Modes of supply in services Christopher Findlay University of Adelaide Assistance of Guo Shengjun and Hussain Rammal

Background Modes of supply in services  Cross border transactions and consumer movement (1,2)  Establishment (3)  Movement of people (4)

Background (cont.) ABS survey found that transactions from offshore establishments were significantly understated in official statistics.  Balance of Payments statistics might only be capturing only about 36% of total actual services exports Financial and insurance services, and other business and professional services were key sectors involved.

Why FDI (mode 3) Literature* suggests 1. FDI likely to be more important than ‘exports’ 2. FDI is more likely to be based on M&A than greenfield projects 3. FDI is an earlier choice in the internationalisation strategy 4. Franchising, licensing (‘knowledge agreements’) are also possible 5. The impact of ICT on modes of doing business is not clear but it does help the break up of value adding chains 6. Policy change matters for choice of mode (direction of effect?) * Bryson and Daniels, Handbook of Service Industries, Elgar

Comments Importance of contact with consumers, value of local adaptation, value of internalising transactions where knowledge and skill matters are forces favouring FDI More use of M&As compared to manufacturing  since internationalisation occurring later in the sector’s development Smaller set up costs leading to an earlier switch out of other modes to FDI compared to manufacturing Knowledge agreements used when knowledge can be codified, where it pays to share risks, where local knowledge is valuable, where original owners are small

Comment ICT development has increased scope to export via other modes, but also increased the scope to control offshore activities 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/ r educing entry barriers Such as quantitative limits and costs of establishment But may also reduce rents available Question: Complementarity of the different modes  Example of education, professional services Impact of expectations of policy reform: FDI flow in advance?

Evolution Little multinational involvement with the intention to re-export (1980s result)  but also some evidence of evolution in choice of operating mode Evidence of links between reform, FDI inflows and trade flows in services  China and India

Interaction if FDI with trade flows of host country Short term  Substitute for imports of the host country in other modes Longer term  Exports by the investor from the new base in modes 1 and 2 back to home country or to third countries  Rationalisation in local services sector, rising imports and exports 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

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 Worth looking at FDI flows alongside shifts in trade Policy point # 1  complementarity of modes and implications for trade negotiations Policy point #2:  concern in developing economies about establishment noted but dynamics important to consider Immediate effects on size of the sector Longer run effects on trade Effects of imports at world prices for other exportable goods/services sectors