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Opening services markets within Europe: Modelling foreign establishments in a CGE framework

  • Lejour, Arjan
  • Rojas-Romagosa, Hugo
  • Verweij, Gerard

Foreign direct investment (FDI) in services is often more important to supply foreign markets than cross-border trade. A complete analysis of services liberalization therefore requires the modelling of FDI. This paper presents the treatment of FDI in our CGE model WorldScan based on the ideas of Petri [Petri, P.A., 1997. Foreign direct investment in a computable general equilibrium framework. Paper Prepared for the Conference, Making APEC work: Economic Challenges and Policy Alternatives, March 13-14. Keio University, Tokyo] and Markusen [Markusen, J.R., 2002. Multinational Firms and The Theory of International Trade. MIT Press] that firms which establish affiliates abroad also transfer firm-specific knowledge. Consequently, capital owned by suppliers from home and foreign countries are not perfect substitutes. We apply this model to the proposals of the European Commission to open up services markets. Even when FDI in services could increase by 20% to 35%, 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.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 25 (2008)
Issue (Month): 5 (September)
Pages: 1022-1039

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Handle: RePEc:eee:ecmode:v:25:y:2008:i:5:p:1022-1039
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  1. Rutherford, Thomas F, 1999. "Applied General Equilibrium Modeling with MPSGE as a GAMS Subsystem: An Overview of the Modeling Framework and Syntax," Computational Economics, Society for Computational Economics, vol. 14(1-2), pages 1-46, October.
  2. Arjan Lejour & Hugo Rojas-Romagosa, 2006. "Foreign Direct Investment in Applied General Equilibrium Models: Overview of the Literature," CPB Memorandum 169, CPB Netherlands Bureau for Economic Policy Analysis.
  3. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
  4. Rutherford, Thomas & Tarr, David & Shepotylo, Oleksandr, 2005. "The impact on Russia of WTO accession and the Doha agenda : the importance of liberalization of barriers against foreign direct investment in services for growth and poverty reduction," Policy Research Working Paper Series 3725, The World Bank.
  5. Nico van Leeuwen & Arjan Lejour, 2006. "Bilateral FDI Stocks by sector," CPB Memorandum 164, CPB Netherlands Bureau for Economic Policy Analysis.
  6. Springer, Katrin, 1998. "The DART general equilibrium model: A technical description," Kiel Working Papers 883, Kiel Institute for the World Economy.
  7. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  8. Brown, Drusilla K & Stern, Robert M, 2001. "Measurement and Modeling of the Economic Effects of Trade and Investment Barriers in Services," Review of International Economics, Wiley Blackwell, vol. 9(2), pages 262-86, May.
  9. W. J. McKibbin & P. J. Wilcoxen, . "The Theoretical and Empirical Structure of the G-Cubed Model," Discussion Papers 118, Brookings Institution International Economics.
  10. Arjan Lejour & Paul Veenendaal & Gerard Verweij & Nico van Leeuwen, 2006. "Worldscan; a model for international economic policy analysis," CPB Document 111, CPB Netherlands Bureau for Economic Policy Analysis.
  11. de Bruijn, Roland & Kox, Henk & Lejour, Arjan, 2008. "Economic benefits of an Integrated European Market for Services," Journal of Policy Modeling, Elsevier, vol. 30(2), pages 301-319.
  12. Keller, Wolfgang & Yeaple, Stephen R, 2003. "Multinational Enterprises, International Trade and Productivity Growth: Firm-Level Evidence from the US," CEPR Discussion Papers 3805, C.E.P.R. Discussion Papers.
  13. Henk Kox & Arjan Lejour & Raymond Montizaan, 2004. "The free movement of services within the EU," CPB Document 69, CPB Netherlands Bureau for Economic Policy Analysis.
  14. Mohamed Hedi Bchir & Yvan Decreux & Jean-Louis Guérin & Sébastien Jean, 2002. "MIRAGE, a Computable General Equilibrium Model for Trade Policy Analysis," Working Papers 2002-17, CEPII research center.
  15. Wolfgang Keller & Stephen R. Yeaple, 2005. "Multinational Enterprises, International Trade, and Productivity Growth: Firm-Level Evidence from the United States," Kiel Working Papers 1249, Kiel Institute for the World Economy.
  16. Hugo Rojas-Romagosa, 2006. "Productivity Effects of FDI Inflows: A Literature Review," CPB Memorandum 170, CPB Netherlands Bureau for Economic Policy Analysis.
  17. Arjan Lejour & Henk Kox & Roland de Bruijn, 2006. "The trade-induced effects of the Services Directive and the country of origin principle," CPB Document 108, CPB Netherlands Bureau for Economic Policy Analysis.
  18. Henk Kox & Arjan Lejour, 2006. "The Effects of the Services Directive on Intra-eu Trade and fdi," Revue économique, Presses de Sciences-Po, vol. 57(4), pages 747-769.
  19. James Markusen & Thomas Rutherford & David Tarr, 2005. "Trade and direct investment in producer services and the domestic market for expertise," Canadian Journal of Economics, Canadian Economics Association, vol. 38(3), pages 758-777, August.
  20. Henk Kox & Arjan Lejour, 2005. "Regulatory heterogeneity as obstacle for international services trade," CPB Discussion Paper 49, CPB Netherlands Bureau for Economic Policy Analysis.
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