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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.
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
3
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
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.
5
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,
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).
7
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.
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.
9
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).
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
11
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
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).
13
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.
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.
15
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.
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.
17
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
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.
19
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.
20
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.
21
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).
22
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.
23
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.
24
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
25
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.
26
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.
27
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
28
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
29
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
30
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.
31
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.
32
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.
33
REFERENCES
Boylaud, O. and G. Nicoletti (2000), “Regulation, Market Structure and Performance in
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,
www.ictregulationtoolkit.org/en/Section.2145.html.
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.
OECD (2007a), “Towards a Services Trade Restrictiveness Index (STRI). A Proposal for a Road Map for
Future Trade Committee work on Services”, OECD/TAD/TC(2007)4.
34
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.
OECD (2009), “Methodology for Deriving the STRI”, paper presented to the Services Experts Meeting, 2
July.
Ofcom (2009), “The Communications Market 2008”, http://www.ofcom.org.uk/research/cm/cmr08/.
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
Services”, in Findlay, C. and Warren, T. (eds) Impediments to Trade in Services: Measurement and
Policy Implications, Routledge, London and New York.
Xavier, P. and Ypsilanti, D. (2008), “Switching Costs and Consumer Behaviour: Implications for
Telecommunications Regulation”, Emarald, 10, 13-29.
35
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
36
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.
37
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.
38
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
39
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.
40
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.
41
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.