Economic Impact of Trade and Investment Liberalization in the Telecommunications Sector

A Survey of Issues and Arguments

in The Journal of World Investment & Trade
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The Journal of World Investment & Trade

Law • Economics • Politics


As a shorthand, the term FDI (foreign direct investment, as opposed to indirect or portfolio investment) will be used frequently in this article to signify foreign ownership and control. 2 See Globerman (1999), at p. 9: "... there have been very few studies of the economic welfare consequences of FW in the specific sectors of interest." 1 The British government privatized BT in the early 1980s but retained a "golden share" for a number of years that could be used to ensure that the company fulfilled certain public policy (including national security) objectives. In continental Europe, liberalization came in the late 1990s, when the issue was that of transforming basic telecoms markets from State monopolies (in which there had obviously been no question of private investment, either by local or foreign companies) to competitive markets. However, once markets were liberalized, Article 48 of the Treaty Establishing the European Community (�·x Article 58 of the Etc: Treaty) required national treatment for companies with a commercial presence in EU Member States. Some investment restrictions exist (e.g. in France, Greece and Portugal), but they are meaningless since they can be circumvented by the incorporation of an EU affiliate.

'Graham (2000), p. 2. 1 Ibid., p. 17. 6 Ibid., p. 22. 7 Ibid., p. 11. I.

8 Lee and Lie (2000), p. 1. y Id. 10 See ITU (1998).

Wall Communications (2000), p. 14. � LATAs (local access and transport areas) generally correspond to long distance area codes and encompass one or more local telephone exchanges.

�3 Fez (1995). Sidak (1997) observes, at pp. 273-274: "the Fcc contended that the new Eco [effective competitive opportunities] test would be 'predictable yet flexible'. A more pragmatic assessment is that the Echo test is malleable to the point of being utterly unpredictable ... [It] is so byzantine that it can produce any result that the Fcc desires." 14 Section 310(b) of the U.S. Communications Act of 1934 limits foreign investment in common carrier radio licensees to a maximum of 20 percent directly at the operating company level and 25 percent indirectly at the holding company level, unless the Fee finds that a waiver of the latter limit is in the public interest. Besides Section 310(b), there is a whole array of other measures in the Communications Act itself, as well as in other pieces of legislation, that can be used to restrict trade, foreign investment and foreign competition in the U.S. telecoms industry.

" Piragibe (1998), p. 21.

16 Lee and Lie (2000), pp. 5-6. 17 Ibid., p. 10.

11 Australia (1995), p. 10. ''' None of the studies presented in this article examined the economic impact of outward FDI. However, there is a body of literature that supports the view that both inward and outward FIJI improve economic efficiency; see, for example, Roseman (1985). 20 Globerman (1999), p. 1. 21 Wall Communications (2000), p. 48.

22 Globerman (1999), p. 4. 23 Ibid., p. 20. 24 lid. 25 Wall Communications (2000), p. 49. 2(, Sidak (1997), pp. 169-170. 27 Ibid., p. 159. 21 Nor do the authors discuss the receptiveness of a country to foreign investment in terms of national branding, i.e. of establishing and projecting abroad a particular image of a country. However, resistance to foreign investment would suggest not only insecurity, but also a lack of confidence in a country's enterprises to compete successfully in the global market.

2'1 Wall Communications (2000), pp. 49 and 50. 311 Globerman (1999), p. 6. 31 Ibid., p. 11. 3= Wall Communications (2000), p. 51. 33 Sidak (1997), p. 159. 3a Phillips (2000), p. 55.

.15 Wall Communications (2000), p. 49. 36 Id. 31 Id. See also OECD (1999). 31 Wall Communications, ibid., p. 50. ■w Sidak (1997), p. 167.

411 Ibid, p. 191. 41 Graham (2000), p. 11. 42 See, for example, OL'cn Communications Outlook (annual). 43 The fact that some countries encourage outward investment, while being skittish about inward foreign investment, suggests residual mercantilism left over from the mind-set that considered "imports bad" and "exports good". 44 Globerman (1999), p. 4. 45 Id. 'fi Id.

" Compare ibid., p. 20. 4X Ibid., p. 5. 4'' Ibid., p. 7. 511 Wall Communications (2000), p. 83.

51 Globerman (1999), p. 7. S2 Wall Communications (2000), p. 54.

5; Since the spin-off of Bce's shares in Nortel, the latter has done nothing to suggest that R&D is being transferred out of Canada. s� Wall Communications (2000), footnote on p. 85. And Nortel's headquarters is in Brampton, Ontario, again not in Ottawa. 55 Ibid. p. 84: "Given the limited role of R&D at the carrier level, the value of any lost R&D positions may not be a significant concern." sú Id. 57 Globcmian (1999), p. 5. 58 Wall Communications (2000), p. 86.

5" Ibid., p. 54. 611 Sidak (1997), p. 163. Ibid., pp. 163-164. ��= Globerman (1999), p. 5. 63 Graham (2000), p. 4. 61 Ibid., p. 3.

11 Wall Communications (2000), p. 52. f,6 Id. 67 Ibid., p. 53. be Lee and Lie (2000), pp. 25-26.

'•'< Globerman (1999), p. 1. 70 Wall Communications (2000), p. 53. The irony is that Tclcglobe-up until October 1998 Canada's monopoly supplier of overseas facilities- developed a U.S.-centric strategy during the WTO negotiations on basic telecommunications services, while it was still subject to more onerous ownership restrictions than other Canadian carriers and while the Government of Canada was extending the company's privileged status an additional ycar-and-a-half lest Canadian facilities be bypassed if competition started too soon. 72 Globerman (1999), pp. 9-10. w Wall Communications (2000), p. 53.

m Ibid., p. 80. 75 Phillips (2000), p. 55. 76 Globerman (1999), p. 8. 77 Id.

11 Wall Communications (2000), p. 91. �9 Globerman (1999), p. 8. ""Lee and Lie (2000), p. 26. 81 Id. R= Wall Communications (2000), p. 79. R3 Ibid., p. 83.

84 Globerman (1999), p. 11. "� Id. �6 Sidak (1997), p. 114. 87 Ibid., p. 124: "... Section 310(b) imposes signiticant transactions costs on foreign investors and U.S. licensees that seek to affiliate with one another. Those costs are more than the obvious burden of hiring Washington communications lawyers, consultants, and publicists. The larger costs are the agency costs of inferior structures for ownership and control of the resulting international teleconununications venture. The Few neither acknowledges nor bears those costs. Like all costs, however, those agency costs ultimately work their way into the price that consumers pay for the firm's services and the return that the firm's owners earn on their invested capital." ss Ibid., p. 114. 8') Ibid., pp. 231-236. 911 Ibid., pp. 287-364. '" Ibid., pp. 237-239.

112 While auctions have been used in the areas of satellites, mobile and fixed wireless services, they could potentially apply as well to the radio spectrum that most wircline carriers need to link the operations of their networks. I-' Globerman (1999), p. 3. 94 Wall Communications (2000), p. 10.

''' Phillips (2000), pp. SS and 56. ''" As Globerman (1999) sagely observes at p. 3: "... the traditional focus of welfare economists is on efficiency and equity. [However,] politicians [have] eclectic policy concerns." Therefore, Wall aims to present his clients' complaints in a manner that allows them to be assessed against the benchmarks that the Government itself has established. wall Communications (2000), p. 72. ''" Ibid., p. 76: "... constraints on capital resulting from foreign ownership restrictions have increasingly limited the ability of the industry to maintain investment levels competitive with more open economies." vv Ibid., pp. 77-79. 1011 Ibid., p. 89: "Because human resources are dynamic ... whereas physical capital is essentially static in nature, we believe that the impact of the ownership rules on human resources is potentially a more significant problem than the impact on investment in physical infrastructure." 101 Ibid., p. 79: "It is simply not realistic to believe that Canada beat the world in telecommunications infrastructure and technology while restricting foreign investment in the industry." This is a weak argument. While Wall's skepticism vis-d-vis government claims of success is not unmerited, his incredulity may cause him to overlook the fact that the FDI restrictions may have less impact than other factors on Canada's performance (e.g. the benefits of one-tier regulation in Canada as opposed to two- or three-tier regulation in the United States and strategic alliances with U.S. carriers).

"'= Globerman (1999), p. 11: "[The costs of the FW restrictions] may be substantially higher now and in the foreseeable future than they have been in the past, given: (1) the commitment ofpolicymakcrs to have competition in all segments of the Canadian telecommunications industry; (2) the seemingly accelerating rate of technological change in the sector along with a growing convergence between telecommunications and computer technologies, which make technological gaps between international firms more likely; (3) the proliferation of wireline and wireless alternatives, which expand the set of entry strategies available to foreign-owned carriers, as well as the market niches that can potentially be served by specialized carriers." 103 Wall Communications (2000), p. 90: "... the Canadian telecom industry is facing the challenge of a new phase of capital investment. We believe the key concern is not so much whether investments will occur (they will) but how quickly and at what cost. The reality of limitations placed on foreign ownership is to clearly place a chill on Canada's ability to match the speed of investment of other countries, at comparable costs." III. The higher the score, the greater a market is restricted. '°5 All European countries were found to be less restrictive than Canada. 1°" Warren (2000), p. 83.

1117 Globerman (1999), p. 3. "'" The general lack of success of foreign carriers in the U.S. market raises the possibility that these companies do not have sufficient productivity advantages to overcome these drags. Nevertheless, it is possible that the United States is able to capture some benefits from the distortions that its laws, regulations and Congressional sabre-rattlers impose on telecoms markets (such as capturing economic rents, disabling foreign competitors, etc.). This story can be repeated time and again, because anyone with global ambitions must have a presence in the U.S. market. Possessing critical scale, the United States can perhaps afford to behave as a market maker and to extract rents from foreign applicants. For smaller countries, in whose markets participation is not mission-critical to foreign service providers, however, their governments arc market takers; they must set rules that are favourable to investors and service providers.

111') Globerman (1999), p. 15. 110 Ibid., p. 20. See Hubert (1995); and OECD Communications Outlook (annual).

� Lee and Lie (2000), p. 2. 111 Ibid., p. 18. m Ibid., p. 19. 115 Piragibe (1998), pp. 20-21. 116 Ibid., p. 19. 117 Ibid., p. 21. 11" Wireless interconnection charges in Japan remain notoriously elevated, while wireline interconnection charges have only been reduced modestly under severe pressure from the United States.

n9 Phillips (2000), p. 55. 120 Lee and Lie (2000), p. 29. 121 Ibid., p. 26. ,z= Ibid., p. 27. 123 Id.

124 Ibid., p. 26. 125 Ibid., p. 29.

126 Sidak (1997), p. 214. 127 Wall Communications (2000), p. 74. 128 Ibid., p. 78. 120 Ibid., p. 91. 13" However, the OEf:H Communications Outlook does not present any data comparing the availability of particular types of services or service packages in OLCD Member countries.

111 Graham (2000), p. 20. 132 Sidak (1997), p. 217. 133 Ibid., p. 286.

134 According to the theory of second best, when the conditions for free trade are not fulfilled a move to free trade may lead to a less efficient or inequitable state. t.15 Generally higher for incumbents (due to relatively increased rates of return and, perhaps, the capture of economic rents) and lower for new entrants. 136 Generally higher due to relative scarcity. 137 Generally higher because of less efficiently priced inputs.

'•'" Wall Communications (2000), p. 104.

1-") But compare Hubert (1995) and the OECD Comnumications Outlook (annual). 1411 RIJC Dominion Securities (2001) forecast that capital expenditure in the U.S. telecoms industry would decline by 2 percent in 2001 versus an increase of 14 percent in Canada. The same report also spoke of "'cape catchup' required to upgrade U.S. telecoms infrastructure (e.g., digital wireline service has been widely available in Canada since 1993, but only recently available in the U.S.)." Canada's lead over the United States in digital deployment is the basis for competitive pricing and service offerings at the residential consumer level, while Canada tends to lag in business services. This kind of performance is consistent with the predominantly social democratic ethos in Canada. 141 Globerman (1999), at p. 17, identifies "two questions ... of particular interest: (1) Have the restrictions significantly affected inward FDI flows? (2) Have reductions in inward Fdi flows had significant and measurable impacts on economic efficiency by altering competitive conditions and other contributors to spillover efficiency effects?" "Reductions" is not the right word. The issue is "restrictions". Investment flows seem to have increased rather than decreased since the foreign ownership rules were introduced in 1987 (and passed into law in 1993), for Canada has opened the market to competition and loosened those restrictions. 1_' This recommendation reflects greater confidence in economic history than in the application of economic theories and econometric models to future events, given the risk with such prospective research projects of poor quality inputs being fed into the models and producing misguided conclusions.

Australia, 1995: Further Liberalization of the Australian Telecommunications Market, WTO Doc. No. S/NGBT/W/14, 28 September.

Bhagwati, Jagdish, 1995: An Unhealthy Obsession with Reciprocity, Financial Times, 24 August.

Conklin, David W. (ed.), 2000: Strategies for the 21st Century—Canadian Telecommunications Policy Forum, Conference Papers, Richard Ivey School of Business, University of Western Ontario, London, Ontario.

Coughlin, Cletus, 1992: Foreign-Owned Companies in the United States: Malign or Benign? 74 Federal Bank of St. Louis Bulletin 17.

Fcc (United States, Federal Communications Commission), 1995: Market Entry and Regulation of Foreign-Affiliated Entities, Report and Order, IB Docket 95-22, 11 F.C.C. Rcd 3873.

Findlay, Christopher, and Tony Warren, 2000: Impediments to Trade in Services: Measurements and Policy Implications, Routledge, London.

Gera, Surendra, Wulong Gu, and Frank C. Lee, 1999: Foreign Direct Investment and Productivity Growth: The Canadian Host-Country Experience, Working Paper No. 30, Research Publications Program, Industry Canada, Ottawa.

Globerman, Steven, 1999: Implications of Foreign Ownership Restrictions for the Canadian Economy— A Sectoral Analysis, Discussion Paper No. 7, Industry Canada, Ottawa.

Graham, Edward M., 2000: Subsidies, Market Closure, Cross-Border Investment, and Effects on Competition: The Case of FDI in the Telecommunications Sector, Discussion Paper, Institute for International Economics, Washington, D.C.

Hubert, Ronald, 1995: An Analysis of Comparative Regulatory and Policy Structures Based on the Telecompetitiveness Index, in Stanbury (ed.), op. cit., pp. 81―102.

ITU (International Telecommunications Union), 1998: Telecom Reform 1998, Geneva.

Lee, Nae-Chan, and Han-Young Lie, 2000: Korea's Telecom Services Reform through Trade Negotiations, Research Paper, Korea Information Society Development Institute, Seoul.

Marko, M., 1998: An Evaluation of the Basic Telecommunications Services Agreement, CIES Policy Discussion Paper 98/09, Centre for International Economic Studies, University of Adelaide, Australia.

OECD (Organisation for Economic Co-operation and Development), annual: OECD Communications Outlook, Paris.

Idem, 1999: Open Markets Matter: The Benefits of Trade and Investment Liberalization, OECD Policy Brief, October.

Phillips, John, 2000: Foreign Direct Investment Restrictions, in Conklin (ed.), op. cit.

Piragibe, Clelia, 1998: Regulation and Competition in the Japanese Telecommunication Services Market, Working Paper No. 45, United Nations University and Institute of Advanced Studies, Tokyo.

RBC Dominion Securities, 2001: Telecom Capex Part II: Network Utilization, Telecom Services Weekly, Vol. 3, No. 9, 19-25 February.

Roseman, Daniel (ed.), 1985: Canadian Investment Abroad, International Business Council of Canada, Ottawa.

Idem, 1999: Implementing the WTO Agreement on Basic Telecommunications, presentation to the AsiaPacific Economic Co-operation Forum's Working Group on Telecommunications, Lima, Peru, 20 September.

Sidak, J. Gregory, 1997: Foreign Investment in American Telecommunications, University of Chicago Press, Chicago.

Stanbury, W.T. (ed.), 1995: Perspectives on the New Economics and the Regulation of Telecommunications, Institute for Research on Public Policy, Montreal.

Wall Communications, 2000: Policy Study of the Canadian Telecommunications Foreign Ownership Regime, Wall Communications, Ottawa.

Warren, Tony, 2000: The Identification of Impediments to Trade and Investment in Telecommunications Services, in Findlay and Warren, op. cit.


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