state-owned investor, lopsided competition structure will result in large-scale mobile network investment. However, this result is different with previous research that the balanced competition structure facilitates network investment. This paper points out that lopsided competition structure will aggravate the soft budget constraint (SBC) problem of state-owned telecom operators, especially for the followers. The followers will increase investment on network coverage to capture market share. In order to build level-playing-field the government will impose policy intervention on the leader, this intervention will also brings about SBC and even ratchet effect. Ultimately all the state-owned telecom operators will fall into "network investment war".Secondly, this paper analyzes further the utilization efficiency of mobile investment brought about by the lopsided competition structure, explores the relationship between competition and network utilization efficiency. Considering the mobile network’s multi-layers characteristic and the different investment demands between core network and access network, this paper initially use a Slack-Based Measure of DEA model (DEA-SBM) to evaluate mobile network efficiency and network elements’ utilization. Results show that Chinese mobile network is inefficient; core network utilization is higher but access network utilization is lower. The efficiency value show obvious regional difference that is the efficiency in eastern region is significantly higher than that in middle and western regions. Based on the efficiency value, this paper constructs fixed-effect and Tobit panel data models to verify the relationship between competition structure and network efficiency. The empirical results show that lopsided competition structure prejudices the whole network efficiency and core network utilization, but enhances access nework utilization.Finally, all the results show that, under the same state-owned investor the lopsided competition structure will irritate network investment but bring about network inefficiency. That means to a certain extent there is relevance between lopsided competition structure and network overinvestment in China’s mobile sector. The current competition status can not achieve the balance between facilitating network investment and enhancing network efficiecny. Therefore, it is necessary to build level playing field under the current ownership structure; however, considering the mobile network construction separately at present, balancing competition structure will aggravate access network utilization, strengthening network co-construction and sharing is urgent especially in the3G era. For the long-run, diversification of investors and network neutralization can weaken state-owned telecom operators’ dependence on network infrastructure. Further improving telecommunications regulatory institution will facilitate the effectiveness of China’s telecom liberalization.