FDI in services

Christopher Findlay and Guo Shengjun

University of Adelaide

Background

Evidence of links between reform, FDI inflows and trade flows in services China and India

Modes of supply in services Cross border transactions and consumer

movement (1,2) Establishment (3) Movement of people (4)

Determinants of FDI outflows from home country Push and pull factors

Changing comparative advantage at home Driven by growth which is linked to domestic reform Leads to interest in supplying established or new markets from an

offshore base Adjustment process can be rapid, as reform and growth take

hold and wage rate rises accelerate/exchange rate shifts Policy change in host countries

Reducing entry barriers Such as quantitative limits and costs of establishment May also reduce rents available

As well as growth in demand etc.

Impact of expectations of policy reform:

FDI flow in advance?

Interaction with trade flows of host country Short term

Substitute for imports in other modes Assumes substitution among modes (?)

Longer term Exports from the new base in modes 1 and 2,

back to home country or to third countries Rationalisation in local services sector, rising

imports in other activities ie two-way trade growth which is familiar in cases of

goods liberalisation

Hypotheses

1. FDI out Policy reform and structural change leads to growth and

FDI outflow from home countries

2. FDI in Policy reform leads to FDI inflow (with a lag) in host

countries

3. 2 way trade: FDI inflow is associated with growth in services exports

and services imports

4. Net effect Effect on net trade balance uncertain

Further ideas about trade

between pairs of countries

Method

Items 1-3 by description Statistics on item 4

China

Policy: Sequence of reform following accession to WTO

in 2001, just completed, but widely anticipated FDI in services

Inflow boom in 2002, then slight decline Trade

Rapid growth in X and M: net services balance continues to fall

India

Policy Greater policy reform starting in 1991 with rapid

change in last two years FDI in services

Inflow boom in 05 and 06 Trade

Rapid growth in two way trade: net balance turns around

Net trade balance

Times series analysis for India shows that net trade balance improves (permanently) with a lag of three quarters

Implications

Useful to examine FDI flows in context of shifts in trade

Policy concern about establishment noted but dynamics important to consider Immediate effects on size of the sector Longer run effects on trade Value of imports at world prices for other

exportable goods/services sectors