Measuring restrictions on FDI in services in developing countries and transition economies

Notwithstanding the worldwide trend towards liberalization since the early 1990s, there remain substantial disparities between regions and individual countries in the severity of observable restrictions on inward foreign direct investment (FDI) in services. This paper quantifies and analyses such restrictions in the services sector of developing countries and economies in transition, using a methodology developed in a recent study of OECD countries. The study contains a more comprehensive and up-to-date compilation, quantification and analysis of restrictions on FDI in services in developing countries than prior studies, many of which have tended to rely on the General Agreement on Trade in Services -GATS) schedules for information. It draws on large number of sources in addition to the GATS. The study is confined to measuring restrictions discriminating between foreign and domestic investors and does not take into account policies impinging on all investors, such as product of labour market regulations. The sample includes 50 developing countries in Latin America, Asia, Africa and Europe. everal different types of restrictions are considered: limitations on foreign ownership, screening or notification procedures, management restrictions and operational restrictions. These restrictions on FDI are computed for a large number of services industries and aggregated into a single measure for the services sector as a whole in each country. The results should be interpreted carefully in the light of the frequent changes to, and complex nature of, national policies on FDI, which render classification and quantification challenging. The study finds that the GATS schedules by themselves are poor guides to the stance of policies on FDI for most countries and generally underestimate the extent to which countries have opened up their services industries to FDI. It provides a heretofore unavailable systematic and internationally-comparable set of indicators for policies on FDI in, services that will be of value to policymakers concerned with international negotiations on FDI and researchers studying FDI. Moreover, the analysis suggests that Latin america and economies in transition generally have relatively low levels of restrictions, whereas higher levels of restrictions are found in developing Asia. Inward FDI in services is strongly negatively correlated with the severity of restrictions.