Rent capture, also known as rent “seeking”, refers to the process of obtaining and maintaining wealth transfers. While the use of this term is quite new, the behaviour described by this terminology "has been with us always" (Buchanan, 1980:3). In economics, rent capture occurs when an individual, firm or institution seeks to generate income by capturing economic rent through taking advantages of the economic environment; in other words, using both legal and illegal ways of rent seeking, rather than earning income through production activity. Most research on rent capture focuses on the attempt to capture particular monopoly privileges (taking advantage of government regulations of market
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control); it also refers to an increase of added welfare by gaining ownership or control of assets without necessarily being productive.
Rent capture has been influenced largely by the business environment changes (especially in emerging countries) the role of globalisation, the increase of MNE power and the institutional changes, which have created opportunities that did not exist when there was general agreement that the state should play a more limited role. Many scholars used the term “Monopoly Privilege Rent Seeking” when one firm seeks to capture rent using local pressure groups, tariff protection, tax and royalty exemptions, government subsidies, getting states loans or credit lines. The terminology of rent capture was associated to the monopoly for the first time by Tullock (1967); however, the terms “rent capture/ rent seeking” was expressed later by Krueger (1974) as the behaviour of seeking extra value via the manipulation of the business environment rather than the usual meaning of “rent” as payment of a lease. Robbins (1981), Bhagwati (1982) pointed out that there is some misunderstanding between the concept of beneficial profit capture and detrimental rent capture.
Frequently, a further clarification is drawn between “rent” made legally through lobby pressure, government privilege, incentive or royalties, and the profits generated common- law crimes such as bribery, fraud, embezzlement, theft or any other illicit practise. This perspective sees "profit" as acquired, through a mutually-agreeable operation between two parties (buyer and seller), and the income of common-law crime non-consensually, using power, force or fraud imposed on one party by another. “Rent”, by contrast to “Profit”, is acquired when a third party expropriates one party’s transaction opportunities, gaining absolute control and advantage of a monopolistic market.
Rent capture is assumed to occur often in the form of lobby generated by the Government economic regulations, such as tariffs, taxes, quotas or other entry barriers. Regulatory capture is a notion linked to collusion between companies and the government regulatory bodies. That is perceived as enabling extensive rent capture behaviour, particularly when they must rely on the firm’s information about the market. Moreover, many researches associate the concept of rent capture with corruption and bribery.
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Chowdhury (2006) explains that bribery is a form of rent-seeking by the government institutions. He defines the concept as a bureaucratic behaviour, which encourages the government organisations to use their power to achieve benefit (either legally or illegally).
Likewise, with the increase of globalisation FDI flow, rent capture behaviour has become more significant as institutional changes have created opportunities that did not exist when government intervention and control over the economy was limited. Olson (1982) argues that the pressure group’s involvement in the state economy is a key factor in the deteriorating the economic growth. He also states that the increase of MNE activities (especially in the emerging market) has led to an increase in the “the rent capture phenomenon”. He also observed that this phenomenon was generated by organised groups who have local political influence for their own benefit, rather than that of the state economy or local consumers.
Posner (1975) and Tullock (1967) analyse and measure the rent capture behaviour, discovering that the problem of identification is comparable to that of determining monopoly waste and other market inefficiencies. They added that the “rent capture” waste can only be recognised by substituting the observer’s own paradigm of value. Similarly, if the state executes a legitimate activity, the action exercised by the pressure group to maintain this activity it is not necessarily wasteful. Subsequently, the government role in regulating economic activities, identifying a particular activity as wasteful, should be based on norms that fall outside economic theory.
Theoretically, rent capture could be seen as "buying" a favourable regulatory business environment that would probably be less costly than investing in R&D or improving the production facilities. In that case, the firm will have two options: firstly, to gather income from its own production using its own resources, while spending money on research and development, employee training, technology access, additional capital goods. The second option is unrelated entirely to any contribution to total wealth or well-being. This method is based on money spent on lobbying, to get easy access and some advantage in the market
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without necessarily improving the firm competitiveness. The term “rent capture” is often associated with government corruption, or the excessive influence of special interests.
Chowdhury (2006) suggests that the rent capture could be initiated by government representatives (mainly in emerging countries) such as political leaders and lobby representatives, seeking bribes or other favours from individuals or firms that stand to gain from having special economic privileges. This opens up the possibility of exploitation of the consumer. Eisenhans and Hartmut’s (1996) work illustrates that rent capture by bureaucracy could increase the production cost of public goods, as well as rent-seeking by tax officials which might engender a loss in revenue to the public exchequer. A significant distinction can be made between rent-seeking activities aimed at secure favourable legislation to create rent, and other activities devoted to allocating a share of such rent once it has been created. There are also important differences between rents that emerge from government restrictions on market output and government redistributive activity emerging directly from the tax-transfer process.
II.2.1.2 Rent capture and the telecommunication sector
In an open economy associated with deregulation or long transition periods towards free market competition (unregulated market competition), rent seeking is generated by firms pressure and rewarding politicians and bureaucrats to pursue favourable strategies in order to achieve higher market returns; higher than expected without the rent seeking. Therefore, the main question to ask is: how do firms develop particular political strategies to success in rent capture?
In the case of rent seeking, we can refer to the telecommunication sector as one of the fastest growing industries in the world (UNCTAD, 2010). I use the example below to explain how rent capture would occur in emerging countries. I therefore, propose the following contingencies: (A) all available rents are dissipated through rent seeking; (B) no rent dissipation and local government capture the rents; (C) no rent dissipation, MNEs would capture the rent.
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Barzel (1974) suggests the telecommunication sector barriers to entry take the form of licenses to operate. Given that the license to operate has value, competition between MNEs to bid for the licence will result in real resources being used for lobbying costs, queuing costs and inefficiencies in the cost of the delivery that dissipate the eventual rents. When MNEs buy the country’s capital and labours in order to acquire the license, the removal of the barriers would eliminate them from obtaining the license and remove the wasteful use of resources on rent-seeking behaviour. Consequently, there are real resource gains from the removal of barriers to MNEs when the country’s labour and capital dedicated to acquisition of the license becomes available. No rent dissipation occurs if there is no influence on the decision of delivering the license. In this case, we need to look at who could eventually capture the rents. The government may capture the rents as payments from MNEs, or from eventual taxes imposed on MNEs. In either of these scenarios, the rents are not lost to the host economy. On the other hand, when an MNE obtains the license to import, it receives a windfall profit equal to the ad valorem equivalent of the quota; this tax is imposed typically at the time of a transaction, but it could also be imposed on an annual basis. Or, it could take the form of a stamp duty, which is imposed as an ad valorem tax in some countries (including Algeria). This discussion led to the following hypothesis:
H3: there is a strong correlation between rent seeking and FDI inflow.