the impact of policy heterogeneity on trade and direct investment in services
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The impact of policy heterogeneity on trade and direct investment in services. Arjan Lejour, Henk Kox. Frankenstein visits Lisbon. Why so little trade in services?. Technical reasons: most service products cannot be shipped in boxes - PowerPoint PPT PresentationTRANSCRIPT
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The impact of policy heterogeneity on trade and direct investment in services
Arjan Lejour, Henk Kox
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Frankenstein visits Lisbon
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Why so little trade in services?
Technical reasons: ► most service products cannot be shipped in boxes ► physical proximity of service producer and consumer often
required
Alternative international supply form: setting up a local subsidiary (FDI)
Regulation-based trade barriers► Directly trade barriers (non tariff)► Non-tariff barriers caused by regulation of service markets
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Regulation-based trade barriers for services
Many different types► additional diplomas, certificates, licenses, requirements on input
use, marketing, local professional insurance, membership of professional association, juridical form, etc. (EC, 2002)
► common element: qualification costs
Different motives for regulations: ► ensure quality of the service or ► reliability of the service provider► protect incumbent firms► satisfy special domestic interest groups
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Nature of regulation-caused trade cost barrier
Qualification costs for service providers: mainly fixed costs
Form an entry barrier that also affects domestic service providers
Like all fixed costs, regulation-caused costs could be a source of scale economies...... if borders were open!
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Main barrier for service trade: not regulation as such but regulation heterogeneity
Each country regulates in a different way Foreign service regulation comes on top of
regulation in home market Causing fixed compliance costs, specific for that
export market Compliance costs are independent of firm size →
press hardest on SME
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Costs of regulation heterogeneity
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The effects of regulation heterogeneity on trade and FDI
Prior work: OECD researchers developed relative measures of regulation intensity level per country (Nicoletti et al.)
They found negative impacts of regulation levels on bilateral trade and FDI in services
Problem with levels: two countries with same regulation level may have very different regulations in place
► causes additional costs for exporters
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Indicator for bilateral policy heterogeneity
For explaining bilateral trade and direct investment patterns we need a quantitative measure for bilateral policy heterogeneity
Use OECD International Regulation database► Database: 1600 regulation items ► Selection of 200 items in product market regulation
For each regulation item pair-wise comparison of countries► yields a matrix of bilateral indicators for policy heterogeneity
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Refinements
Heterogeneity indicator: ► an indicator for regulation-caused NTBs► increases in the level of policy heterogeneity between countries► specific for each country pair
Decomposable for separate regulation domains:► Barriers to competition ► Administrative burdens on startups ► State control ► Regulatory and administrative opacity ► Explicit barriers to trade / investment
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Bilateral commercial services exports (ln), 1999-2001, 480 obs
TLS/SUR Country of origin Of Destination
GDP org. 0.85***
GDP dest. 0.73***
Distance -0.97*** -0.97***
Language -0.50*** -0.50***
PMR org -0.48***
Entr. Barr dest -0.02
Het. Start ups 0.83*** 0.83***
Het. Competition -2.66*** -2.66***
Het. reg. & adm. -0.21 -0.21
Het. State 0.04 0.04
Het trade&inves -0.22 -0.22
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Results for trade regressions
"Traditional" gravity variables:► all were significant and had the expected signs
Heterogeneity in market regulation has a strong negative impact on bilateral trade in commercial services
► strongest effect: sub-indicator for 'barriers to competition'
Several methods (OLS, FE, TLS / SUR) used for testing robustness
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Bilateral direct investment, 1999, 252 obs
TLS/SUR Country of origin Of Destination
GDP org. 0.98***
GDP dest. 0.68***
Distance -1.18*** -1.18***
Language -0.07 -0.07
PMR org -0.92***
FDI restrictions -9.33***
Het. Start ups 0.84 0.84
Het. Competition -3.46*** -3.46***
Het. reg. & adm. -0.61 -0.61
Het. State -2.50*** -2.50***
Het trade&inves 1.57*** 1.57***
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Results for bilateral FDI
Non-policy variables: ► gravity variables all significant and expected sign ► Technology variable (service productivity in origin country):
significant positive effect
Heterogeneity in market regulation has significant negative impact:
► strongest for regulation domain "Barriers to competition“► and FDI restrictions
Some policy heterogeneity domains affect choice between exporting and FDI
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Policy context:
EC (2004): new proposals that should boost internal service market by 2010. Principal instruments:
► reduce regulation heterogeneity► Country of origin principle► abandon discriminating regulations► single point of contacts for foreign service firms
Use our regression results for quantifying possible effects of EU proposals
Close reading of proposals and establish their probable impact on heterogeneity
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Impact of proposed EU directive on heterogeneity indicators
Component of regulation Reduction due to EU directive
Regulatory and administrative opacity 66 - 77 %
Explicit barriers to trade and investment 73 - 78 %
Administrative burdens on start-ups 34 - 46 %
Barriers to competition 29 - 37 %
State control 3 - 6 %
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Simulated effect of new EU proposals on service trade and investment
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Conclusions
Heterogeneity in regulation hampers trade and FDI in services► In particular barriers to competition
Analysis of effect non-tariff barriers was always elusive (NTBs difficult to quantify)
► our analysis from perspective of policy heterogeneity seems fruitful
► Follow-up: test its explanatory power for the OECD as a whole
Results may have implications for future GATS negotiations► More emphasis on mutual recognition