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OECD EXPERTS MEETING ON THE SERVICES TRADE RESTRICTIVENESS INDEX (STRI) Paris, 2-3 July 2009 SERVICES TRADE RESTRICTIVENESS: TELECOMMUNICATION SERVICES * * This paper presents the results of the STRI work for telecommunications services. The team responsible for the STRI project consists of: Massimo Geloso Grosso, Frederic Gonzales, Anna Jankowska, Rainer Lanz, Molly Lesher, Sébastien Miroudot, Hildegunn Kyvik Nordås (project leader) and Alexandros Ragoussis. Contact persons for this paper are Molly Lesher ([email protected]), Hildegunn Kyvik Nordås ([email protected]) and Alexandros Ragoussis ([email protected]). The team would like to acknowledge the contribution of Dale Andrew and Douglas Lippoldt to the development of the STRI in general. The team would like to thank Dimitri Ypsilanti and Margit Molnar, OECD, and Youlia Lozanova of the ITU for sharing their expertise and experience in the telecommunications sector; and Dale Honek, Markus Jelitto, Claudia Locatelli and Lee Tuthill of the WTO Secretariat for helping with the classification of measures. Finally, the team wishes to thank Ken Ash and Raed Safadi for useful comments and discussions on the STRI project.
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Page 1: SERVICES TRADE RESTRICTIVENESS: TELECOMMUNICATION … · TABLE OF CONTENTS SERVICES TRADE ... 4. Regulation and trade in telecommunications ... SERVICES TRADE RESTRICTIVENESS: TELECOMMUNICATION

OECD EXPERTS MEETING ON THE SERVICES TRADE RESTRICTIVENESS

INDEX (STRI)

Paris, 2-3 July 2009

SERVICES TRADE RESTRICTIVENESS:

TELECOMMUNICATION SERVICES*

* This paper presents the results of the STRI work for telecommunications services. The team responsible for the

STRI project consists of: Massimo Geloso Grosso, Frederic Gonzales, Anna Jankowska, Rainer Lanz, Molly Lesher, Sébastien Miroudot, Hildegunn Kyvik Nordås (project leader) and Alexandros Ragoussis. Contact persons for this paper are Molly Lesher ([email protected]), Hildegunn Kyvik Nordås ([email protected]) and Alexandros Ragoussis ([email protected]). The team would like to acknowledge the contribution of Dale Andrew and Douglas Lippoldt to the development of the STRI in general. The team would like to thank Dimitri Ypsilanti and Margit Molnar, OECD, and Youlia Lozanova of the ITU for sharing their expertise and experience in the telecommunications sector; and Dale Honek, Markus Jelitto, Claudia Locatelli and Lee Tuthill of the WTO Secretariat for helping with the classification of measures. Finally, the team wishes to thank Ken Ash and Raed Safadi for useful comments and discussions on the STRI project.

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TABLE OF CONTENTS

SERVICES TRADE RESTRICTIVENESS: TELECOMMUNICATION SERVICES ................................. 3

EXECUTIVE SUMMARY ............................................................................................................................. 3

1. Introduction ....................................................................................................................................... 5 2. Definition of the sector ..................................................................................................................... 6 3. How are telecommunications services traded? ................................................................................. 7 4. Regulation and trade in telecommunications .................................................................................. 10 5. Which regulations should be included in the STRI? ....................................................................... 15 6. Methodology for developing the STRI ........................................................................................... 20 7. Results ............................................................................................................................................. 23 8. Robustness checks and relevance.................................................................................................... 28 9. Summary and conclusions .............................................................................................................. 31

REFERENCES .............................................................................................................................................. 33

ANNEX I: ADDITIONAL INFORMATION ON THE TELECOMMUNICATIONS STRI ...................... 35

ANNEX II : METHODOLOGY ................................................................................................................... 38

Tables

Table 1.Definition of the telecommunications sector ..................................................................................... 6 Table 2. Examples of different modes of trade for telecommunications sub-sectors ..................................... 7 Table 3.Market imperfections and trade enhancing regulatory responses .................................................... 14 Table 4.A classification of regulations included in the telecommunications STRI ...................................... 17 Table 5.Gravity regressions with the STRI for telecoms ............................................................................. 31

Figures

Figure 1. The composition of the STRI if all measures take the value of one ............................................. 23 Figure 2. Aggregate telecommunications STRI ........................................................................................... 24 Figure 3. STRI by mode of supply ............................................................................................................... 25 Figure 4. STRI by market access/national treatment and domestic regulation ............................................ 26 Figure 5. STRI by discriminatory/non-discriminatory measures ................................................................. 27 Figure 6. STRI by restrictions on operations versus establishment .............................................................. 27 Figure 7. Telecommunications STRI by sub-sector ..................................................................................... 28 Figure 8. Telecommunications STRI according to different weighting schemes ......................................... 29

Boxes

Box 1. Trade and the internet .......................................................................................................................... 9

Annex Tables

Annex Table A1. A description of all of the measures included in the telecommunications STRI………35

Annex Table A2. A comparison of telecommunications STRI scores across weighting schemes…………37

Annex Table A3. Number of missing observations by category and country…………………...…………41

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SERVICES TRADE RESTRICTIVENESS: TELECOMMUNICATION SERVICES

EXECUTIVE SUMMARY

The OECD Services Trade Restrictiveness Index (STRI) project was launched by the Trade

Committee in June 2007 as a tool for quantifying barriers to trade in services at the sector level. This paper

presents the STRI for telecommunications. Telecommunications are defined as comprising fixed line,

mobile and internet infrastructure and services. The STRI indices are presented in aggregate form as well

as decomposed into several classifications: by category of measure, GATS classification, a discriminatory

and non-discriminatory taxonomy, and an entry and on-going operations rubric. These different

classifications will facilitate the use of the indicators in policy analysis for multiple purposes and as a tool

for trade negotiators.

Telecommunications are subject to a number of market imperfections – the most important being

network externalities, access to essential facilities and switching costs. These all favour incumbent firms

and constitute an important entry barrier for new providers in general and foreign providers in particular

and require regulation for competitive markets to prevail. The STRI for telecommunications therefore

includes pro-competitive regulation in addition to explicit barriers to trade and investment as well as

domestic regulation that may have a negative impact on trade and investment.

Pro-competitive regulation can be considered trade enhancing, while lack of it may be trade restricting

when markets are uncompetitive. An innovation of the telecommunications STRI is that it introduces

conditional restrictions that capture the fact that the absence of regulation can be trade enhancing under

certain market conditions. It thus takes into account that one size may not fit all as far as regulation is

concerned. In addition, this feature introduces flexibility for including future best practices.

There are a number of possible scoring and weighting schemes that can be applied when creating a

composite index. The weighting scheme chosen for the STRI is a combination of expert judgement for six

categories of regulations and equal weights of individual measures within these categories. The choice is

based on what is known about the causal relationship between trade barriers and trade, and a careful

statistical analysis of the regulatory database.

Foreign ownership restrictions receive the highest weight in the STRI followed by discriminatory

measures and barriers to competition. Mexico, Korea and Turkey are the most restrictive countries

according to the STRI, and their score is largely driven by restrictions on foreign ownership in the case of

Mexico and Korea, and by discriminatory measures (e.g. restrictions on foreign participation in public

procurement) in the case of Turkey. The least restrictive countries are the United Kingdom, Denmark and

the United States.

The countries that are ranked the most restrictive have relatively more restrictions on market access

and national treatment, while the least restrictive countries‟ remaining restrictions are mainly in the form of

non-discriminatory domestic regulation. This result suggests that there is still scope for significant

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improvement of market access in telecoms within the OECD. In particular, lifting barriers to commercial

presence would lower the index value towards the OECD average for the most restrictive countries. For

the least restrictive countries, possible gains from further liberalisation lie in the area of domestic

regulation.

Robustness checks show a very high rank correlation among different weighting schemes, meaning

that the ranking of countries in the telecommunications STRI is exceptionally robust and not driven by a

particular weighting scheme, but rather by the underlying restrictiveness in the data. The STRI was also

employed in gravity regressions where it was strongly and negatively correlated with foreign direct

investment and sales of foreign affiliates in the telecommunications sector. It is concluded, then, that the

STRI for telecoms appears to measure what it is supposed to measure – namely restrictions on trade and

investment.

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1. Introduction

1. The OECD Services Trade Restrictiveness Index (STRI) project was launched by the Trade

Committee in June 2007 as a tool for quantifying barriers to trade in services at the sector level (OECD,

2007a). This paper presents the regulatory profiles and indexes for telecommunications services in 29

OECD countries for the year 2007. Telecommunications was chosen as a pilot sector because it is among

the most tradable services, there are a number of regulatory issues related to a well-functioning

international market for telecommunication services and information on trade and regulation in the sector

is relatively well-developed. In fact, telecommunications was the first services sector for which an

agreement under the auspices of the World Trade Organization (WTO) and General Agreement on Trade

in Services (GATS) was finalised.

2. The methodology used in this study builds upon the work of others who have studied barriers to

trade in telecommunication services. This methodology was pioneered by the Australian Productivity

Commission (APC) and applied to a range of services, including telecommunications (Warren, 2000). The

OECD has adopted a somewhat similar methodology in the context of its work on product market

regulation (Boylaud and Nicoletti, 2000), and this methodology has since been refined (Conway and

Nicoletti, 2006). It was subsequently adopted with some methodological improvements, including

estimating tax equivalents, in Trade Committee work focusing on several services sectors in non-OECD

economies (see Dihel and Shepherd, 2007). The approach taken in the OECD STRI project builds upon

these efforts using state of the art methodology to a regulatory database compiled for the STRI project.

3. The STRI indices are presented in aggregate form as well as decomposed into several

classifications: by category of measure, GATS classification, a discriminatory and non-discriminatory

taxonomy, and an entry and on-going operations rubric. These different classifications will facilitate the

use of the indicators in policy analysis for multiple purposes and as a tool for trade negotiators.

4. Telecommunications are still characterised by a number of market imperfections, although

liberalisation and technological progress have improved the competitiveness of the market substantially.

Most OECD countries have rolled back state ownership and lifted explicit barriers to trade and investment

in the sector. The absence of explicit barriers is, however, not enough to facilitate market access for

foreign services suppliers. In addition, regulation that ensures interconnection with or access to major

suppliers or dominant firms‟ essential facilities is necessary. Hence, in telecommunications regulation can

be trade enhancing, while a lack thereof may well be trade restricting. The STRI therefore covers

regulatory issues beyond explicit barriers to trade and investment.

5. It is well established in the literature and in regulatory practices that essential facilities in the

telecommunication infrastructure need to be shared to create competitive markets. There are several ways

that governments can mandate or encourage infrastructure sharing. Among the least intrusive ways, seen

from the point of view of the infrastructure owner, is mandating interconnection on reasonable terms,

followed by different forms of local loop unbundling (bitstream, full unbundled access). Among the most

intrusive ways is mandating functional or structural separation of vertically integrated companies.

Regulating interconnection in a way that facilitates foreign market entry is firmly entrenched in the WTO

Telecommunications Reference Paper on Basic Telecommunications as well as in a number of free trade

agreements.

6. Telecommunications are subject to rapid technological progress. Developing a trade

restrictiveness index for the sector that captures current trade restricting and trade promoting regulation and

in addition provides forward-looking policy recommendations is challenging. In several market segments

the appropriate regulation that fosters open and competitive markets depends on the maturity of the market

and the technology. Furthermore, technology is converging towards a common internet-based platform,

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which may open new avenues for competition, but may also change the ability of new entrants to gain

access to the infrastructure of incumbents. Many OECD governments have therefore introduced regulatory

reforms with the objective of developing pro-competitive, technology-neutral regulations.

7. This paper presents a set of regulatory profiles that capture different aspects of trade restrictive

regulations and explicit trade barriers in the telecommunications sector. They are based on information

from the extended OECD Product Market Regulation survey for 2007/2008, the OECD Communications

Outlook 2007 and the International Telecommunications Union (ITU) Regulatory Database.

8. The rest of the paper is structured as follows: Sections 2 and 3 define telecommunications and

trade in telecommunications respectively. Section 4 discusses market imperfections and how they can be

addressed through trade-enhancing regulation. Section 5 discusses the choice of regulatory variables to

include in the STRI, Section 6 presents the methodology while Section 7 reveals and analyses the results.

Finally, Section 8 relates the index to trade and investment flows and estimated trade costs, while Section 9

draws conclusions.

2. Definition of the sector

9. Table 1 presents definitions of the telecommunications sector according to the W/120

classification used by most countries for GATS scheduling purposes, the Central Product Classification

(CPC), Extended Balance of Payments Statistics (EBOPS) which is the most commonly used classification

system for reporting trade in services and ISIC Rev 4 which is used for reporting foreign direct investment,

foreign affiliate sales and production.

Table 1. Definition of the telecommunications sector

Name W/120 CPC EBOPS ISIC 4

Voice telephone services 2.C.a. 7521 247 611+612+619

Packet-switched data transmission services 2.C.b. 7523** 247 611+612

Circuit-switched data transmission services 2.C.c. 7523** 247 611

Telex services 2.C.d. 7523** 247 611

Telegraph services 2.C.e. 7522 247 611

Facsimile services 2.C.f. 7521**+7529** 247 611

Private leased circuit services 2.C.g. 7522**+7523** 247 611

Electronic mail 2.C.h. 7523** 247 611+612

Voice mail 2.C.i. 7523** 247 611+612

On-line information and data base retrieval 2.C.j. 7523** 247 611+612

Electronic data interchange (EDI) 2.C.k. 7523** 247 611+612

Enhanced/value-added facsimile services, incl. store and forward, store and retrieve

2.C.l. 7523** 247 611

Code and protocol conversion 2.C.m. n.a n.a n.a

On-line information and/or data processing (incl. transaction processing) 2.C.n. 843** 247 611+612

Source: WTO, OECD, UN. (**) indicates that the service specified constitutes only a part of the total range of activities covered by the UN’s Central Product Classification (CPC) concordance (e.g. voice mail is only a component of CPC item 7523). ISIC classification is according to type of infrastructure (wired, wireless and satellite).

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10. The lack of details in the EBOPS classification is reflected in a lack of detail in the trade data. A

number of countries provide trade data for total telecommunications only and for some countries trade data

are available at an even more aggregate level (i.e. including postal services). As a result, it is difficult to

isolate trade patterns – as well as study the impact of the STRI – in telecommunication services at a more

disaggregated level than EBOPS will allow.

11. The W/120 and corresponding ISIC categories are chosen as the basis for defining the

telecommunications sector in this study. This is clearly not the only possible definition, but since a

purpose of the STRI is to identify and quantify barriers to trade in services in a way that is useful for trade

negotiators, it seems to be the best option. Data on regulation and trade restrictions usually distinguish

between fixed line, mobile and internet services. This corresponds to the ISIC classification of

telecommunications, which allows an analysis of regulation and its relationship with sector performance.

12. Because of rapid technological changes and convergence towards a common internet platform,

the activities that naturally fall under telecommunications change over time. The definition of the sector

and its sub-sectors in trade agreements, notably the GATS, may be somewhat dated and does not

necessarily reflect the business environment at present. For instance, television is increasingly part of a

bundle of services offered to households at a flat monthly rate.1 Yet television is found under different

chapters both in trade agreements and in the classification of services in the balance of payments. For this

reason and the fact that broadcasting is subject to different regulatory concerns, it has been decided not to

include broadcasting in the STRI for telecommunications.

3. How are telecommunications services traded?

13. Telecommunication services involve the transmission or treatment of a signal between different

locations, which can involve an alteration of its properties or storage. Any transaction between two parties

in different countries for the purposes of the transmission or treatment of a signal can be considered

international trade. Table 2 outlines the relevance of different modes of supply for telecommunication

services sub-sectors (that is, fixed line, mobile services and internet).

Table 2. Examples of different modes of trade for telecommunications sub-sectors

Fixed service Mobile Internet

Mode 1: Cross-border supply

Revenue from interconnection with

foreign networks / from services of

signal treatment

Mode 2: Consumption abroadRevenue from tourists and business

travellers using the local network

Revenue from international roaming

charges

Revenue from tourists and business

travellers using local internet

services

Mode 3: Commercial presence

Mode 4: Movement of people

Revenue made from international calls terminated or transited through the

domestic country

Revenue from foreign affiliates and joint ventures

Temporary movement of telecommunications professionals

14. Measuring telecommunications services trade has become increasingly difficult. A large amount

of international traffic takes place under peering agreements between providers, that is, without a record of

currency transactions across borders. Furthermore, although most OECD countries report gross trade

flows, a few still report net flows.

1 . According to Eurostat as reported in the European Commission (2008), 12% of European households buy

television as part of a communications bundle.

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15. In what follows, we draw attention to a number of distinctive characteristics of trade in each sub-

sector. It is worth noting that the separation between different activities in the sector may not be as relevant

in the future when voice and data are likely to share common internet platforms.

3.1. Fixed line telecommunication services

16. Cross-border trade in telecommunications is mainly related to making international telephone

calls. In the past, the accounting rate system administered by the ITU governed the payments for

international calls. It typically involved net payments at bilaterally negotiated wholesale prices among

state-owned monopolies. Payments were made only if the number of minutes terminated was unbalanced.

Furthermore, the accounting rates tended to entail considerable transfers from developed to developing

countries. With the liberalisation of the sector, the accounting rate system has largely been replaced by a

reference termination rate which is non-discriminatory.

17. Like under the accounting rate system, payments between carriers of international traffic are

usually made on a net basis, and sometimes “bill and keep” is used, involving no financial transactions

even when traffic is not balanced. Assessing trade in telecommunications from balance of payments data

may therefore shed little light on developments in international markets in telecommunications. As

explained by Molnar (2008), fixed line minutes of international calls have declined over recent years and

the price per minute has declined even more. Falling demand in spite of sharply lower prices reflects the

substitution away from fixed line telephony to e-mail, mobile and voice over internet protocol (VoIP).

18. VoIP is provided over internet broadband networks where, technically speaking, voice is like any

other piece of information. However, in order to call fixed line and mobile telephones, interconnection is

required. VoIP can be particularly attractive for international calls as voice can be transported on the

internet across the border and terminated as a local call. International calls in the traditional sense could

therefore cease to exist in the not-too-distant future.

19. Commercial presence is established through foreign direct investment, where minority

shareholding and mergers and acquisitions (M&A) have been the most common ways of entering the

market in OECD countries. Globally, the share of telecoms in total services M&A increased from 12% in

the period 1987-1992 to 36.6% in 1999-2004 with the highest share (56.4%) in the later period in

Denmark, Sweden and the United Kingdom (Coerdacier et al. 2009).

20. Explicit barriers to cross-border trade are few and the technological possibilities to enforce

remaining restrictions are probably limited in the fixed line and VoIP telephone segment. In contrast,

restrictions on commercial presence are relatively numerous. First, direct restrictions on foreign ownership

remain in place in three OECD countries, and are more common in non-OECD countries. Second,

uncompetitive markets affect foreign suppliers at least as much as local ones. Therefore, the STRI for

telecoms includes a number of non-discriminatory regulatory measures that affect the entry of foreign

firms through commercial presence.

3.2 Mobile telecommunications services

21. Mobile services have become increasingly important in the OECD area. Indeed, mobile services

make up 40% of all OECD-area telecommunication revenues, and mobile subscribers outnumber fixed

subscribers by a ratio of three to one (OECD, 2007b). Mobile telecommunication is unique in that it uses

radio waves (spectrum), instead of wires, to connect users. Spectrum is a scarce resource that is non-

homogeneous (that is, the characteristics of each area of the spectrum are different, so that only a portion of

the entire spectrum is suited to mobile telephony). Because of spectrum‟s scarcity, both domestic and

international regulation and standards play an essential role in the mobile services market.

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22. Trade in mobile telecommunication services can be characterised by the four modes of supply

outlined in the GATS (see Table 2). Cross-border supply and commercial presence represent the two most

important channels for mobile services trade. In the past, the impetus for establishing a foreign affiliate

was heightened by the desire to avoid high roaming fees from other networks. One way to reduce high

roaming fees is to ensure that foreign mobile operators receive mobile virtual network operator (MVNO)

status in the host country rather than being limited to using the services of only a single mobile operator in

the host country. Trade via Mode 2, or consumption abroad, is a relatively minor share of mobile services

trade and is limited primarily to fees derived from roaming. Finally, trade through the temporary

movement of people represents the smallest share of mobile services trade.

23. In the past several years, technological advances have facilitated a convergence between fixed

and mobile telephony (phones that act as a mobile phone outside the home but connect to a Wi-Fi or

Bluetooth when inside the home). However, it is not clear that these so-called “converged services”

substitute to a large degree for one another. Yet there appears to be significant scope for substitutability in

the future, particularly as there is a shift of SMS to internet-based routing and VoIP over mobile networks

(Sutherland, 2007). There is high demand for mobility in the provision of all manner of

telecommunication services, yet advances in the underlying cellular technology will be needed to meet this

demand.

3.3 Internet services

24. Both fixed and mobile services are associated with the transmission of voice, while the internet

involves the transmission of any signal that can be electronically stored in a computer. The internet

operates in a distinct manner from the other telecommunication sub-sectors in that trade occurs almost

exclusively between firms rather than between individual customers and firms. The case of foreign

affiliates operating in a country is a notable exception to this rule, as well as many activities in the sector

involving the treatment of signals. The operation of the internet and how trade takes place in the sector is

summarised in Box 1.

Box 1. Trade and the internet

Internet service providers need a link to the universal network in order to provide customers with access to all available internet content. A new service provider needs to establish a link to just one other internet provider to access the universal network. Every provider has physical Points of Presence (PoP) in a number of regions. Firms maintain connections between PoPs at the so-called Network Access Points (NAPs). Schematically we could represent the system as follows:

PoP NAP

Internet Service Provider Individual Point of Presence (PoP) Network Access Point (NAP) NAP

NAP PoP

Trade occurs at the Network Access Points, where firms of different nationalities interconnect. While the addition

of new members involves a flow of data across borders, international trade will not take place if the new entrant establishes a link with a firm of the same nationality in order to access the universal network. Payments between firms for these interconnections can take the form of exchanges in kind (peer transactions). Trade can also occur from the operation of foreign affiliates in a country, or else consist of payments for the treatment or storage of data.

Source: Economides (2005).

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25. Contrary to fixed and mobile telephony, trade in internet services is completely disassociated

from the origin and destination of signals. Trade occurs when a firm chooses to establish a link with the

universal network by connecting to a provider of a different nationality. The establishment of such a link

involves agreements that do not depend on the volume and directional flows of signals. The infrastructure

used for the transmission of signals on the internet is the same as for fixed line and to an increasing extent,

mobile services.

26. To summarise, this section has discussed trade in telecommunications by type of technology.

While still useful, technical convergence has to some extent blurred the distinction between the three sub-

sectors. For instance, VoIP is gaining market share at the expense of fixed line telecommunications

services, and may in the near future dominate the market. It is also increasingly common to purchase a

bundle of services, including fixed line telephony and/or VoIP, internet services, television and sometimes

mobile services. Furthermore, the price of the bundle is typically a flat fee.

27. When a stand-alone service, mobile tariffs are still usually a combination of a fixed fee and per

minute rates. However, the fixed fee includes a certain number of minutes, and if that number is not

exceeded by the customer, mobile services are also in practice subject to a flat rate. In the UK, for

instance, only 16% of mobile subscribers exceed their inclusive minutes (Ofcom, 2008). Finally, internet

services are also gaining ground over mobile networks. It is envisaged that in the not-too-distant future

most telecommunication services will be provided over the internet.

4. Regulation and trade in telecommunications

28. As opposed to the other pilot sectors, a lack of regulation can be a trade restriction in

telecommunications. This is an issue well established in international trade agreements, which often

include articles on regulation. Principles for regulation are also the main topic of the WTO

Telecommunications Reference Paper on Basic Telecommunications under the GATS. Pro-competitive

regulation should therefore also be included in the STRI.

29. As a background to the presentation of the specific measures included in the STRI for telecoms,

this section reviews recent literature on regulation and identifies the market imperfections that are most

relevant for trade. The most important market imperfections identified in the literature are network

externalities (bandwagon effects), control over essential facilities in the network, and switching costs. For

each market failure a policy intervention may be necessary for markets to function properly, including

facilitating the entry of foreign services providers. In the following section, each of the most important

market imperfections identified in the literature and the appropriate regulatory interventions are discussed

to highlight barriers for inclusion in the STRI.

30. It is important to note up front that the telecommunication sector is subject to rapid technological

changes and in many cases a best practice has yet to be established. Furthermore, the appropriate

regulation depends on the maturity of the market and the technology in question. Finally, regulation is

costly and subject to imperfections and a cost-benefit analysis may not always come out in favour of

regulation even when market failures can be identified.

4.1 Network externalities or bandwagon access

31. Network externalities arise because a network has a higher value to the individual the more

people are linked to the network. Such externalities are found both in relation to subscription and use. In

the case of subscription, the new subscriber‟s gain is the opportunity to communicate with all existing

subscribers, while existing subscribers gain from one more member in the network. The new subscriber

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will, however, only consider her own benefit when deciding whether to subscribe. Network externalities

can therefore lead to start-up problems and underinvestment in the absence of regulation. The regulatory

remedy is typically price regulation or subsidies to compensate the supplier until a critical mass of

subscribers is reached and demand is sustained.

32. Alternatively, universal service obligations (USO) can be imposed. In practice, it is often the

incumbent dominant firm that faces universal services obligations, while entrants are often required to

share the cost. Whether universal service obligations are a burden for the incumbent or an advantage in the

long-run depends on the way in which contracts for USOs are tendered and the particularities of each

market. Contributions to universal services that are transferred to the incumbent can be considered a tax

on entrants if, in fact, the incumbent gains from fulfilling the obligation. This is more likely to take place

if USO contracts are not competitively awarded (e.g. grandfathering).

33. In market segments in which access to networks is already universal, the start-up problem has

obviously been solved and continued government intervention to stimulate demand may be superfluous.

However, with the emergence of new technologies that require substantial investments in infrastructure,

the issue may resurface. At the moment investment in broadband appears to be the sub-sector in which

network externalities may justify government intervention in order to stimulate investment or demand

(ITU, 2009).

34. Network externalities in the use of telecommunications networks can more easily be internalised.

When a telephone conversation is made both parties usually gain, but only one – most often the caller –

pays. Markets have internalised this by introducing toll-free numbers, which have been institutionalised in

the Universal International Freephone Number (UIFN) administered by the ITU. In the consumer market,

collect (or reverse) calls are possible.

35. In addition to the investment issue, network externalities can also be a competition issue. If

newcomers are denied access to the incumbent‟s customers or are only allowed access at unfavourable

conditions, the newcomer may be unattractive to potential consumers because of the limited number of

people that customers can reach at competitive rates. Therefore, mandated interconnection on reasonable

terms is the standard policy measure to deal with network externalities, a policy that is applied in almost all

OECD member countries.

36. Although all OECD countries recognise the need to regulate interconnection and the terms of

interconnection, the scope of regulation differs. Dominant fixed line telecommunication firms are usually

required to interconnect entrants at regulated prices, while newcomers do not face the same requirement.

Mobile services providers are also required to interconnect in many countries, while interconnection in the

internet backbone market is typically not regulated. Yet, the largest firms have chosen to interconnect

through peering agreements in which traffic, but no money, is exchanged and information flows seamlessly

across borders (Faulhaber, 2005).

37. Lack of interconnection regulation can be seen as a barrier to trade and investment in the

telecommunications sector in markets in which there is a dominant firm or where a few firms act as a

cartel. In a competitive market, in contrast, firms will not have incentives to refuse interconnection and

lack of regulation need not be considered a trade barrier, as the internet clearly illustrates. As a result, the

STRI index includes absence of interconnection regulation conditioned on the presence of a dominant firm,

major supplier or a cartel. It is of course a matter of judgement whether or not a dominant firm exists, but

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there appears to be consensus that if one firm has a higher market share than 50%, then it can exert market

power.2

38. Another regulatory issue related to network externalities is standards. They have an important

impact on market conditions and the diffusion of technology. Common standards reduce entry barriers in

new markets. It has, for instance, been argued that a common standard has facilitated the high mobile

penetration rate in Europe.

39. Traditionally, standards were mainly set by regulatory bodies, which co-ordinated at an

international level (e.g. though the ITU).3 Thus, international standards in fixed line telephony and internet

backbone services are adopted in all countries. However, market-driven de facto standards for technical

compatibility have also emerged and some observers argue that the standards problem can be solved by the

market and is not automatically a reason for government intervention. For instance, in the mobile market

standards differ among countries, rendering international roaming difficult or impossible in the past. More

recently, however, handsets often come with technology that ensures interoperability even when standards

differ.

40. However, a technical standard may also lock in a technology and its future development path.

Therefore, setting standards too early may lead to the adoption of an inferior technology, while setting

standards too late may result in a slower diffusion of the technology than would otherwise be the case.

Moreover, setting standards can under some circumstances result in higher prices and a less competitive

market. For instance, when standards are proprietary and used strategically by incumbent firms, they may

lead to higher prices and less competition than if different technologies competed for the market. In any

case inter-operability among different services providers and technological compatibility are considered

important for competitive markets.

41. There is no consensus on the extent to which and in which areas international standards are

necessary to ensure open markets. It is beyond the scope of the STRI project to pass judgement on the

extent to which international standards are needed. The approach should instead be to accept the rationale

for existing standards under international standard setting bodies, and include in the STRI index adoption

of international standards when such standards exist. Or put differently, not adopting international

standards when such standards exist is considered trade restricting. However, for the pilot phase less than

two-thirds of the OECD countries have provided information on the adoption of international standards,

and so the STRI does not include this measure, although ideally it should.

4.2 Access to essential facilities

42. An essential facility is defined as a physical facility that is truly non-duplicable, owned by a

monopoly and potential competitors cannot circumvent it (Faulhaber, 2005). When essential facilities

exist, the regulatory response is to mandate the facility to be shared among rivals on reasonable conditions.

2 . This is not to say that firms with a lower market share cannot exert market power or that firms with more

than half the market always behave uncompetitively. The threat of entry can, for instance, make a

dominant firm behave in a way consistent with competitive markets. It is, however, not practical to take all

the details into account when constructing an index and a 50% market share should give a good indication

of the need for pro-competitive regulation.

3 . An international standard setting body, the International Telecommunications Union (ITU), was

established in 1865. The ITU produces recommendations for the adoption of standards in

telecommunications, from traditional telephony to emerging technologies such as the Next Generation

Network (NGN).

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The telephone local loop is such an essential facility, and local loop unbundling (LLU) is mandated in

almost all OECD countries.

43. However, with new technology there may be substitutes to the services that hitherto could only

be delivered through the local loop. Examples are cable TV networks offering voice and internet services.

In addition, mobile telephone services could be a sufficiently close substitute to constitute competitive

pressure on the incumbent controlling the local loop, at least for voice services. These are examples of

facilities-based competition and it has been argued that local loop unbundling is no longer necessary when

facilities-based competition is feasible. Nevertheless, regulators such as Ofcom and the European

Commission argue that “enduring economic bottlenecks” remain and necessitate access regulation, and

most if not all OECD countries have such regulation in place.

44. The regulatory issues at present appear to be more related to the conditions under which

unbundled loops are rented (i.e. price regulation of local loops). In addition, LLU of fibre networks have

arisen as a new regulatory issue. While there is some debate on whether mandating unbundling of this type

would discourage investment, the ITU‟s view is that the unbundling options that apply to copper should

also apply to fibre (ITU, 2009). OECD research, however, points out that there may technical difficulties

related to unbundling of next generation access networks and that other regulation that ensures non-

discrimination in access to the network may be more appropriate (OECD, 2008b).

4.3 Switching costs

45. Switching costs in the context of telecommunications are defined as the real or perceived costs

that are incurred when changing supplier but which are not incurred when remaining with the current

supplier (Xavier and Ypsilanti, 2008). Switching costs arise from lengthy and cumbersome switching

procedures, non-transparent pricing, technical incompatibility of equipment and long-term contracts with

customers. From a regulatory point of view, number portability is a key issue related to switching costs.

46. If consumers and businesses have to change telephone numbers to switch telecoms provider, they

may hesitate from making the switch even if other services providers offer lower prices or a preferred

services package. This may constitute an entry barrier to new services providers, including foreign ones,

since switching costs are likely to deter potential customers. In addition, switching costs contribute to less

competition among existing services providers.

47. Mandating number portability both for mobile and fixed lines has become a common regulatory

response to uncompetitive behaviour related to switching costs. However, even when number portability is

mandated, a lengthy porting process can still constitute a significant switching cost. Therefore, some

countries, for instance France, Spain and the United Kingdom, have imposed a maximum porting time. The

UK regulation will set a maximum porting lead time for mobile numbers to two hours from 1 September

2009 (European Commission, 2008; Ofcom, 2009). Ideally, the time aspect and efficient implementation

of the regulation should be taken into account in the STRI, but the information to do so is unavailable for

the pilot phase of the project.

48. Other potential regulatory issues related to switching costs are bundling of services. Such

bundling can benefit consumers substantially, providing complementary services at lower prices than

purchasing the services one by one. Furthermore, bundling may save consumers considerable search costs.

However, the practice may have a negative impact on the level of competition in the market when

consumers find it difficult to compare prices and quality among telecoms services providers, and when it is

difficult to switch services provider for one of the services included in the bundle. In the latter case in

particular, it is difficult for new specialised services providers to enter the market, including foreign firms.

Finally, long-term contracts may lock consumers in and raise switching costs.

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49. This section has provided a brief discussion of the most important market imperfections in the

telecommunications sector. It has argued that when markets are inherently uncompetitive, pro-competitive

regulation is necessary to create open markets. On the basis of this discussion, Table 3 sets out the pro-

competitive regulatory measures that can be considered trade enhancing.

Table 3. Market imperfections and trade enhancing regulatory responses

Market imperfection Regulatory response

Mandating interconnection

Regulating the terms and condition of interconnection

Universal services requirements

Local loop unbundling (LLU)

Regulating pricing and conditions of LLU

Number portability

Number portability processes

Network externalities

Essential facilities

Switching costs

50. All of these regulations are candidates for being included in the STRI for telecoms. For universal

services requirements, it is the way the USO contracts are awarded and the way USO is financed rather

than USO requirements per see that can potentially be trade distorting. Grandfathering is considered the

least transparent and competitive way of awarding USO contracts, and is selected for inclusion in the

index, as further discussed in Section 5.

51. The use of scarce resources such as bandwidth is not a market imperfection per see, but the way

that such resources are allocated may raise competition and trade issues. Licensing of mobile operators is

a case in point. Both the decision on how many licenses to award and the way they are awarded (e.g.

auctions versus beauty contest) can raise trade issues, particularly related to commercial presence.

Likewise the allocation of bandwidth and to what extent secondary trading is allowed has a bearing on the

competitiveness of the market and access for foreign services providers.

52. Assessing the competitiveness of the market is not always straight forward. Temporary market

power can be a result of superior technology and better value for money. Furthermore, a mark-up over

costs for firms in this position can be considered a return on the innovation that gained them the

prominence in the first place. Mark-ups can also provide an incentive for others to invest in innovation and

infrastructure.4 If so, competition for the market can create a dynamic and efficient market.

53. This discussion leads us to the difficult question of when regulation is necessary in order to create

a competitive market. And consequently under which circumstances should lack of regulation be

considered a trade barrier? As the discussion reveals there is not always consensus on this. Furthermore,

the need for regulation may vary from one market to the next depending on its size and maturity. A

solution to this dilemma is to deem lack of pro-competitive regulation trade restricting when the market is

considered uncompetitive (i.e. when there is a dominant firm). This is the solution adopted for the STRI as

further explained in Section 6.

4 . See Molnar and Bottini (2008) who find that mark-ups in telecommunications are in the middle range

compared to other sectors.

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5. Which regulations should be included in the STRI?

54. The construction of a telecommunications trade restrictiveness index is a complex exercise in

part because the rapid pace of technological change continuously alters the structure of the industry. The

index should include information that is sufficiently specific and detailed that it can inform trade

negotiations and regulatory reform. But the index should not be so detailed that the primary barriers are

overshadowed by lesser restrictions that add little to the essence of trade restrictiveness.

5.1 Classifying the restrictions according to different typologies

55. Classifying barriers and regulations in telecommunications under different typologies (Table 4)

can increase the usefulness of the regulatory profile and STRI by highlighting different dimensions of the

data specifically for negotiators, regulators and industry analysts.

56. Applying the GATS terminology increases the relevance of the STRI for WTO negotiators.

However, as with any classification, it is not always possible to clearly identify to which category certain

restrictions belong and there are overlaps in the classification of some barriers. For example, quantitative

restrictions belong to both market access and national treatment when they are discriminatory against

foreign providers.

57. Market Access and National Treatment measures are classified together because they are often

difficult to distinguish in practice (although less so for scheduling purposes). This grouping also allows a

distinction to be made between restrictions subject to scheduling under the GATS – and consequently to

negotiations for their removal – and other largely domestic regulatory measures that do not need to be

scheduled.

58. Restrictions not captured by either market access or national treatment are classified under

Domestic Regulation and Other. This category casts a broad net with the aim of capturing the wide range

of possible relevant measures, including those that are part of supplementary documents such as The WTO

Annex on Telecommunications and the WTO Reference Paper on Basic Telecommunications. Domestic

regulatory measures are subject to both existing disciplines and further negotiations with a view to

reinforcing them. This includes increasing their transparency beyond what is required in existing rules on

transparency.

59. Classification according to the GATS modes of service delivery can also provide useful

information for negotiators. These modes include: Mode 1: Cross-border supply; Mode 2: Consumption

abroad; Mode 3: Commercial presence; and Mode 4: Temporary movement of natural persons. Cross-

modal measures are also identified. By highlighting which modes are most restrictive, negotiators can

better tailor their requests and offers in the context of services trade talks.

60. This study further classifies measures according to two distinctions often used in the literature on

restrictiveness indices for services: regulations that apply to the establishment of firms versus those

affecting their on-going operations; and measures that are discriminatory versus non-discriminatory.

Establishment restrictions can generally be regarded as impediments to the movement of capital, while

those applying to firms‟ operations constrain service provision after establishment. Non-discriminatory

measures affect total demand whereas discriminatory ones typically only have a bearing on import

demand. These distinctions are important because diverse types of barriers may have different economic

costs. These classifications are not perfect, but prove useful in helping regulators and industry analysts

identify priority areas for reform given defined economic policy objectives.

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5.2 Measures included in the STRI

61. After careful analysis of the regulatory regimes of OECD countries and input from a wide range

of industry experts, Table 4 proposes a list of measures that should be included in a telecommunications

STRI. The table is based on the following criteria:

Barriers and regulations that are mentioned explicitly in the GATS;

Barriers and regulations that are mentioned explicitly in regional trade agreements; and

Barriers and regulations that experts (during the December 2008 OECD Expert Meeting on

Telecommunications as well as in bilateral consultations) identified as relevant for entering a

foreign market.

In practice, most of the barriers and regulations proposed in Table 4 satisfy more than one of these

criteria.

62. All of the measures included in Table 4 have been statistically analysed to ensure that no

overlapping measures have been included. For example, correlation and principal component analysis was

performed to ensure that no two measures pick up the effect of the same policy or regulation.

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Table 4. A classification of regulations included in the telecommunications STRI

Type of barrier MA&NT1

DR&Other2 Mode 1/2 Mode 3 Mode 4 Horizontal

3 Establishment Operations Discriminatory RTAs8

SXM9

Restrictions to foreign ownership and other market entry conditions

Yes No No Yes No No Yes No Yes X X

Yes No No Yes No No Yes No Yes X X

Yes No No Yes No No Yes No Yes X X

Yes No No Yes No No Yes No Yes X X

Yes No No Yes No No Yes No Yes X X

Yes No No Yes No No No Yes Yes X X

Yes No No No Yes No Yes No Yes X X

Yes No No Yes No No No Yes Yes X

No Yes No No No Yes No Yes Yes X X

Public ownership, size and scope of public enterprises

Yes No No Yes No No Yes No No X

Yes No No Yes No No Yes No Yes X

Yes No No Yes No No Yes No No X

Price control7

No Yes No No No Yes No Yes No X

No Yes No No No Yes No Yes No X

No Yes No No No Yes No Yes No X

No Yes No No No Yes No Yes No

No Yes No No No Yes No Yes No X

Regulatory transparency and licensing/permit systems

No Yes No No No Yes No Yes No X X

No Yes No No No Yes No Yes No X

No Yes No No No Yes Yes No No X

No Yes No No No Yes No Yes No X

No Yes No No No Yes Yes No No X

No Yes No Yes No No No Yes No X

Classifications Criteria

Number of foreign firms permitted to operate is

restricted by economic needs test

Roaming tariffs are regulated

Regulations are not published or communicated

in an internationally accessible manner

Licensing agreements are publicly available

Interconnection agreements are publicly

available

Spectrum information is publicly available

Telecommunication licenses are issued in the

form of individual licenses

Excessive administrative practices in the start up

process for registering a foreign firm

Only joint ventures are allowed

Nationality requirement of board members

Foreign suppliers are treated less favourably

regarding eligibility to subsidies (incl. taxes)

Restrictions on foreign participation in public

procurement4

Number of foreign professionals is restricted by

quotas

Prices for wholesale internet services (including

leased lines) are regulated

National or sub-national governments have

special voting rights in any firm6

Fixed line services prices are regulated

Local loop unbundling prices are regulated

Termination charges are regulated

There are foreign direct equity investment limits

There are restrictions on mergers and

acquisitions

National, state or provincial government hold

equity stakes in the largest firm in sector5

Legal limits on shares that can be acquired in

government controlled firms by foreigners

Discriminatory measures

The number of foreign firms permitted to practice

is restricted by quotas

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Table 4. A classification of regulations included in the telecommunications STRI (continued)

Type of barrier MA&NT1

DR&Other2 Mode 1/2 Mode 3 Mode 4 Horizontal

3 Establishment Operations Discriminatory RTAs8

SXM9

Barriers to competition

No Yes No Yes No No No Yes No X X

No Yes No Yes No No No Yes No X

No Yes No Yes No No No Yes No X

Yes No No Yes No No No Yes Yes X

No Yes No No No Yes No Yes No

No Yes No No No Yes Yes No No X X

No Yes No No No Yes No Yes No X

No Yes No No No Yes No Yes No

No Yes No No No Yes No Yes No X

No Yes No No No Yes No Yes No X

Yes No No No No Yes No Yes No

No Yes No No No Yes No Yes No X

No Yes No Yes No No No Yes No X

Classifications Criteria

If business practices are perceived to restrict

competition, foreign firms have no redress

Suppliers are not required to provide number

portability

There is no structural separation required in fixed

line, mobile, and internet services

Contracts for USO provision are assigned

through grandfathering

Number for VoIP are restricted by the numbering

authority

Infrastructure sharing is not mandated

The decisions of the regulator cannot be

appealed

Secondary trading is not allowed

Publicly-controlled firms are subject to an

exclusion or exemption from competition law

Unbundling rules apply to new fiber last-mile

access

The government can overrule the decision of the

competition authority

Unbundled access to local loop is not required

Resale of voice services is not permitted

Notes: 1 market access and national treatment;

2 domestic regulation and transparency (including the Annex on Telecommunications

and the Reference Paper on Basic Telecommunications), as well as other measures not elsewhere classified or part of the so-called unfinished rule-making business (e.g. government procurement);

3 covers measures affecting more than one mode of supply;

4 affects

particularly modes 1 and 3 in practice, but not in current legal GATS terms; 5 inconsistent with market access if government

ownership is mandated by law; 6 inconsistent with market access when voting rights are linked to the right of holding shares;

7

whether they are an impediment depends on the controls concerned or service controlled (e.g. governments would be required by the Reference Paper to have controls over interconnection prices);

8 RTAs analysed include: the US-Australia FTA (2005); NAFTA

(1994); the Japan-Mexico FTA (2005); EFTA-Mexico (2001) and EC-Mexico (2000); 9 refers to expert judgement given at the

December 2008 OECD Services Experts Meeting on Telecommunications.

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63. The measures included in the STRI (Table 4) have been divided into six categories.5 A

description of each individual variable, including source of data, is included in Annex Table A1.

Restrictions on foreign ownership and other market entry conditions

64. Experts unanimously identified restrictions to foreign ownership and other market entry

conditions as the most important measures in determining whether to enter a foreign telecommunication

services market. As such, explicit barriers to foreign ownership and the operation of foreign-owned firms

are obvious measures that should be included in the STRI. Prominent examples of these measures in the

context of telecommunication services include restrictions on foreign direct equity stakes, requirements for

foreign investment only through joint ventures, limitations on mergers and acquisitions for foreign firms

and controlling the number of firms that may operate by economic needs tests or quotas. And while the

telecommunications sector is a capital-intensive industry, and thus less affected by barriers to the

movement of natural persons, such restrictions can still have a dampening effect on trade. The imposition

of nationality requirements for Board members and quotas on foreign professionals represent important

regulations that restrict market entry for foreign firms, and thus impede trade.

Discriminatory measures

65. Discriminatory taxes and other forms of subsidies further apply as important measures to include

in the STRI.6 In addition, discrimination in government procurement is included because, while currently

excluded from the primary GATS disciplines, WTO members have a mandate to negotiate disciplines in

this area and most OECD members are parties to the WTO Government Procurement Agreement (GPA).

Some recent OECD-member RTAs also identify government procurement as a discriminatory issue in the

context of telecommunication services.

Public ownership, size and scope of public enterprises

66. The size and scope of public enterprises are particularly important in the telecommunications

industry because most countries had government monopoly service providers until relatively recently. And

while government involvement in the sector has been rolled back significantly in the OECD area in the last

10-15 years, vestiges of these monopoly providers still remain in some countries, in some cases acting as

barriers to foreign providers. For example, if the public sector still holds equity stakes in the largest firm in

the sector or has special voting rights (e.g. golden shares), foreign entrants may find themselves at a

disadvantage. Legal constraints on the number of shares (or percentage stakes) foreigners can take also

reduce competition.

Price control

67. The regulation of prices – both at the retail and wholesale level – is an important regulatory tool

that can increase competition in the market for telecommunication services. The STRI includes measures

on price regulation in each of the three sub-sectors: fixed line, mobile and internet. Some OECD member

RTAs explicitly mention various types of price regulation that may be necessary to bring about a sufficient

degree of competition in the market. For instance, the regulation of prices for access to leased lines is a

common feature among OECD countries, and indeed acts as almost a pre-requisite for new entrants in the

5 . The “restrictions on the movement of people” category, which is included in the other pilot sector STRIs, has

been excluded from the telecommunications STRI because there are too few measures in this category that are

applicable to the telecommunications sector.

6 . The importance of a regulatory measure refers to how trade restrictive it is if introduced, not how frequently it

is introduced in OECD Member countries.

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fixed and internet markets. Regulation of international roaming rates are not yet found in RTAs, but

experts identified roaming regulation as the most important price regulation in the context of mobile

services.

Regulatory transparency and licensing/permit systems

68. Measures concerning regulatory transparency and licensing are also included in the STRI. These

regulations involve the publication and communication of the regulatory and licensing regimes as well as

interconnection agreements and spectrum information. In addition, whether telecommunication licenses are

issued via individual licenses for each sub-sector, as opposed to a general license covering all types of

telecommunication services, as well as whether foreign firms are subject to excessive administrative

practices when registering a firm are also added to the index. All of these measures have been included in

at least one of the recent OECD member RTAs analysed, underscoring their importance to the

telecommunication services market.

Barriers to competition

69. The most numerous barriers included in the STRI fall under the barriers to competition category,

reflecting the fact that as a sector formerly dominated by monopoly providers, ensuring competitive

markets is of utmost importance. Measures that allow publicly-controlled firms some type of exemption

from the general competition law or the government to overrule the decisions of the competition authority

all reduce competition in the sector. Other measures involving dispute resolution, such as whether

appropriate dispute resolution mechanisms are in place for foreign suppliers as well as if firms are

permitted to launch appeals of regulatory decisions, are incorporated. Then telecommunication-specific

measures are added, such as whether number portability, local loop unbundling and infrastructure sharing

are required; and whether the resale of voice services and secondary trading are allowed. Further, measures

concerning restrictions on VoIP numbering, the competitiveness of the process through which universal

service obligation (USO) contracts are assigned, and whether structural separation among network owners

and service suppliers is mandated are incorporated in the STRI.7 Many of these measures have been

included in some recent OECD member RTAs.

6. Methodology for developing the STRI

70. The STRI is derived by aggregating regulations that are potentially restricting trade in

telecommunications services into a composite measure of restrictiveness. The construction of the index

involves decisions concerning three main issues: scoring, weighting and aggregation. Scoring relates to

how regulatory measures are recorded. Weighting captures the relative importance of impediments in

terms of trade restrictiveness (the higher the weight the more restrictive a category of measure is

considered relative to other categories). The aggregation method determines how weights are applied to

scores of regulations to add them up to the STRI. A technical paper explaining the alternative

methodologies, their advantages and disadvantages and the robustness of the chosen methodology is

available for interested readers (OECD, 2009). Here a non-technical summary is presented, while the

formulas applied to the regulatory data are presented in Annex 2 in this paper.

7 . In the PMR questionnaire structural separation is specified as accounting, legal or ownership separation or no

regulation on separation. No regulation implies that vertical integration is permitted, with the possibilities of

erecting entry barriers to foreign firms. The STRI includes whether or not unrestricted vertical integration

prevails, but does not distinguish between the different measures that are taken in order to restrict incumbents

from vertical integration.

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71. After considering different scoring schemes, the approach taken in this study is to transform all

information into binary variables.8 A majority of the questions (more than 95%) included in the regulatory

database are Yes/No questions. Regulatory information of a more complex nature (e.g. foreign equity

limits) can easily be transformed to binary variables by introducing bands, whether or not a country‟s

response is above or below the sample mean or median etc. Therefore, for each category of impediment in

a given country a score is assigned either 0 or 1, with the former representing the absence and 1 the

presence of the restriction. This method ensures that all variables are measured on the same scale and that

the lower end is fixed in an absolute sense such that comparison across different countries and over time is

possible.

72. Aggregating individual restrictions into the STRI consists of two steps. First, each measure is

assigned a weight indicating its relative trade restrictiveness within the category of restrictions to which it

belongs (see the typology of measures in Table 4), with weights assigned to individual measures summing

up to one within each category. The second step involves aggregation of the six categories of regulations

into the overall STRI, again using weights reflecting their relative restrictiveness and adding up to one

across categories. Hence, two sets of weights are required, one for individual measures within a category

and one for categories of measures. The advantage of this approach is that the final index is not influenced

by the number of measures within each category of regulations.

73. A number of weighting schemes have been explored to develop the STRI. These are equal

weights, expert judgement and principal component analysis. Equal weights are the most common

weighting scheme recently applied for constructing composite measures. This is a transparent way of

creating an index in the absence of any clear alternative. Lack of clear alternatives could be due to

insufficient knowledge of causal relationships; absence of an empirical basis for deciding which is more

important; or lack of clarity of what the index is supposed to measure. Equal weights are, however, not as

free of judgement as is often claimed. With equal weights, the relative importance of each measure

included may for instance depend on how many measures are included and how individual restrictions are

organised into sub-indicators, leaving rather a lot to subjective judgement.

74. Expert judgement has the advantage that relative importance can be captured in a realistic and

meaningful way. One objection to using expert judgement is subjectivity. As argued above this objection

also applies to other methodologies and the problem can be reduced, for instance, by asking a large group

of experts to agree on a ranking of measures. This approach was taken at the 2008 OECD Experts

Meetings where experts involved in the telecommunications sector were asked not only to rank and score a

list of regulations, but also to agree on the ranking and scoring. This should reduce the subjectivity

problem substantially.

75. A third methodology for weighting measures is principal component analysis (PCA). This is a

statistical methodology that assigns the highest weight to the variables that contribute the most to the

variation in the dataset. In addition, the PCA methodology helps organise the data into sub-indicators that

are uncorrelated to each other. The advantage of PCA is that it produces an index that highlights the

regulatory differences among countries and thereby helps policymakers identify in which areas they

deviate from their trading partners, and in which areas harmonisation would imply the largest policy

changes. This approach is data driven and can be used to overcome the subjectivity of expert judgment.

The disadvantage of PCA is that the assigned weights do not necessarily reflect the relative trade

restrictiveness of a measure, and that the weights are based on the sample of countries for which they are

estimated. If the index is extended to new countries, this may change the scores of countries already

included as well.

8 . When compiling a composite indicator, it is not advisable to include both binary and continuous variables in

the same dataset as the resulting indicator would not have a clear interpretation (see OECD, 2008a).

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76. Before selecting the preferred weighting scheme, the advantages and shortcomings of each

methodology have been carefully assessed. Furthermore, the robustness of the weighting schemes has

been tested by experimenting with the alternatives and by running Monte Carlo simulations using random

weights. Expert judgement was then chosen as the basis for the weighting scheme:

Weights have been assigned to each category of measures according to the ranking made by

experts at the Services Expert Meetings;9

Within each of these categories, equal weights have been assigned to the individual measures.

77. As noted, equal weights are used when there is a lack of clear alternatives. For trade

restrictiveness, however, there is a growing literature on what restricts trade in services, and there is

increasing knowledge of causal relationships. During the Experts Meetings, a telecommunications sector

study was presented where such relationships were explored. Expert judgements during the meetings were

largely consistent with the findings in the study as well as findings in the literature. There is thus evidence

that some regulations are more important than others (e.g. foreign ownership limits are more trade

restrictive than administrative procedures). Within each category of measures, however, it is less clear

which measures are more important. Therefore, equal weights have been assigned to measures within a

category.

78. An index should reflect the variation in the underlying data as much as possible. This is

particularly important for telecommunications as variation among OECD countries is relatively small. A

correlation analysis of the OECD countries on their scores on all the measures on which we have

information reveals that correlation between pairs of countries ranges only from 0.85 between Korea and

the Czech Republic to 0.99 between the Netherlands and Sweden.

79. Figure 1 illustrates what difference the weighting scheme makes. It depicts the index for an

imaginary country which scores one on all the regulatory measures included in the index and hence has the

most restrictive trade and regulatory regime possible according to these measures. Restrictions on foreign

ownership contribute more to the index in both the expert judgement and the PCA schemes than if equal

weights were assigned. Barriers to competition have about the same contribution in all three weighting

schemes, while regulatory transparency and licensing/permit systems are most important in the PCA

weighting. Finally, discriminatory measures carry very little weight in the PCA, because of little variation

in these variables, while it carries a higher weight in the expert judgement scheme. Both expert judgement

and PCA are significantly different from equal weights.10

9 . See the technical annex how expert rankings have been converted to weights.

10 . This does not necessarily affect the ranking of countries according to weighting schemes. As illustrated in

Figure 1, although the regulatory profiles are different depending on the weighting scheme, the overall

indicator is the same in all three cases. When countries have an even regulatory profile, as in this example, the

overall indicator does not depend much on the weighting scheme, while if the regulatory profile is uneven, the

weighting scheme matters more for the overall indicator.

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Figure 1. The composition of the STRI if all measures take the value of one

80. The method for aggregation of the categories into one single index is linear, taking the weighted

average (using expert judgement weights) of the six categories. An advantage of this method is that each

individual measure can be assigned a weight (the product of its weight within the category times the weight

of the category) and aggregated in different ways into different classification schemes in a consistent

manner. The disadvantage is a high degree of compensation such that a high score in one category can be

compensated by a low score on another category, with the result that there is less variation among

countries on the aggregate index than on the sub-indicators.

81. As emphasised in the STRI roadmap (2007a), it may well be the case that restrictions are

complementary. A geometric aggregation could capture such complementarity, but adjustments would

have to be made when countries have a zero score in a category. Furthermore, it would not be possible to

develop measures with different classifications in the same way as with linear aggregation.

7. Results

82. The STRI for telecommunications is presented in Figure 2. It depicts the total index and its

components classified by category. The relatively high importance assigned to restrictions on foreign

ownership drives the distinction between three of the four most restrictive countries and those ranked in the

middle. Mexico, Korea and Canada are the only countries with restrictions on foreign ownership; Canada

has a foreign equity limit of 46% for mobile operators, while Korea and Mexico have a 49% equity limit

across all telecoms sub-sectors included in the regulatory database. For Turkey, the country with the third

most restrictive STRI score, the index is driven less by restrictions on foreign ownership and other market

entry conditions, and more by discriminatory measures (e.g. restrictions on foreign participation in public

procurement) and to a lesser extent limits on transparency and barriers in the licensing and permit system.

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Figure 2. Aggregate telecommunications STRI

83. The policy category ranked second by experts – discriminatory measures – does not vary a lot

among countries. Indeed, with the exceptions of Turkey and Mexico, OECD members have almost no

restrictions in this category of measure. Likewise, public ownership restrictions are not important barriers

in most OECD countries, although Greece‟s STRI score does include a significant component from this

category; Luxembourg and Portugal also have restrictions in this area and for France public ownership

account for a significant share of the total STRI.

84. The last three categories, which are mainly related to domestic regulation, contribute the most to

the restrictiveness index for the majority of OECD countries. Turkey, Austria, Greece, Poland, Hungary,

Portugal, Italy, the Slovak Republic, the Czech Republic and Spain fall behind the best performers as far as

regulatory transparency is concerned, while barriers to competition contribute significantly to the

restrictiveness for all countries (except the Netherlands), as one would expect given the nature of the

sector. Barriers concerning lack of price control regulations are most marked in Mexico, although they

contribute to the STRI scores for most OECD countries (the Netherlands is the only country that has no

barriers in this category of measures).

85. Compared to the PMR for telecommunications, two countries are ranked as significantly more

restrictive in the PMR than in the STRI. These are Luxembourg and Switzerland. Both get a high PMR

value because of public ownership and a high market share of the incumbent. While public ownership also

features prominently in their STRI indices, market structure is considered an outcome of regulation in the

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STRI and only used as an indicator on whether or not lack of pro-competitive regulation is trade restricting

as explained above.11

86. In contrast, Finland is ranked the third least restrictive in the PMR and is often praised for its

forward-looking regulatory approach in the telecommunications sector, yet its STRI score falls just about

in the middle of the group of OECD countries. Restrictive measures that contribute to Finland‟s STRI

score include nationality requirements for Board members in both the fixed and the mobile sectors as well

as several competition-related measures. For example, secondary trading is not allowed and site sharing is

not mandated. Moreover, USO contracts are granted through grandfathering, the least competitive of all

methods of assigning these types of contracts. It seems that these measures, two of which represent new

data collected by the ITU, account for the difference between Finland‟s ranking on the PMR and the STRI.

87. The individual regulatory measures are classified in several ways in order to highlight different

aspects of trade restrictiveness. Figure 3 depicts the composition of the index according to mode of supply.

Restrictions on foreign ownership are reflected in restrictions on Mode 3, while Modes 1, 2 and 4 do not

appear to be heavily restricted in OECD member countries although some countries, notably Austria,

Norway and Hungary, report that they have quotas on foreign professionals allowed to practice. Apart

from explicit restrictions on foreign ownership, most of the regulations apply to two or more modes of

supply.

Figure 3. STRI by mode of supply

11 . It can be argued that state ownership is penalised twice in the PMR, since the state typically owns the

incumbent, which has retained a high market share, possibly partly because public ownership may deter new

entrants.

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88. Figure 4 depicts country STRIs according to the market access/national treatment versus

domestic regulation and other measures classification. It is clear that market access and national treatment

are relatively more important among the most restrictive countries. Turkey is an exception to this general

observation, having a relatively low score on market access/national treatment, but a high score on

domestic regulation and other behind the border issues, contributing to an overall high score.

Figure 4. STRI by market access/national treatment and domestic regulation

0

0.1

0.2

0.3

0.4

0.5

0.6

GB

R

DN

K

USA

FRA

NLD

DEU ITA

CZE

SVK

ESP

SWE

LUX

PR

T

JPN

CH

E

NZL FIN

BEL

HU

N

AU

S

GR

C

ISL

PO

L

CA

N

NO

R

AU

T

TUR

KO

R

MEX

Market access and national treatment

Domestic regulation, transparency and other measures not classified elsewhere

89. In Figure 5, the discriminatory/non-discriminatory dimension is introduced. This classification

complements the market access/national treatment typology by providing some clarity regarding the

discriminatory nature of the measures (market access and national treatment were combined in the

previous classification because of difficulties in distinguishing them). Discriminatory measures feature

prominently among the most restrictive countries while the 10 least restrictive countries (except the USA

and Germany) only have non-discriminatory barriers to trade.

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Figure 5. STRI by discriminatory/non-discriminatory measures

0

0.1

0.2

0.3

0.4

0.5

0.6

GBR

DNK

USA

FRA

NLD

DEU

ITA

CZE

SVK

ESP

SWE

LUX

PRT

JPN

CHE

NZL

FIN

BEL

HUN

AUS

GRC ISL

POL

CAN

NOR

AUT

TUR

KOR

MEX

Non discriminatory

Discriminatory

90. The index has been calculated for regulations on market entry versus restrictions on on-going

operations. Figure 6 sets out the results.

Figure 6. STRI by restrictions on operations versus establishment

0

0.1

0.2

0.3

0.4

0.5

0.6

GB

RD

NK

USA

FRA

NLD

DEU IT

AC

ZESV

KES

PSW

ELU

XP

RT

JPN

CH

EN

ZL FIN

BEL

HU

NA

US

GR

CIS

LP

OL

CA

NN

OR

AU

TTU

RK

OR

MEX

Operations

Establishment

91. Finally, the STRI has been decomposed to show how much each sub-sector (fixed line, mobile

and internet) as well as cross-modal measures contribute to the overall STRI score (Figure 7). In most

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countries the internet is the least restrictive, while mobile and fixed lines contribute about the same to the

overall STRI. Exceptions to this are Canada, Switzerland, USA and Korea where mobile contributes more

and New Zealand where fixed line contributes more to overall restrictiveness.

Figure 7. Telecommunications STRI by sub-sector

8. Robustness checks and relevance

92. This section presents the result of robustness checks testing the sensitivity of results to the

weighting scheme that has been chosen. It also explores the extent to which the STRI measures what it is

supposed to measure – restrictions on trade and commercial presence.

8.1 Robustness checks

93. Section 6 discussed the strengths and weaknesses of the most commonly used weighing schemes

for estimating composite indicators and concluded that a combination of expert judgement for categories of

measures and equal weights within categories is the preferred scheme. Such a decision is of course based

on judgement in addition to evidence from empirical analysis. Therefore, it is useful to assess the extent to

which the resulting STRI depends on the weighting scheme. For that purpose, the STRI has been

calculated using alternative weighting schemes as well. The results are presented Figure 8. Panel A

shows the overall index for telecoms when equal weights are used, Panel B shows the results with weights

based on principal component analysis, and Panel C presents the results with random weights, showing the

maximum, mean and minimum value of the STRI from 3 000 Monte Carlo simulations. A table comparing

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STRI scores across the different weighting schemes as well as the actual number of restrictions per country

can be found in Annex Table A2.

Figure 8. Telecommunications STRI according to different weighting schemes

Panel A: Equal weights

0

0.1

0.2

0.3

0.4

0.5

0.6

USA

GBR

DNK

NLD

DEU

FRA

ITA

CZE

SVK

ESP

HUN

SWE

CAN

BEL

FIN

JPN

NZL

ISL

LUX

NOR

AUS

CHE

PRT

AUT

POL

KOR

GRC

TUR

MEX

STRI

OECD average

Panel B: Principal component analysis weights

0

0.1

0.2

0.3

0.4

0.5

0.6

USA

GBR

DN

KFR

AN

LDD

EU ITA

JPN

NZL FIN

BEL

CZE

CAN

SWE

SVK

ESP

HU

NA

US

LUX

CHE

NO

RPR

TIS

LG

RC POL

AU

TTU

RKO

RM

EX

STRI

OECD average

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Panel C: Random weights

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

STRI index

Upper limit

Lower limit

Mean for random weights

94. The ranking of countries are robust to the weighting scheme, although the level of the STRI is

systematically below the average obtained from random weights. The Spearman rank correlation between

these measures and the STRI calculated with expert judgement weights are the following:

Equal weights: 0.87

PCA-based weights 0.85

With a rank correlation close to 0.9, it can be concluded that the ranking of countries in the STRI is not an

artefact of the chosen weighting scheme, but very robust to the most commonly used weighting schemes.

8.2 Relevance

95. The STRI is a composite index developed from a regulatory database. Although it is documented

that the measures included are all potentially trade restrictive, a final test on the relevance of the STRI is to

what extent it actually measures what it is supposed to measure; namely restrictions on trade and

commercial presence. To check this, the STRI index was entered into the gravity equation and the extent

to which it is correlated with trade and investment is estimated.12

The results are presented in Table 5.

12 . The gravity model explains bilateral trade as a function of relative market size and relative trade costs. It is

extended by the STRI as one additional component of trade costs and estimated on EBOPS data for bilateral

trade, OECD data on bilateral FDI and a new FATS dataset for OECD countries based on firm level data from

Orbis.

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Table 5. Gravity regressions with the STRI for telecoms

Imports Inward FDIInward FATS

(Orbis)

Distance -1.312*** -0.479*** -0.343

Common border 0.346*** -0.437** 1.347***

Common language 0.262*** 0.968*** 0.071

STRI index -0.634 -1.467*** -2.466***

Number of obs. 5,129 3,138 597

R-squared 0.86 0.73 0.61

Notes: The model is run on a panel covering the period 1999-2006, using time-varying country fixed effects. ***, ** and * signify statistical significance at a 1, 5 and 10% level respectively.

96. The STRI is strongly and significantly correlated with FDI and sales of foreign affiliates (FATS);

the higher the index (the more restrictive the country), the lower is FDI and FATS. The correlation with

imports is also negative, but not statistically significant. Given the difficulties of measuring cross-border

trade as discussed in Section 4, this should not be surprising. A less data-demanding way of assessing

trade costs for cross-border trade is to estimate trade costs based on the market share of imports relative to

local services. A methodology for estimating trade costs in this way has been developed by Novy (2008)

and calculated for the pilot sectors (Miroudot et al, 2008). It is found that the STRI for telecoms is

statistically significantly related to trade costs in telecoms as measured in this way, with a correlation

coefficient of 0.42. The regressions thus support the conclusion that the STRI measures restrictiveness to

trade in services.

9. Summary and conclusions

97. Telecommunications represent an infrastructure sector that provides essential services for the

economy and the information society. Due to its critical importance and a number of market imperfections

the sector was dominated by government monopolies in the past. During the last two decades, however,

technological progress, reforms and liberalisation have transformed telecoms towards a dynamic sector in

which some market segments have become competitive. Nevertheless, state control remains in some

countries, while market imperfections still necessitate pro-competitive regulation in many markets.

98. The most important remaining market imperfections in the sector are network externalities,

essential facilities and switching costs. These all favour incumbent firms and may constitute a severe entry

barrier for new providers in general and foreign providers in particular. Therefore, the STRI for

telecommunications includes lack of pro-competitive regulation in markets that are uncompetitive.

99. The STRI for telecommunications shows a ranking of OECD countries according to trade

restrictiveness along several dimensions that should make it suitable for policy analysis as well as for trade

negotiators. The index is robust to different weighting schemes and thus not an artefact of the

methodology chosen. Trade restrictiveness as measured by the index is shown to be strongly related to

trade in telecommunications services, particularly trade through commercial presence. Countries that have

retained such restrictions therefore have the highest (i.e. most restrictive) score in the ranking.

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100. The countries that are ranked in the top half according to restrictiveness have relatively more

restrictions on market access and national treatment, while the bottom half of the ranking‟s restrictiveness

mainly comes from non-discriminatory domestic regulation. This result suggests that there is still scope

for significant improvement in market access in telecoms also within the OECD. In particular, lifting

barriers to commercial presence would lower the index value towards the OECD average for the most

restrictive countries.

101. Remaining trade barriers among the most open OECD countries are mainly barriers to

competition, regulatory transparency and other non-discriminatory measures. These are subject to changes

over time as market conditions develop and regulatory best practice with them. Barriers to competition for

instance can be highly trade restrictive. This is acknowledged in many RTAs that include articles on

competition. However, the trade restrictiveness of lack of pro-competitive regulations obviously depends

on the competitiveness of the market. An innovation in the STRI to deal with the problem that one size

does not fit all is to introduce conditional restrictions. Lack of pro-competitive regulation is deemed

restrictive if the market is uncompetitive. This approach can be further developed and refined, but should

help maintain an index that is relevant to policy makers in a rapidly changing sector.

102. Finally, the STRI suggests that given the importance of non-discriminatory regulations on

operations in the least restrictive countries, possible gains from further liberalisation lies in the area of

domestic regulation. Domestic regulation often becomes more important when explicit barriers to trade

and investment have been removed, as they may significantly affect foreign services providers‟ cost of

servicing the market in question.

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REFERENCES

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Telecommunications”, Economics Department Working Paper no. 237, OECD, Paris.

Coerdacier, N., De Santis, R.A., Aviat, A. (2009), Cross-border Mergers and Acquisitions and European

Integration », Economic Policy, January, 55-106.

Commission of the European Communities (2008), “Progress Report on the Single European Electronic

Communications Market 2007 (13th Report)”, Brussels, 19/03/2008 SEC(2008) 356.

Conway, P. and G. Nicoletti (2006), “Product Market Regulation in the Non-Manufactuing Sectors of

OECD Economies: Measurement and Highlights”, Economics Department Working Paper no. 530,

OECD, Paris.

Dihel, N. and B. Shepherd (2007), "Modal Estimates of Services Barriers", OECD Trade Policy Working

Paper No. 51, OECD, Paris.

Economides, N. (2005), “The Economics of the Internet Backbone”, NET Institute Working Paper No 04-

23.

Faulhaber, G.R. (2005), “Bottlenecks and Bandwagons: Access Policy in the New Telecommunications”,

in Handbook of Telecommunications Economics, Volume 2, Elsevier B.V.

ITU (2009), “The Accounting Rate System”, ICT regulation toolkit,

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Miroudot, S., Lanz, R. and Nordås, H.K., (2008), “Entry Barriers and the Extensive Margin: Estimating

Trade Restrictiveness from Trade Flows and Lack Thereof”, paper presented to the OECD Technical

Workshop on the STRI, 12 December.

Molnar, M. (2008), “Different Regulation, Different Impacts: What Determines Trade Restrictiveness in

Telecommunications?”, paper presented at the OECD Services Expert Meeting, 10 December.

Molnar, M and Bottini, N. (2008), “How large are competitive pressures in services markets? Estimation of

mark-ups for selected OECD countries”, Paper presented to the technical workshop on the STRI 12

December 2008.

Nordås, H.K. and Kox, H. (2008), “Quantifying Regulatory Barriers to Services Trade”, OECD Trade

Policy Working Paper no. 85.

Novy, D. (2008), “Gravity Redux: Measuring International Trade Costs with Panel Data”, The Warwick

Economic Research Paper Series (TWERPS) No 861.

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Future Trade Committee work on Services”, OECD/TAD/TC(2007)4.

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OECD (2007b), OECD Communications Outlook 2007, OECD, Paris.

OECD (2008a), Handbook on Constructing Composite Indicators: Methodology and User Guide, OECD,

Paris.

OECD (2008b), “OECD Policy Guidance on Convergence and Next Generation Networks”, paper for the

OECD Ministerial Meeting in Seoul, Korea, 17-18 June.

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Sutherland, E. (2007), “Fixed-Mobile Convergence”, in Trends in Telecommunication Reform 2007, ITU,

Geneva, pp. 87-100.

Warren, T. (2000), “The Identification of Impediments to Trade and Investment in Telecommunications

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Telecommunications Regulation”, Emarald, 10, 13-29.

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ANNEX I: ADDITIONAL INFORMATION ON THE TELECOMMUNICATIONS STRI

Annex Table A1. A description of all of the measures included in the telecommunications STRI

Measures Source Year Code

What is the maximum foreign participation/ownership (in %) for: Spectrum-based

operators: 34-49%ITU Regulatory Database 2007 TC.1.1.23.9

What is the maximum foreign participation/ownership (in %) for: Spectrum-based

operators: 50-65%ITU Regulatory Database 2007 TC.1.1.24.9

What is the maximum foreign participation/ownership (in %) for: Spectrum-based

operators: 66-99%ITU Regulatory Database 2007 TC.1.1.25.9

What is the maximum foreign participation/ownership (in %) for: Long-distance

service operators: 34-49%ITU Regulatory Database 2007 TC.1.1.23.11

What is the maximum foreign participation/ownership (in %) for: Long-distance

service operators: 50-65%ITU Regulatory Database 2007 TC.1.1.24.11

What is the maximum foreign participation/ownership (in %) for: Long-distance

service operators: 66-99%ITU Regulatory Database 2007 TC.1.1.25.11

What is the maximum foreign participation/ownership (in %) for: Internet service

providers (ISPs): 34-49%ITU Regulatory Database 2007 TC.1.1.23.14

What is the maximum foreign participation/ownership (in %) for: Internet service

providers (ISPs): 50-65%ITU Regulatory Database 2007 TC.1.1.24.14

What is the maximum foreign participation/ownership (in %) for: Internet service

providers (ISPs): 66-99%ITU Regulatory Database 2007 TC.1.1.25.14

Only joint ventures are allowed?OECD Product Market

Regulation Database2007 TC.1.10.0.0

There are restrictions on mergers and acquisitionsOECD Product Market

Regulation Database2007 TC.1.20.0.0

The number of foreign firms permitted to practice is restricted by economic needs

test - fixed

OECD Product Market

Regulation Database2007 TC.1.60.0.1

The number of foreign firms permitted to practice is restricted by economic needs

test - mobile

OECD Product Market

Regulation Database2007 TC.1.60.0.2

The number of foreign firms permitted to practice is restricted by quotas - fixedOECD Product Market

Regulation Database2007 TC.1.70.0.1

The number of foreign firms permitted to practice is restricted by quotas - mobileOECD Product Market

Regulation Database2007 TC.1.70.0.2

Board of directors/Managers (fixed): majority must be nationals or residents OECD FDI Restrictiveness Index 2006 TC.1.160.1.1

Board of directors/Managers (mobile): majority must be nationals or residents OECD FDI Restrictiveness Index 2006 TC.1.160.1.2

Number of foreign professionals permitted to practice is restricted by quotas - fixedOECD Product Market

Regulation Database2007 TC.1.100.0.1

Number of foreign professionals permitted to practice is restricted by quotas -

mobile

OECD Product Market

Regulation Database2007 TC.1.100.0.2

Foreign suppliers are treated less favourably regarding eligibility to subsidies or

taxes - fixed

OECD Product Market

Regulation Database2007 TC.3.282.0.1

Foreign suppliers are treated less favourably regarding eligibility to subsidies or

taxes - mobile

OECD Product Market

Regulation Database2007 TC.3.282.0.2

Restrictions on foreign participation in public procurementOECD Product Market

Regulation Database2007 TC.3.291.0.0

National, state or provincial government hold equity stakes in the largest firm in

sector - mobile

OECD Product Market

Regulation Database2007 TC.4.330.0.2

National, state or provincial government hold equity stakes in the largest firm in

sector - internet

OECD Product Market

Regulation Database2007 TC.4.330.0.3

National, state or provincial government hold equity stakes in the largest firm in

sector - fixed service

OECD Product Market

Regulation Database2007 TC.4.330.0.5

There are statutory or other legal limits to the number or proportion of shares that

can be acquired by foreign investors in gov't controlled firms - mobile

OECD Product Market

Regulation Database2007 TC.4.333.0.2

There are statutory or other legal limits to the number or proportion of shares that

can be acquired by foreign investors in gov't controlled firms - internet

OECD Product Market

Regulation Database2007 TC.4.333.0.3

There are statutory or other legal limits to the number or proportion of shares that

can be acquired by foreign investors in gov't controlled firms - fixed service

OECD Product Market

Regulation Database2007 TC.4.333.0.5

National, state or provincial governments have special voting rights (e.g. golden

shares) in any firms within the sector - mobile

OECD Product Market

Regulation Database2007 TC.4.340.0.2

National, state or provincial governments have special voting rights (e.g. golden

shares) in any firms within the sector - internet

OECD Product Market

Regulation Database2007 TC.4.340.0.3

National, state or provincial governments have special voting rights (e.g. golden

shares) in any firms within the sector - fixed service

OECD Product Market

Regulation Database2007 TC.4.340.0.5

Are mobile termination rates regulated in your country? ITU Regulatory Database 2007 TC.5.390.0.2

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Annex Table A1. A description of all of the measures included in the telecommunications STRI (continued) Measures Source Year Code

Both wholesale and retail roaming rates are regulatedOECD Product Market

Regulation Database2007 TC.5.400.1.2

Are wholesale internet prices regulated? (internet and leased lines) Country Regulatory Agencies 2009 TC.5.410.0.3

Are local loop unbundling prices regulated?Derived from 2007 OECD

Communications Outlook2006 TC.5.420.0.3

Are fixed telecommunication services provided in your country without price

control?ITU Regulatory Database 2007 TC.5.430.0.1

When business practices are perceived to restrict competition, foreign firms have

redress

OECD Product Market

Regulation Database2007 TC.6.680.0.0

Publicly-controlled firms are subect to an exclusion or exemption, either complete

or partial, from the application of general competition law

OECD Product Market

Regulation Database2007 TC.6.790.0.0

Is number portability required from fixed line operators? ITU Regulatory Database 2007 TC.6.820.0.1

Is number portability required from mobile operators? ITU Regulatory Database 2007 TC.6.821.0.2

The government can overrule the decision of the competition authorityOECD Product Market

Regulation Database2007 TC.6.830.0.0

The decisions of the regulator can be appealedOECD Product Market

Regulation Database2007 TC.6.831.0.0

Is international resale of fixed-line voice services permitted? ITU Regulatory Database 2007 TC.6.860.0.1

Is international resale of mobile voice services permitted? ITU Regulatory Database 2007 TC.6.860.0.2

Regulatory unbundling of the local loop required? ITU Regulatory Database 2007 TC.6.870.0.0

Unbundling rules apply to new fiber last-mile access?OECD Product Market

Regulation Database2007 TC.6.880.0.3

Is secondary trading allowed? ITU Regulatory Database 2007 TC.6.970.0.2

Is collocation/site sharing mandated? ITU Regulatory Database 2007 TC.6.980.0.7

Are numbers for VoIP restricted by the numbering authority?2007 OECD Communications

Outlook2006 TC.6.1050.0.3

Contracts for USO provision are assigned through: GrandfatheringOECD Product Market

Regulation Database2007 TC.6.1090.1.0

There is structural separation in mobile services in the form of: no separationOECD Product Market

Regulation Database2007 TC.6.1110.1.2

There is structural separation in internet services in the form of: no separationOECD Product Market

Regulation Database2007 TC.6.1110.1.3

There is structural separation in fixed line services in the form of: no separationOECD Product Market

Regulation Database2007 TC.6.1110.1.5

Regulations are published or otherwise communicated to the public in an

accessible manner at the international level

OECD Product Market

Regulation Database2007 TC.7.630.0.0

Are licensing agreements publicly available? ITU Regulatory Database 2007 TC.7.700.0.0

Are interconnection agreements made public? ITU Regulatory Database 2007 TC.7.710.0.0

Does your country make publicly available information on spectrum (e.g.

regulations and spectrum management table, spectrum fees, etc.)?ITU Regulatory Database 2007 TC.7.740.0.2

Is an individual license required? ITU Regulatory Database 2007 TC.7.760.0.0

Is the number of working days for completing all of the pre-registration and

registration procedures above the OECD average?

Derived from OECD Product

Market Regulation Database2007 TC.7.934.0.0

Is the cost to complete all mandatory procedures for the pre-registration and

registration stages above the OECD average?

Derived from OECD Product

Market Regulation Database2007 TC.7.956.0.0

Is the number of public and private bodies to contact to register a foreign company

above the OECD average?

Derived from OECD Product

Market Regulation Database2007 TC.7.1189.0.0

Discrimination against foreign companies in red tape procedures?1 Derived from OECD Product

Market Regulation Database2007 TC.7.1300.0.0

Notes: The code column in the table refers to the code used to catalogue the measures in the OECD Regulatory Database, which is freely available on the OECD website. 1 This is a binary variable that equals "1" if a country administers a different procedure for domestic (versus foreign) companies for

any of the red tape measures included in the OECD Product Market Regulation Database and "0" otherwise.

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Annex Table A2. A comparison of telecommunications STRI scores across weighting schemes

Country Categories contributing the most to the expert judgement index2

Expert

JudgementEqual Weights

Principal

Component

Analysis

Number of

Restrictions1

AUS 0.14 0.24 0.21 15 Public ownership; Barriers to competition

AUT 0.23 0.25 0.33 17 Restrictions on foreign ownership; Regulatory transparency

BEL 0.13 0.16 0.17 11 Restrictions on foreign ownership; Barriers to competition

CAN 0.20 0.16 0.19 14 Restrictions on foreign ownership; Barriers to competition

CHE 0.13 0.25 0.23 12 Barriers to competition; Price controls

CZE 0.09 0.14 0.18 8 Regulatory transparency; Barriers to competition

DEU 0.06 0.11 0.10 6 Restrictions on foreign ownership; Public ownership

DNK 0.04 0.06 0.06 4 Price controls; Barriers to competition

ESP 0.09 0.15 0.21 8 Regulatory transparency; Barriers to competition

FIN 0.13 0.18 0.17 12 Restrictions on foreign ownership; Barriers to competition

FRA 0.05 0.11 0.07 5 Public ownership; Regulatory transparency

GBR 0.04 0.06 0.05 3 Price controls; Barriers to competition

GRC 0.15 0.29 0.31 17 Public ownership; Regulatory transparency

HUN 0.14 0.15 0.21 9 Restrictions on foreign ownership; Regulatory transparency

ISL 0.17 0.21 0.26 12 Restrictions on foreign ownership; Barriers to competition

ITA 0.08 0.13 0.15 8 Regulatory transparency; Barriers to competition

JPN 0.13 0.18 0.16 9 Restrictions on foreign ownership; Barriers to competition

KOR 0.34 0.27 0.39 21 Restrictions on foreign ownership; Barriers to competition

LUX 0.12 0.23 0.23 14 Regulatory transparency; Barriers to competition

MEX 0.57 0.55 0.65 32 Restrictions on foreign ownership; Barriers to competition

NLD 0.05 0.08 0.10 4 Price controls; Regulatory transparency

NOR 0.21 0.24 0.24 16 Restrictions on foreign ownership; Barriers to competition

NZL 0.13 0.18 0.17 11 Restrictions on foreign ownership; Barriers to competition

POL 0.17 0.27 0.31 16 Restrictions on foreign ownership; Regulatory transparency

PRT 0.12 0.25 0.24 14 Regulatory transparency; Public ownership

SVK 0.09 0.14 0.20 8 Regulatory transparency; Barriers to competition

SWE 0.12 0.15 0.19 9 Regulatory transparency; Restrictions on foreign ownership

TUR 0.25 0.35 0.35 18 Discriminatory measures; Regulatory transparency

USA 0.05 0.03 0.04 3 Restrictions on foreign ownership; Barriers to competition

STRI Score

Note: 1 Out of a total of 62 possible restrictions.

2 The two categories contributing the most to each country's STRI are indicated in this

column, with the first category noted representing the highest contribution.

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ANNEX II : METHODOLOGY

In order to calculate the STRI, each measure is assigned a weight within category and each

category is assigned a weight relative to other categories. Their product forms a set of weights used for

the calculation. Let be score of country in measure ; be the measure-specific weight measuring

the relative importance of inside category in terms of trade restrictiveness, and be the category-

specific weight. The overall weight for measure is given by the product . Using the latter, the

country STRI can be written as the weighted average of scores, that is

where . It is important to notice that since both weights for measures and categories sum

up to one, i.e. and , the sum of their products also adds up to one, i.e. .

1. Scoring

All regulations are transformed into binary scores. Continuous scores are transformed into

by the use of a measure-specific threshold

In order to assess whether is restrictive, two approaches are used depending on the nature of the

variable:

(a) Economic theory or legal and institutional factors. That is, set a threshold in terms of the values‟

economic significance. For example, when transforming foreign equity limits we choose

based on the fact that 50% represents the majority control of a firm to the foreign investor. Two more

thresholds and are introduced reflecting minority ratios granting rights to block

management decisions, the first by the foreign investor, the second by local owners.

(b) For other variables, particularly related to transparency and regulatory “red tape”, an absolute

threshold cannot be established. For such variables, i.e. upper limit of days required for visa

processing, number of working days, number of procedures and cost of getting a license, the sample

mean is set as threshold. Admittedly this violates the criteria that scores should be independent of the

sample. However, since best practice changes over time on these variables; there is no obvious

bottom line; as it turns out that these variables are strongly correlated with trade performance, they are

included in the STRI.

2. Weighting

2.1 Expert judgment for categories/equal weights for measures

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Let be the ranking of group be the ranking of category in terms of relative restrictiveness with

being most restrictive, and the number of measures inside category . The resulting weight for

measure can be written as the product of the weight for category (the first fraction of the formula) and

the weight for the measure inside the category (second fraction):

The approach corresponds to assigning (i) a more than proportionally increasing weight to higher

ranked categories, provided that a > 1 and (ii) equal weights for the measures inside each category.

Parameter reflects the importance we assign to categories ranked highly restrictive relative to the rest. In

particular, for the resulting weights reduce to an equal-weighting scheme for categories. The larger

parameter is, the higher the weights assigned to the more restrictive categories. For , the most

restrictive category receives a weight of unity, and becomes the binding restriction rendering the others

irrelevant. A very high value of a could be applied for instance in sectors where commercial presence is the

only feasible mode of supply. In that case a foreign equity limit of 0% would render everything else

irrelevant. The STRI is calculated for , which gives reasonable space between the rungs on the

ranking ladder. However, more research on the estimation of this parameter would be useful in future.

2.2 Factor analysis (principal components)

A principal component is an eigenvector in the correlation matrix of the variables included in a

dataset. Eigenvectors are ranked according to their corresponding eigenvalues. The number of components

has been chosen on three criteria: 1) the eigenvalue of the component is larger than one; 2) each

component explains more than 10 percent of the variance of the data; 3) the selected components explain

jointly more than 60 percent of the variance of the data. Each component is defined as a set of coefficients,

so-called „loadings‟, measuring the correlation between the individual variables (measures or categories)

and the latent component. PCA assumes that the variables are multivariate normally distributed, which is

not the case for binary data. However this problem can be solved by using the tetrachoric correlation

matrix13

adjusted to become positive definite, as the basis to extract the components, instead of Pearson‟s

correlations. The factors are orthogonally rotated with the purpose of minimising the number of variables

that have a high loading on the same factor. The approach followed here is to weight each variable

according to the proportion of its variance that is explained by the component it is associated to (i.e. the

normalised squared loading), while each component is weighted according to its contribution to the portion

of the explained variance in the dataset (i.e. the normalised sum of squared loadings).

In order to take into account the number of measures under each category the PCA is performed in

two steps. First the PCA is used to assign weights to each measure inside the categories. A sub-indicator

is calculated using these weights for each category. Let be the loading of measure at the PCA

performed inside category on the respective component after rotation, and be the loading of category

. Let also be the proportion of the variance of the entire sample explained by component in

the PCA performed for measures inside categories, and be the same proportion in the PCA performed

for categories. The resulting weight for measure can be written as the product of the weight for

13 . Tetrachoric correlations assume a latent bivariate normal distribution ( ) for each pair of variables ( ),

with a threshold model for the manifest variables ( if and only if ). The means and variances of

the latent variables are not identified, but the correlation, , of and can be estimated from the joint

distribution of and and is called the tetrachoric correlation coefficient.

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category (the first sum of the formula) and the weight for the measure inside the category (second

sum):

The resulting weight is expressed on a scale from zero to one. The denominator of each fraction

ensures that .

2.3 Equal and random weights

A full equal-weighting scheme corresponds to the case where for all and for

all , where stands for the number of measures inside category , and for the number of categories.

Notice that equal weights for both categories and measures is equivalent to the mathematical scheme

presented for the treatment of expert judgments, when .

Random weights, on the other hand, correspond to randomly chosen numbers applied to

each measure where again . The purpose of this final method is purely for sensitivity analysis

on the index results. In particular, we repeat the calculation of the index 3 000 times using a different set of

random weights. We then report the upper limit, mean and lower limit of the index value for each country.

By performing this Monte-Carlo experiment we create an interval reflecting the range of possible values

the index can take in the case of each country when different weighting schemes are applied. The interval

depends upon the extent countries have a relatively even or mixed regulatory profile. In the case of a

country with a relatively even regulatory profile, the country‟s position will be calculated over a number of

consistent regulatory observations that rank relatively high or relatively low, regardless of the weights or

transformation applied (in this case, the interval will be narrow). In contrast, countries with a mixed

regulatory profile will have a much wider interval between upper and lower limit.

3. Treatment of missing values

An issue related to scoring and weighting is how to deal with data that are missing (see Annex Table

A3). Here, the approach is taken to exclude missing measures from the calculation of the STRI for a

country, i.e. missing observations are disregarded when forming equal weights for measures. Hence,

equal weights within categories always sum up to one for each country but countries may have different

weights for the same measure. The reason is that the number of measures, over which weights are

distributed in a category, may differ across countries.

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Annex Table A3. Number of missing observations by category and country

CountryForeign

ownership (19)

Discriminatory

measures (3)

Public ownership

(9)

Price controls

(5)

Barriers to

competition (17)

Transparency

and licensing (9)

AUS 1

AUT

BEL

CAN

CHE 1

CZE 1

DEU 1 2

DNK 4

ESP 4 1

FIN 1

FRA 4 3 1

GBR 2 2

GRC 2 1

HUN 1

ISL 4 6 1 2

ITA

JPN 4 1 4 2

KOR 2

LUX 6

MEX 4 2 1

NLD

NOR 1

NZL

POL 2

PRT 1

SVK 4 1

SWE 1

TUR 1

USA 4 6 1 2

Note: Numbers in parentheses of the column headings indicate the number of measures included in the respective category.