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