Exposure of the business services industry to international competition

This report analyses the exposure of business services industry to foreign competition, either through trade or through foreign direct investment. Internationalisation of the Dutch business services industry is compared to the situation in the USA and a number of EU countries. Read also the accompanying press release.The theoretic framework offers a micro-foundation for internationalisation decisions by individual firms, in particular the choice between exporting, licensing one's product to an independent foreign supplier, and setting up own production in a foreign subsidiary. The framework accounts allows for the importance of intangible assets in competition process, as is found in many knowledge-intensive branches of the business services (BS) industry. The presence of intangible assets strengthens the urgency of having a local presence in foreign markets. The theory predicts that the exposure of BS industry to foreign competition will increasingly get the form of direct investment instead of imports or licensing agreements. The theoretic framework stood up quite well against the empirical data in the BS industry. The growth of domestic BS markets correlates negatively with the import share in total supply and positively with the share of foreign subsidiaries in domestic supply.National regulations have a substantial impact on trade and direct investment patterns in the BS industry. Regulatory interventions either operate directly through laws or indirectly, by delegating the regulatory powers to national branch associations. This is particularly important for knowledge-intensive BS branches. Foreign BS suppliers often have to comply with several additional regulations that function as non-tariff barriers to national BS markets. Strong differences exist between countries as to the strictness of market regulations for BS industry. The Dutch and UK markets for business services are among the most liberalised ones.Large net welfare gains for national economies can be achieved by allowing more competition from foreign BS suppliers: technology and knowledge spillovers from abroad, better services quality, more competition in domestic BS markets, scale-related cost advantages, and cheaper intermediary BS inputs for client industries. Buyer protection for some knowledge-intensive professional business services can be shaped in a more non-discriminatory way than is the case now. On balance, removal of remaining barriers for imports of BS products and foreign subsidiaries is expected to have positive net welfare effects. Dutch BS firms are in a good position to benefit from future deregulation and liberalisation of BS industry in other OECD countries.