FDI in services

1. FDI in services Christopher Findlay and Guo Shengjun University of Adelaide

2. 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)

3. 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?

4. 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

5. Hypotheses Further ideas about trade between pairs of countries • FDI out • Policy reform and structural change leads to growth and FDI outflow from home countries • FDI in • Policy reform leads to FDI inflow (with a lag) in host countries • 2 way trade: • FDI inflow is associated with growth in services exports and services imports • Net effect • Effect on net trade balance uncertain

6. Method • Items 1-3 by description • Statistics on item 4

7. 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

8. 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

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

10. 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