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Archived — Research Summaries: Working Paper 2008-01: Formal and Informal Barriers To Foreign Direct Investment in the Telecom Sector

by Ronald Hirshhorn

This study reviews previous efforts to measure foreign direct investment (FDI) restrictions and applies a new measure to assess the relative significance of Canada's restrictions on foreign investment in telecommunications. Following previous studies, a weighted average index is developed in which the weights reflect the relative significance of different restrictions. However, unlike recent measures of FDI barriers developed for the Organisation for Economic Co-operation and Development, which focus solely on the direct investment barriers incorporated in legislation, there is an attempt to also take account of informal barriers, including the barriers to entry erected by incumbent telecom carriers and the corporate and labour market practices of some countries that generally discourage investment by non-residents. While, in many industrial countries, controls on foreign investment have been eliminated, entry remains difficult because of the market advantages retained by incumbent telecommunications firms. In the measure developed in this study, a variety of market and policy indicators are used to take account of these informal barriers.

Consistent with previous studies, Canada is found to have among the highest barriers to inward FDI. Canada's index of FDI barriers, based on data covering 2003 to 2006, is higher than all other nine countries examined except Korea. The U.K. and the U.S. have the lowest barriers to FDI. Sub-indexes were constructed to measure: (1) restrictions affecting potential entrants to the market for fixed network services; (2) potential entrants to the market for mobile services; and (3) foreign enterprises and potential foreign investors. The general barriers to entry into fixed network and mobile telecom services are not significantly higher in Canada than other industrial counties, but discriminatory barriers are much higher, reflecting the fact that Canada is one of the few industrial countries to still limit foreign investment in telecommunications.

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