The Employment Implications of Liberalizing Foreign Direct Investment in Services

Paper prepared for the Directorate for Trade and Agriculture, the Organisation for Economic Co-operation and Development. I thank Frédéric Gonzales for his assistance with FATS data. 1 Executive Summary As the world emerges from the global financial crisis, unemployment remains high in some of the major economies of Europe and North America. A key empirical question is whether liberalisation of FDI in services can contribute to job creation. According to the analysis of this paper, the answer is in the affirmative under a wide variety of circumstances. The proposition is by no means obvious. Services trade barriers occur behind the border, often in the form of restrictive regulations affecting the establishment and operations of domestic and foreign services suppliers. To the extent that the restrictive regulations induce services firms to use more inputs than otherwise, then trade liberalisation will have the effect of lowering costs by reducing input requirements — equivalent to a productivity improvement. And productivity improvements cost jobs rather than creating them, all other things being equal.