Trade and foreign direct investment in services: A review

Abstract

Services sector has emerged as the largest and fastest-growing sector in the world economy in the last two decades, providing more than 60 per cent of global output and, in many countries, an even larger share of employment.Not only has the services sector grown in terms of its share in global output and employment, its share in total trade has also grown rapidly in this period.Along with this, we find that global FDI is also shifting away from manufacturing towards services sector.The growing importance of services sector and the corresponding rise in its role in integrating the world economy has led to a stream of literature that examines different aspects of trade and FDI in services.However, very few studies have focussed on the conceptual issues with respect to trade and FDI in services.This paper undertakes a selective review of both theoretical as well as empirical studies on trade and foreign direct investment (FDI) in services.It identifies some of the conceptual issues in this area, e.g., whether theories of trade and FDI are relevant for services; what are the important barriers to trade in services; and what are the important determinants of FDI in services.The main objective of the paper is to provide policy insights that emerge from this literature for developing countries.

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