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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)

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fdi in services

FDI in services

Christopher Findlay and Guo Shengjun

University of Adelaide

background
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
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
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
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
method
Method
  • Items 1-3 by description
  • Statistics on item 4
china
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
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
Net trade balance
  • Times series analysis for India shows that net trade balance improves (permanently) with a lag of three quarters
implications
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