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