March 15, 2007

Opening services markets within Europe; modelling foreign establishments in a CGE framework

In services, the activities of foreign affiliates often exceed the value of cross-border trade. A complete analysis of services liberalisation therefore requires the modelling of FDI.

This paper presents the treatment of FDI in our CGE model WorldScan based on the ideas of Petri (1997) and Markusen (2002). They assume that firms establishing affiliates abroad also transfer firm-specific knowledge. Consequently, capital and products differ from existing capital and products in the host country. As an illustration, we apply this model to assess the proposals of the European Commission to open up services markets. FDI in services could increase by 20% to 35%. However, the overall economic impact is limited. Our assessment suggests that GDP in the EU25 could increase up to 0.4%. These effects could be up to 0.8% higher if foreign capital also increases the overall productivity of the services sector.


Hugo Rojas-Romagosa
Verweij. G.