Foreign Direct Investment in Services and the Domestic Market for Expertise

A growing body of evidence suggests that the close availability of diverse business services is important for economic growth. Producer services such as managerial and engineering consulting can provide specialized knowledge to help domestic firms develop at lower unit cost. But these intermediate services are often nontraded, or costly to trade, which may be one reason that cities and industrial complexes form and economic performance differs across regions. Because services are costly to trade, foreign services are best transferred through foreign direct investment. This has important implications for public policy. Policies that affect foreign direct investment differ considerably from those that affect trade in goods. The authors develop a model of services, results from which show that: A) Liberalizing restraints on inward foreign direct investment has a powerful positive impact on the income and welfare of the importing country. The impact is much stronger than in traditional competitive models of trade in goods. B) Policies to protect domestic skilled labor against competition from imported services can have the perverse effect of lowering returns to domestic skilled labor-because while imported services economize on the use of domestic skilled labor (compared with domestic service industries), the positive effects on scale and productivity in the downstream industry can be powerful enough that the real wages of domestic skilled labor rise after the liberalization of foreign direct investment in service industries. In other words, domestic skilled labor and foreign direct investment are partial-equilibrium substitutes in the model but are typically general-equilibrium complements. C)The increase in the variety of imported services leads to increased total factor productivity in downstream industries, but the relative impact on downstream industries depends on how intensively they use intermediate services. The differential in effects on productivity in the production of final goods can be strong enough that permitting foreign direct investment can actually affect whether a good is exported rather than being imported. Policymakers should be aware that protection of a domestic service industry affects different constituencies differently. Although domestic capital owners may be adversely affected by foreign direct investment, domestic skilled workers in the industry are likely to see demand for their skills-and their real wages-rise. Moreover, downstream industries that use the service unambiguously benefit from foreign direct investment and their expansion can be surprisingly strong.

Bibliographic Details

Main Authors:	Markusen, James, Rutherford, Thomas F., Tarr, David
Format:	Policy Research Working Paper biblioteca
Language:	English en_US
Published:	World Bank, Washington, DC 2000-08
Subjects:	AGGREGATE SUPPLY, ASSETS, AVERAGE COSTS, BASE YEAR, CD, COMPARATIVE ADVANTAGE, COMPETITIVE MODELS, CONSUMER PRICE INDEX, CONSUMERS, CONTRACTUAL ARRANGEMENTS, COST FUNCTIONS, DECISION MAKING, DIMINISHING RETURNS, ECONOMIC ACTIVITY, ECONOMIC ANALYSIS, ECONOMIC GEOGRAPHY, ECONOMIC GROWTH, ECONOMIC PERFORMANCE, ECONOMIC THEORY, ECONOMICS, ECONOMICS LITERATURE, ELASTICITIES, ELASTICITY, ELASTICITY OF SUBSTITUTION, EQUILIBRIUM, EQUILIBRIUM MODELS, EXTERNALITIES, EXTERNALITY, FINANCIAL MANAGEMENT, FINANCIAL SERVICES, FIXED COSTS, FIXED PRICES, GDP, GROWTH RATE, HUMAN CAPITAL, IMPERFECT SUBSTITUTES, IMPORTS, INCOME, INCREASING RETURNS, INCREASING RETURNS TO SCALE, INTEREST RATE, INTERMEDIATE GOODS, INTERMEDIATE INPUTS, LABOR INPUTS, LABOR MARKETS, LAWS, MARGINAL COST, MARGINAL COSTS, MARGINAL PRODUCT, MARGINAL PRODUCTIVITY, MARGINAL REVENUE, MARKET DISTORTIONS, MIDDLE INCOME COUNTRIES, MONOPOLISTIC COMPETITION, NATIONAL INCOME, NET EXPORTS, OIL, OPTIMIZATION, POLICY RESEARCH, POSITIVE EFFECTS, PRIVATE COSTS, PRODUCERS, PRODUCT DIFFERENTIATION, PRODUCTION FUNCTION, PRODUCTIVITY, PRODUCTIVITY INCREASES, PUBLIC POLICY, REAL PRICES, REAL WAGES, RETIREMENT, RETURNS TO SCALE, SAVINGS, SCALE ECONOMIES, SCALE EFFECT, SUBSTITUTION EFFECT, SURPLUS VALUE, TARIFF BARRIERS, TAX REVENUES, TERMS OF TRADE, TOTAL FACTOR PRODUCTIVITY, TRADE BALANCE, TRANSACTIONS COSTS, TRANSITION ECONOMIES, UNEMPLOYMENT, URUGUAY ROUND, WAGE RIGIDITIES, WEALTH, WORLD TRADE ORGANIZATION,
Online Access:	http://documents.worldbank.org/curated/en/2000/08/443563/foreign-direct-investment-services-domestic-market-expertise http://hdl.handle.net/10986/19798
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