Measurement and Modeling of the Economic Effects of Trade and Investment Barriers in Services by Drusilla K. Brown, Tufts University and Robert M. Stern, University of Michigan.
Prepared for the Coalition of Service Industries (CSI) World Services Congress
Atlanta, GA, November 1-3, 1999.
In this paper, we adapt the latest version of the Michigan Model of World Production and Trade to incorporate relationships and data for cross-border services trade and foreign direct investment (FDI) in the major developed and developing countries subsumed in the model’s structure and database.
Firms are taken to be monopolistically competitive. Each firm produces a set of differentiated products. Products are differentiated both by the original R&D undertaken at headquarters that defines the basic product and by the final location of production. Each firm faces a fixed cost in the country where production occurs, and it then sets an optimal mark-up of price over marginal cost for sales from each location. Free entry guarantees that profits are zero.
Firms locate production for export or for local consumption depending on the type of barriers restraining the conduct of multinationals. In this version of the model, barriers to trade in services take two forms. First, firms may face an ad valorem tax on local capital installed. Second, foreign affiliate firms may face a policy-induced fixed cost of production for local operations.
We report the impact on welfare, trade, factor prices, sectoral output, economies of scale, and activities of multinationals that might occur following the introduction of national treatment of multinational firms in all countries of the model.
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