STRI for Telecommunications OECD Services Experts Meeting, Paris, 3 July 2009

Overview Regulations included in the index Classification of the regulations Methodology The indices Robustness Relevance Conclusions

Description of the sector Telecommunications in the STRI includes: Fixed line telecommunications services Mobile services Internet Telecommunications is a dynamic sector characterised by rapid technological changes Market imperfections play an important role

Telecommunications and trade restrictions Market imperfections: Network externalities Essential facilities Switching costs Regulations can be trade enhancing; lack of regulation can be trade restrictive Selection criteria for including regulations in the STRI: Mentioned in the GATS and/or RTAs; Expert judgement. RTAs analysed: US-Australia FTA, NAFTA, Japan-Mexico, EFTA-Mexico, EC- Mexico

Restrictions included in the STRI Categories Sector specific Source Restrictions on foreign ownership Yes/Horizontal PMR, ITU Discriminatory measures Yes PMR Public ownership Price control PMR, OECD Comm. Outlook, ITU Barriers to competition Regulatory transparency and licensing systems OECD Comm. Outlook, ITU Subsidies and taxes horizontal; public procurement sector specific

Classification of restrictions # categories Regulation areas 6 GATS 2 (NT+MA and DR/Other) By mode 3 Discriminatory or not 2 Entry or ongoing operations GATS: those scheduled and those not scheduled Discriminatory or not because NT and MA are combined

Methodology - scoring 87% of the measures are binary Scores are binary 0 indicates no restrictions; 1 indicates a restriction and lack of regulation when regulation is required Regulation is required when markets are uncompetitive Interaction term between regulation and market structure

Methodology - weighting Starting point: the 6 categories of regulation Each category (j) is weighted according to expert judgement : Equal weights are used under each heading (and sum to 1 within each category) Each weight is carried over from one classification to the next: Just to give you a sense of the weights for the categories: Restrictions on foreign ownership (40%); Discriminatory measures, standards and equivalence (appx. 22%); Public ownership, size and scope of public enterprises (appx. 6%); Price controls and regulation on market behaviour (7%); Barriers to competition (appx. 15%); Regulatory transparency and licensing (10%).

Methodology: aggregation

Design of the STRI Equal weights Expert judgment within categories Restrictions on foreign ownership and market entry Individual measures Discriminatory measures Barriers to competition Regulatory transparency Price controls Public ownership Equal weights within categories Rank 1 40% Rank 2 22.5% Rank 3 15% Rank 4 10% Rank 5 7.5% Rank 6 5% Expert judgment Categories of measures are ranked from the most to the least trade restrictive

STRI scores OECD average At the outset, I want to mention that due to a misclassification in the database, the STRI scores for a small number of countries had to be re-calculated. The revised scores are presented here, and will be incorporated into the revised document that will be presented to the TC in October. For practical purposes, however, this mistake only changed the ranking of Belgium, so it should not significantly impact the analysis presented in the paper. The higher the score = the more restrictive is a country’s barriers to trade in telecommunications. The relatively high importance assigned to restrictions on foreign ownership drives the distinction between three of the four most restrictive countries and those ranked in the middle. Mexico, Korea and Canada are the only countries with restrictions on foreign ownership; Canada has a foreign equity limit of 46% for mobile operators, while Korea and Mexico have a 49% equity limit across all telecoms sub-sectors included in the regulatory database. For Turkey, the country with the third most restrictive STRI score, the index is driven less by restrictions on foreign ownership and other market entry conditions, and more by discriminatory measures (e.g. restrictions on foreign participation in public procurement) and to a lesser extent limits on transparency and barriers in the licensing and permit system. Regulatory transparency, barriers to competition and price controls contribute the most to the restrictiveness index for the majority of OECD countries.

STRI by GATS The individual regulatory measures are classified in several ways in order to highlight different aspects of trade restrictiveness. This next figure depicts country STRIs according to the market access/national treatment versus domestic regulation and other measures classification. It is clear that market access and national treatment are relatively more important among the most restrictive countries. Turkey is an exception to this general observation, having a relatively low score on market access/national treatment, but a high score on domestic regulation and other behind the border issues, contributing to an overall high score. You can also see pretty clearly from this figure that for the vast majority of OECD countries (that is, those that fall toward the left hand side of the figure), domestic regulations and other types of barriers contribute the most to each countries’ STRI score.

STRI by mode This next figure depicts the composition of the index according to mode of supply. None of the OECD countries have restrictions on Modes 1 &2, and there are very few countries which have restrictions on Mode 4. The Mode 4 restrictions involve quotas on foreign professionals allowed to practice. Restrictions on foreign ownership are reflected in restrictions on Mode 3, which are present in all of the countries analysed. Cross-modal restrictions are also common, as you can see from the blue segments. You can find the STRI scores broken down by other typologies in the paper (e.g. discriminatory/non-discriminatory & operations versus establishment).

Robustness Rank correlation equal weights 0.89 Rank correlation PCA weights 0.83 Robust to all weighting schemes Even regulatory profiles – results do not depend on weighting schemes It is really important is to see how robust the STRI scores are to different weighting schemes. As Hildegunn indicated earlier, the preferred weighting scheme is a combination of expert judgement for categories of measures and equal weights within categories. Such a decision is of course based on judgement in addition to evidence from empirical analysis. Therefore, it is useful to assess the extent to which the resulting STRI depends on the weighting scheme. For that purpose, the STRI has been calculated using alternative weighting schemes (equal weights and weights based on principal component analysis). The Spearman rank correlation between these measures and the preferred STRI is quite high (close to 0.9), so it can be concluded that the ranking of countries in the STRI is not an artefact of the chosen weighting scheme, but very robust to the most commonly used weighting schemes. Indeed, we see more even regulatory profiles in the telecommunications sector – that is, countries tend to either be relatively more or less restrictive across all of the measures -- than we do for the other pilot sectors, and this contributes to the relatively high correlation we see among the different weighting schemes.

Relevance – STRI performance in gravity regressions Mode Correlation Significance Imports Negative No FDI 1% FATS Although it is documented that the measures included in the STRI are all potentially trade restrictive, a final test on the relevance of the STRI is to what extent it actually measures what it is supposed to measure; namely restrictions on trade and commercial presence. To check this, the STRI index was entered into the gravity equation and the extent to which it is correlated with trade and investment is estimated. The results are presented in the table above. The gravity model explains bilateral trade as a function of relative market size and relative trade costs. It is extended by the STRI as one additional component of trade costs and estimated on EBOPS data for bilateral trade, OECD data on bilateral FDI and a new FATS dataset for OECD countries based on firm level data from Orbis. The STRI is strongly and significantly correlated with FDI and sales of foreign affiliates (FATS); the higher the index (the more restrictive the country), the lower is FDI and FATS. The correlation with imports is also negative, but not statistically significant. Given the difficulties of measuring cross-border trade as discussed in the paper, this should not be surprising. There are no regulatory measures that restrict modes 1 & 2 in the index; thus, the impact on trade therefore comes through a complementarity between modes.

Conclusions The STRI for telecommunications is very robust to different weighting schemes The STRI for telecommunications is strongly and negatively correlated to FDI and FATS in the sector More restrictive countries have relatively more restrictions on market access and national treatment The least restrictive countries’ remaining restrictions are mainly in the form of non-discriminatory domestic regulation Telecommunications is a sector that is subject to market imperfections that require regulation in order to keep markets competitive. OECD countries differ more on trade restrictiveness in telecommunications than in the other pilot sectors. The STRI for telecommunications shows a ranking of OECD countries according to trade restrictiveness along several dimensions that should make it suitable for policy analysis as well as for trade negotiators. The index is robust to different weighting schemes and thus not an artefact of the methodology chosen. The STRI for telecommunications is strongly and negatively correlated to FDI and FATS in the sector, providing assurance that the STRI measures what it is supposed to measures – that is, barriers to trade in telecommunication services. The more restrictive countries have relatively more restrictions on market access and national treatment … Whereas the least restrictive countries’ remaining restrictions are mainly in the form of non-discriminatory domestic regulation. The STRI exercise suggests that given the importance of non-discriminatory regulations on operations in the least restrictive countries, possible gains from further liberalisation lies in the area of domestic regulation. Domestic regulation often becomes more important when explicit barriers to trade and investment have been removed, as they may significantly affect foreign services providers’ cost of servicing the market in question.

OECD Trade and Agriculture www.oecd.org/trade/stri Contacts Hildegunn.Nordas@oecd.org Molly.Lesher@oecd.org Alexandros.Ragoussis@oecd.org