Informatika | Távközlés » Margit Molnar - Different Regulations, Different Impacts, What Regulations affect Trade in Telecommunications Services

Source: http://www.doksinet OECD Experts Meeting on Telecommunication Services Paris, 10 December 2008 DIFFERENT REGULATIONS, DIFFERENT IMPACTS – WHAT REGULATIONS AFFECT TRADE IN TELECOMMUNICATIONS SERVICES? by Margit Molnar Senior Economist, OECD Trade and Agriculture Directorate Source: http://www.doksinet TABLE OF CONTENTS DIFFERENT REGULATIONS, DIFFERENT IMPACTS - WHAT REGULATIONS AFFECT TRADE IN TELECOMMUNICATIONS SERVICES? .1 Executive summary .4 Introduction .6 Selected features of the telecommunications sector .6 Telecommunications services as critical inputs to production and delivery of goods and other services .6 Is the telecommunications sector a distinctive network industry? .7 Telecommunications trade has soared during the past two decades.8 What constitutes trade in telecommunications services? .8 What can be measured – a large gap to gauge.11 Shaping patterns of trade .11 Falling barriers in telecommunications .15 Inducing competition in a network with large

fixed and sunk costs .16 Ensuring efficient interconnection .17 Accounting for network externalities .18 Lowering switching costs .18 Managing spectrum efficiently .18 Regulating multiproduct firms .19 Providing universal service .19 Liberalisation and technological progress are bringing down prices and boosting trade in telecommunication services.19 Convergence of services is reshaping telecommunications markets .21 Bringing down roaming tariffs: relying on technological progress or regulation? .25 Assessing competitive pressures in telecommunications markets .29 The top-down approach: from prices to mark-ups .29 The bottom-up approach: picking regulations that may matter .31 Conclusion .34 REFERENCES .36 ANNEX 1. REGRESSION RESULTS 37 ANNEX II. WHY VOIP? 52 Tables Table 1. Turnover of French and US affiliates abroad and foreign affiliates in France and the United States in telecommunications, 1995-2005 . 15 Table 2. A number of telecommunications markets can potentially be subject to

regulation 16 Table 3. Simple elasticities for residential users are higher than for businesses for most years 21 Table 4. Economy-wide regulation and its higher-level components negatively affect trade 32 Table 5. Economy-wide regulation and its higher-level components negatively affect trade (cont) 33 2 Source: http://www.doksinet Annex Tables Annex Table 1. Sector-specific regulations adversely affect trade flows in some model specifications 37 Annex Table 2. Mid-level components of the general PMR have a negative but smaller effect on trade 38 Annex Table 3. Mid-level components of the general PMR have a negative but smaller effect on trade (cont.) 39 Annex Table 4. The impact of the lowest-level PMR indicators on trade is negative but relatively small 40 Annex Table 5. The impact of the lowest-level PMR indicators on trade is negative but relatively small (cont.) 41 Annex Table 6. The impact of the lowest-level PMR indicators on trade is negative but relatively small

(cont.) 42 Annex Table 7. The impact of the lowest-level PMR indicators on trade is negative but relatively small (cont.) 43 Annex Table 8. Sector-specific regulations are important deterrents of foreign direct investment in telecommunications . 44 Annex Table 9. Economy-wide regulations are less important when deciding to invest in telecommunications . 45 Annex Table 10.Mid-level PMR indicators do not affect inward FDI in telecommunications except administrative barriers on start-ups. 46 Annex Table 11. Some lowest level PMR components have a large negative impact on inward FDI in telecommunications . 47 Annex Table 12. Some lowest level PMR components have a large negative impact on inward FDI in telecommunications (cont.) 48 Annex Table 13. General FDI restrictions also affect the telecommunications sector 49 Annex Table 14. FDI restrictions in telecommunications are important deterrents for potential investors in this sector . 50 Figures Figure 1. Telecommunications leads

productivity growth in services in Spain 7 Figure 2. The United States is by far the largest initiator of fixed international calls, 2006 12 Figure 3. Along with the United States, Mexico is the largest receiver of fixed international calls, 2006 12 Figure 4. In some countries, more international calls originate from mobile than from fixed phones 13 Figure 5. Some countries receive more international calls from mobile than fixed locations 13 Figure 6. The United Kingdom has taken the lead in branching overseas 14 Figure 7. The United States and the United Kingdom are the largest receivers of telecommunications investment . 14 Figure 8. Figure Residential and business telephone charges in OECD have sharply fallen over 1990-2006 . 20 Figure 9. Average broadband pricing for residential users in USD ppps, 2006 29 Figure 10. Broadband pricing per MB for residential users in USD ppp, 2006 30 Figure 11. Differences in mark-ups are large across countries, 1993-2006 30 Figure 12. Higher

barriers to ownership tend to be associated with higher pricing of leased lines in OECD . 34 3 Source: http://www.doksinet DIFFERENT REGULATIONS, DIFFERENT IMPACTS – WHAT REGULATIONS AFFECT TRADE IN TELECOMMUNICATIONS SERVICES? Margit Molnar Executive summary The telecommunications industry is distinct among services industries owing to the crucial role it plays in driving economic growth and the rapid change in some of its key features such as technology and regulatory environment. Productivity growth in the sector – fuelled by technological progress, falling regulatory barriers and competition – is associated with downward spiralling of telecommunications charges. High price elasticities of demand for telecommunications services imply a substantial boost to traffic when prices fall and underline the importance of creating an economic environment conducive to competition among providers. Telecommunications services are traded in myriads of forms with technological

progress continually adding innovative ways to trade this service. In addition to the traditional way of originating telecommunications services in one country and terminating in another, roaming and provision by foreign affiliates have become widespread and most recently, foreign operators provide both international and domestic services even without commercial presence. Telecommunications is also unique among services industries in the sense that a large part of trade in this sector is either not recorded or, even when recorded, not reflected in publicly available data. The only relatively good data, available in time series and in international comparisons, cover the segment comprising outgoing international calls from fixed locations; however, that segment accounts for an evershrinking part of cross-border traffic. Data on investment in the sector are scarce as are data for sales of foreign affiliates. While such serious data limitations inhibit in-depth analyses of trade-related

activity in the sector, it is still possible to provide an approximate indication of some developments by drawing on available information, indirect indicators and innovative analytical approaches. Trade in telecommunications services, similarly to other services, appears to be largely affected by domestic regulation. To assess the impact of such regulations, two approaches are applied: assessing the impact of regulations in general without looking at specific measures (i.e a top-down approach) and assessing the impact of particular regulatory measures on trade (i.e a bottom up approach) Prices can be a rough indicator of the competitive pressures prevailing in markets. Price comparisons for unit broadband capacities, for instance, provide an indication that Japan, Korea, France, Italy and most Scandinavian countries have relatively competitive markets, while competitive pressures in  Senior Economist, Trade and Agriculture Directorate, OECD. T: +33 1 4524 8949 E-mail:

Margit.Molnar@oecdorg The author is most grateful to Reka Horvath (at present with Ofcom, previously Consultant, OECD) for her expert input and insightful conversations as well as to Mark van Duijn for his exemplary statistical assistance. 4 Source: http://www.doksinet Turkey, Mexico, Greece and all Central European OECD Member countries appear to be much more limited. Mark-ups, which provide information about competitive pressures taking into account the input costs, indicate that such pressures are in general larger in telecommunications than in other network industries, but smaller than in inherently competitive industries (e.g retail and wholesale trade, business services etc.) This is not surprising given that the telecommunications sector is no longer considered a natural monopoly like some other network industries (e.g gas or water supply), although is still retains some characteristics of a network industry in terms of sunk and fixed costs. A rigorous testing of the impact

of regulations on trade flows suggests that different regulatory measures affect cross-border trade and foreign direct investment (FDI) in different ways. Most components of the OECD product market regulation (PMR) indicators have a negative impact on cross-border trade in telecommunications services, with larger coefficients on more aggregated indicators. Sector-specific regulation, on the contrary, does not appear to affect cross-border trade in most model specifications; it has a negative impact, however, on FDI. FDI in telecommunications is not much affected by economy-wide product market regulation except, for instance, with respect to some specific components related to state control. FDI restrictions, such as ownership barriers or restrictions on the operations of foreign affiliates have a sizeable negative impact on inward foreign direct investment in telecommunications, in particular if such regulations specifically target the telecommunications sector. 5 Source:

http://www.doksinet Introduction The telecommunications sector was selected by the Trade Committee as one of the sectors, along with business services and construction, to be covered in pilot studies aimed at examining the effects of regulations on trade flows. Telecommunications is distinct among services owing to its crucial role in driving economic growth and its rapidly changing technological and regulatory environment. This sector is also unique in that demand for this service is derived demand and that most of the trade in this sector is not recorded. Therefore, trade-related data analysis and conclusions are generally confined to the small segment consisting of fixed-line calls, for which reasonably good data are available. The telecommunications industry is a regulated industry owing to its network characteristics. Different regulations may have different impacts on trade flows and an aim of this report is to identify the ones that may affect trade. Such regulations will be

examined from the point of view of their impact on trade, however, they can in principle be put in the GATS context at a later stage. The economics of telecommunications regulation is a science on its own. Here only those regulations will be mentioned that either directly relate to international trade, investment or foreign affiliates or are perceived to have a bearing on trade flows. Selected features of the telecommunications sector Telecommunications services is a broad sector encompassing the transmission of sound, images, or other information by such channels as telephone, telex, telegram, cable, broadcasting, satellite, electronic mail, or facsimile services and including business network services, teleconferencing, and support services.1 The definition of the category may differ somewhat by country; in the United States, for instance, internet providers do not belong to telecommunications but rather to information services. The importance of the telecommunications sector for the

economy is not only reflected in its sheer size of about 3% of GDP in 20052, but even more by its contribution to overall productivity growth, hence to the growth of the economy. Given the telecommunication sector‟s prominent role as a driver of economic growth, it is crucial to create an economic policy environment that stimulates productivity growth in this sector. Telecommunications services as critical inputs to production and delivery of goods and other services The telecommunications sector is characterised by continuous technological innovation spurring productivity growth in the sector. Given the sector‟s critical role in producing inputs to the production and delivery of goods and other services, innovation and productivity growth in telecommunications are crucial for the entire economy. Total factor productivity (TFP) estimates using firm-level data in the Amadeus database show that the telecommunications sector has been the fastest growing in Spain (Figure 1). Correa

(2006) shows that the telecommunications sector registered above-average productivity growth over the past 34 years in the UK and confirms that other industries have greatly benefited from rapid productivity growth in this sector. This may have emanated from the policy of encouraging infrastructure investment in their production processes. 1. EBOPS (Extended Balance of Payments Services) classification, Manual on Statistics of International Trade in Services, http://www.imforg/external/np/sta/bop/BOPmanpdf downloaded on April 10, 2008 2. Telecommunications revenue as a percentage of GDP for all OECD countries (OECD, 2007c). 6 Source: http://www.doksinet Figure 13. Telecommunications leads productivity growth in services in Spain Average annual compound growth rate of TFP, 1995-2005 0.45% 0.40% 0.35% 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% Note: Total factor productivity was estimated using firm-level data from the Amadeus database. Source: Author’s estimation. Is the

telecommunications sector a distinctive network industry? Telecommunications is a network industry and stemming from this nature it is characterised by large fixed and sunk costs and network externalities, but it is distinct in a sense that it is no longer considered to be natural monopoly and that its ways of provision of the service have benefitted from the rapid development of technology. Telecommunications is a network industry characterised by large fixed and sunk costs Telecommunications is a network industry with several points or nodes connected by communications pathways. The network layout has some very important implications The first and most important is that there are large fixed and sunk costs involved in building network infrastructure. This is why, in the past, telecommunications was once considered a natural monopoly. Later, when the importance of competition in telecommunications became obvious, there was an ongoing debate on whether this competition should occur

using alternative infrastructure (facilities based competition) or by requiring incumbent operators to share their network (resale competition). In the end, what happened was a mixture of the two: while the “last mile” (or the local loop), that is the wire from the local telephone switch to the end users was rarely duplicated, alternative infrastructure to connect local switches was often built by new entrants. In fact, technological progress over the last two decades made it possible to use already-existing non-telecommunications infrastructure to connected end-users via alternative communications links even in the last mile: first, the cable television network was upgraded to carry information into both directions (rather than only deliver broadcasting content to the end-user), second, power lines can now be used to carry communications signals to the final users. Finally, Fixed Wireless Access technology can also be deployed to deliver communications services to end-users. In

many cases, in order to build the infrastructure, firms have to overcome legal limits and other difficulties. For example, it is often very difficult to obtain rights of way in order to build alternative infrastructure in the last mile (more recently to lay fibre networks).3 Also, in the case of mobile telephony only entities that have the right to use the radio spectrum can roll out network components. 3 “One reason why the pace of fibre investment in the local loop is relatively slow in many OECD countries is the cost associated with network construction, in particular for rights of way and ducts or poles, as well as the 7 Source: http://www.doksinet Still, even when alternative connecting infrastructure exists, competition can be enhanced if companies who do not own infrastructure are also allowed, on a commercial basis, to use existing facilities. and network effects The value of being part of a network increases with the number of people connected to the network. A

customer, in his decision of whether or not to join a network, affects not only his own welfare but also that of existing and future participants. Telecommunications services are provided in myriads of ways owing to technological progress The telecommunications industry is one of the industries most often associated with technological change and this is manifest in the myriad ways that telecommunications services are provided. Perhaps one of the most important characteristics of the industry is the way technological progress makes once very important services less important, replacing them with new services. Traditionally, wire-line fixed telephony was the primary service of the industry. Today, mobile communication services and internet service make up an increasing share of the industry. The Ofcom UK Communications Market Review 2008 states: “Mobile telephony (including an estimate for messaging) accounted for 40% of the total time spent using telecoms services [in the UK],

compared to 25% in 2002. However, much of this growth has come about as a result of an increase in the overall number of voice call minutes (from 217 [billion] in 2002 to 247 [billion] in 2007) rather than because of substitution with fixed voice, which still accounted for 148 billion minutes last year, down only 10% from 165 [billion] minutes in 2002.” As a result of technological progress, continuous renewal of telecoms services infrastructure is a permanent feature of the industry. Therefore, regulation needs to be re-thought on a regular basis For example, the regulation of VoIP (Voice over Internet Protocol) services (e.g numbering and number portability) is lacking in several countries even though these services already exist. Similarly, the future regulation of new-generation networks already needs to be addressed even though the new infrastructure is not yet completed. As noted in the European Competitive Telecommunications Association (ECTA) 2007 Regulatory Scorecard: “It

can cause considerable uncertainty to both dominant firms and those relying on access to bottleneck infrastructure, if the competitive impact of such upgrades is not understood or the regulatory approach is not clearly defined”. Continuous service innovation is also a persistent characteristic of the sector. In order not to stifle innovation, care needs to be taken that new services are not regulated in a manner that would interfere with the ability of firms to reap the benefits of their innovation and investment. Telecommunications trade has soared during the past two decades What constitutes trade in telecommunications services? Telecommunications services are now traded in several ways. Telecommunications services originated in one country and terminated in another country are cross-border services under the GATS irrespective of whether the same service provider is present in both countries. Thus, the most basic way of trading in this service is making an international call.

Roaming abroad is also part of international trade in associated legal and regulatory difficulties in obtaining permits for access to streets, roads, and other public land. This issue of rights of way in laying fibre in the last mile is a complex legal, managerial, and technological issue where obtaining public rights of way permission, and constructing the required ducts (or poles) is often closely interlinked with national and/or local government legal frameworks and policies.” Public rights of way for fibre deployment to the home (OECD 2007c). 8 Source: http://www.doksinet telecommunications services and international trade in telecommunication services is no longer confined to delivering services through networks crossing national boundaries. With the removal of entry barriers to the telecommunications sector worldwide, multinational carriers have created an increasing number of local businesses to provide these services. In addition, according to GATS, international

corporate staff transfers in the telecommunications industry and the provision of telecommunication services abroad by self-employed suppliers (e.g telecommunications engineers) are also considered as international trade Some of the major ways telecom services cross borders can further be disaggregated according to the network or technology used as media to transmit the service. International calls can be made from a fixed or mobile location, international roaming involves making mobile phone calls or sending text messages when abroad or calling or messaging a mobile phone when it is abroad. Internet-related international trade comprises, for example, accessing the internet in another country or in the same country when routed through a foreign internet exchange point. International calls from a fixed location The most common telecommunications service involving international payments is the provision of international calls. Traditionally, before the liberalisation of

telecommunications, most countries had a designated international carrier. International carriers from different countries had interconnection arrangements between them and traffic flowed through settlement routes. Under the accounting rate system, payments were only made at the end of a certain period and only if there was a traffic imbalance: only the country that originated more minutes paid the other country a settlement rate per excess minute. Carriers having relatively lower collection charges (i.e prices they charged their subscribers) – often due to competition from other carriers – and a net traffic deficit were dissatisfied with the accounting rate regime; it subsidised high cost monopoly carriers at the expense of lower cost carriers and end-users from competitive regimes. A variant of the accounting rate system still exists, sometimes with more complicated payment structures. Settlement rates are usually higher than national call termination rates, and some

country/carrier pairs have higher rates than others. This gives rise to incentives for operators to search for alternative methods to deliver international calls. For example, it might be cheaper to deliver a call from country A to country B via country C if country C has a more favourable settlement rate with country B than country A. Similarly, operators can set up a communications link between two countries, deliver calls from country A to country B via this link, and then send the call from their premises into the network of the national operator thus making it appear as a national call. Finally, an operator can convert the voice signals into data packets and send the call via the internet using VoIP. At the terminating end, the call is again turned into a voice signal and is sent over to the PSTN (public switched telephone network) taking advantage of only having to pay national termination charges. In a liberalised telecommunications market a customer has several ways of making

an international call from a fixed location. The most important distinction between these options is whether the call is delivered on traditional settlement routes or is delivered outside the accounting rate system. Dialling an international number from a connection point within the network of the historical operator where the call is routed through the traditional settlement routes is one end of the spectrum of possibilities, while using the services of a fixed-line replacement VoIP company or calling through nomadic VoIP operators like Skype are on the other end. Recently, several fixed line replacement VoIP companies started offering free international calls to fixed phones as part of their basic subscription package. Similarly, internet providers started to bundle calls to international fixed numbers together with broadband and sometimes television services at a fixed price. 9 Source: http://www.doksinet All these developments suggest that calling international fixed numbers is

becoming very cheap – even though calling mobiles is still comparatively expensive (mostly due to higher mobile national termination charges). International calls from a mobile location Another common channel for international telecommunications traffic concerns international calls from a mobile location. International mobile calls are initiated on a mobile handset but are then routed through the fixed transit network. International roaming International roaming is a service offered by mobile providers allowing their customers to use their mobile phones abroad. International roaming includes two forms of trade:  Making mobile phone calls, sending text messages and accessing data services when abroad  Calling or messaging a mobile phone when it is abroad When a mobile user switches on her mobile phone in a foreign country most phones, guided by their SIM (subscriber identidy module) card, look for networks of partners with whom the customer‟s operator has roaming agreements,

choosing the one with the strongest signal. The user can also choose a roaming network manually or she may possess a SIM card that is enabled to have a preference for specific networks. International internet connectivity Under this heading there are two main forms of trade:4  accessing internet content in another country, and  accessing internet content in the same country when routed through a foreign internet exchange point. There is a U-shaped relationship between international internet traffic volumes and the development of internet backbone infrastructure (routers and cables). This is due to the fact that unlike in the case of international calls, some of the international internet traffic – mostly initiated in developing countries – is not “efficient”. In many cases, it would be more desirable to access content created and hosted locally than using international gateways to access content in another country. Similarly, several developing countries can only access

locally hosted content on the network of a different internet service provider (ISP) via international gateways because there are no internet exchange points (IXPs) in the country.5 Similarly, accessing content in country A from country B sometimes can only be achieved through country C because that is where the single international gateway going from country A leads. The OECD countries are already on the increasing part of the U-shaped curve that relates international internet traffic to internet backbone infrastructure while some developing countries might first decrease their international internet traffic before starting to increase it again. 4. In fact, there is a third form of internet-related trade that is paying for storing internet content on a foreign server, but this is much less economically significant than the other two forms. 5. According to the OECD there were 92 countries in April 2007 which did not have an IXP (Global opportunities for internet access

developments, OECD 2007). 10 Source: http://www.doksinet Commercial presence of foreign companies Back in the era when telecommunications were considered to be a natural monopoly telecommunications companies, in most cases, were state-owned. Following liberalisation, some countries fully privatised the incumbent operators without any restrictions on foreign ownership, others fully privatised with some restrictions on foreign ownership, while others retained some state-ownership or strategic position such as the “golden share” with or without restrictions on foreign ownership in the privatised segment. Even countries that generally welcome foreign investment can maintain restrictions on investment in sensitive sectors such as banking, aviation, airports, shipping, broadcasting, newspapers and telecommunications. Foreign ownership in telecommunications is opposed because first, foreign ownership may make it more difficult for governments to influence investment in infrastructure

and technology, which can facilitate the realisation of national economic and development goals; and second, because telecommunications services, if provided by foreign owners could be withdrawn during international disputes to influence the outcome of negotiations. What can be measured – a large gap to gauge Measuring telecommunications services trade has become increasingly difficult owing to: (i) the ever larger chunk of traffic not passing over the PSTN but rather transiting via the internet, leased lines or frame-relay networks and (ii) increased cases where a single carrier handles the traffic to the destination country over its circuits. Even when traffic is measurable, data are not publicly available for most forms, especially in international comparisons. Data for international phone calls, for instance, are available for a large number of countries for fixed calls in both outgoing and incoming directions, but only for a limited number of countries for mobile or VoIP calls.

Moreover, it is only the volume of such calls is available, not the value The figures that appear in the Balance of Payments statistics under trade in telecommunication services give little insight into real traffic owing to the variety of settlement systems used. As a result, what can be assessed is only a tiny part of the traceable traffic, which itself is also only a very small share of actual traffic. Data on investment in telecommunications services overseas are also relatively scarce and sales of foreign affiliate are even scarcer. These serious data limitations imply that any results obtained using available data should be interpreted with appropriate care. Shaping patterns of trade As for fixed international calls, by far the largest amount of such calls originates in the United States (Figure 2). While this is not surprising given its size, the number of outgoing calls is disproportionately larger than the size of the economy alone would suggest. Moreover, the size of the

economy and population do not seem to be the major determinant of outgoing calls. 11 Source: http://www.doksinet Figure 14. 80 The United States is by far the largest initiator of fixed international calls, 2006 70.1 70 60 50 40 30 20 12.0 10 9.4 5.7 5.4 4.8 3.8 3.6 3.3 2.5 2.2 2.2 2.2 1.6 1.5 1.4 1.3 1.2 1.1 1.1 1.0 1.0 0 International outgoing fixed telephone traffic (billion minutes) Source: ITU World Telecommunications/ICT Indicators Database. The United States is likewise the largest receiver of international calls, although it is closely followed by Mexico (Figure 3). Six of the other G7 countries receive similarly large amounts of international calls (and China‟s record is of the same magnitude as well). Figure 15. Along with the United States, Mexico is the largest receiver of fixed international calls, 2006 20 18 18.5 17.6 16 14 12 10 8 7.7 76 75 72 6.7 65 6 4 2 2.4 24 22 21 19 1.7 17 15 15 14 13 13 1.1 11 11 10 0 International

incoming fixed telephone traffic (billion minutes) Source: ITU World Telecommunications/ICT Indicators Database. Information on calls from mobile locations is limited, but what is available suggests that in some countries like Slovenia, more calls originate from mobile than from fixed phones (not including VOIP) (Figure 4). The proportion of calls originating from mobile phones at slightly above 10% in New Zealand is low. 12 Source: http://www.doksinet Figure 16. In some countries, more international calls originate from mobile than from fixed phones Shares of mobile and fixed international calls, 2006 (in %) 100% 10.4% 90% 80% 70% 28.9% 50.1% 45.0% 22.4% 20.5% 77.6% 79.5% 39.2% 60% 50% 89.6% 40% 30% 20% 71.1% 49.9% 55.0% 60.8% 10% 0% International outgoing fixed telephone traffic International outgoing mobile telephone traffic Source: ITU World Telecommunications/ICT Indicators Database. On the reception side, the Slovak Republic and Turkey receive more

international calls originating from a mobile phone than from fixed phones (Figure 5). France and Hungary, at the other end of the spectrum, receive a small amount of such calls relative to those coming from fixed locations. Figure 17. Some countries receive more international calls from mobile than fixed locations Share of incoming mobile and fixed international calls, 2006 (in %) 100% 17.4% 90% 37.6% 80% 70% 10.7% 55.8% 51.1% 60% 50% 82.6% 40% 62.4% 30% 20% 89.3% 44.2% 48.9% 10% 0% Slovakia Turkey Czech Republic France Hungary* International incoming fixed telephone traffic International incoming mobile telephone traffic Source: ITU World Telecommunications/ICT Indicators Database. The United Kingdom is by far the largest investor overseas in telecommunications (Figure 6); its invested stock is more than 6 times larger than that of second-ranked Germany or third-ranked France. Even Canada, Netherlands and Norway invested more in telecommunications industries

overseas than the United States or Japan. The telecommunications sector is very important for UK investors: in 2001, the year for which the most recent data are available, almost a quarter of outward FDI was in telecommunications. The corresponding share for Germany would be slightly above 8%, for France it would be between 3 and 4%. For most other OECD countries, the shares of outward investment in telecommunications would be less than 1%. 13 Source: http://www.doksinet Figure 18. The United Kingdom has taken the lead in branching overseas Outward FDI stock in telecommunications services, most recent available year (in million USD) 250000 207925 200000 150000 100000 50000 32830 29212 12591 12015 8177 5013 4536 3780 3062 1791 994 377 0 GBR DEU FRA CAN NLD NOR USA JPN DNK GRC ITA KOR AUS 2001 2005 2005 2001 2004 2005 2005 2005 2005 2004 1997 2004 1996 Source: OECD Foreign Direct Investment Statistics database. The United States and the United Kingdom receive most foreign

direct investment in telecommunications among OECD countries (Figure 7). FDI in telecommunications makes up over 7% of total inward FDI stock in the United Kingdom, 3-4% in the United States and 1-2% in France. Figure 19. The United States and the United Kingdom are the largest receivers of telecommunications investment Inward FDI stock in telecommunications services, most recent available year (in million USD) 70000 60000 58510 50000 38198 40000 30000 20000 13478 7769 10000 7333 6685 6127 5863 5725 5308 4415 4262 3734 FRA 2005 DEU 2005 GRC 2004 FIN 2005 CZE 2005 POL 2005 CAN 2001 DNK 2005 NLD 2004 0 USA 2005 GBR 2001 TUR 2005 JPN 2005 Source: OECD Foreign Direct Investment Statistics database. Rather than foreign direct investment statistics, FATS (Foreign Affiliate Trade Statistics) provide a better picture on sales of foreign affiliates in a given country, if available. The OECD FATS database only allows for a very partial tracing of activities of

foreign affiliates in the telecommunications sector owing partly to the lack of FATS in many countries and to the high level of aggregation in reporting such statistics (Table 1). The available data suggest that for France, sales in the inward direction (ie sales of foreign affiliates in the country) exceeds the outward direction (i.e sales of French affiliates abroad), while this share in the United States is the reverse with sales of US affiliates abroad being bigger. In terms of their relative importance (i.e their share in total sales of foreign affiliates in the country and domestic affiliates abroad), for the United States, inward and outward sales shares are of similar magnitude in both countries. 14 Source: http://www.doksinet Table 6. Turnover of French and US affiliates abroad and foreign affiliates in France and the United States in telecommunications, 1995-2005 FRANCE, FATS turnover in the telecommunication sector 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Inward 435 387 780 663 736 1029 1498 1037 3403 5020 6028 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Inward 26703 40421 9617 14672 14076 23207 26998 30789 43530 43870 33127 Share of total inward 0.15% 0.13% 0.28% 0.23% 0.25% 0.36% 0.53% 0.38% 0.47% 0.36% 0.67% Outward 181 282 386 489 1247 1393 1527 605 Share of total outward 0.08% 0.12% 0.17% 0.20% 0.47% 0.45% 0.48% 0.19% USA, FATS turnover in the telecommunication sector Share of total inward 1.73% 2.42% 0.65% 0.90% 0.79% 1.13% 1.30% 1.52% 2.05% 1.91% 1.33% Outward 3502 6814 8795 14625 26300 25018 25045 29288 30349 54400 55181 Share of total outward 0.21% 0.36% 0.45% 0.74% 1.19% 1.00% 0.99% 1.16% 1.06% 1.64% 1.49% Source: OECD FATS database. Falling barriers in telecommunications When regulation is considered, the telecommunications sector can be divided into markets for services or products provided to end users (retail markets), and markets for the inputs which are necessary for operators to provide services and

products to end users (wholesale markets) (Table 2). 15 Source: http://www.doksinet Table 7. A number of telecommunications markets can potentially be subject to regulation Retail Fixed Mobile Access to the public telecommunications network Access to the public mobile telecommunications network Publicly available telecommunications services Publicly services Leased lines Wholesale Call origination on the public telecommunications network Termination of national telecommunications network calls Termination of international telecommunications network calls on on the the public public Transit services on the public telecommunications network available mobile telecommunications Call origination on the telecommunications network Wholesale broadband access mobile Termination of national calls on the public mobile telecommunications network Termination of international calls on the public mobile telecommunications network Wholesale access to the telecommunications

network Wholesale unbundled access public public mobile The wholesale national mobile telecommunications market for international roaming Wholesale leased line terminations Provision of wholesale trunk segments of leased lines International circuit for internet connectivity (interconnection of countries with the internet backbone) Note: The markets in italics do not fall under the jurisdiction of national regulatory authorities, instead, their prices are usually subject to international negotiations. Regulation tends to be heavy in telecommunications as in network industries in general. Given the nature of telecommunications, in most countries the focus is on how to create effectively competitive markets using regulation. Striking the balance between competition and the level of regulation is a key issue in telecommunications (as is in other network industries) due to the necessity to create a competitive arena to enhance efficiency and to provide sufficient incentives to

invest in network infrastructure. The telecom industry has been the fastest among network industries to open up competitive segments to new entrants and now the major issue remains how to prevent the incumbent operator of the network from restricting competition in the competitive segments. Inducing competition in a network with large fixed and sunk costs Large fixed and sunk costs in building telecommunications infrastructure imply that regulators can facilitate the entry of new market players with two sets of measures: first, by reducing the cost of building alternative infrastructure, and second, by making infrastructure sharing possible. by reducing the costs of building alternative infrastructure The cost of deploying copper or fibre in the last mile can be reduced by putting clear, efficient and non-discriminatory rules in place for obtaining rights of way. Similarly, making access to the ducts of the incumbent available also creates a favourable environment for alternative

operators to invest in the last mile. and through infrastructure sharing Infrastructure sharing can mean anything from pure resellers (who depend entirely on the incumbent‟s infrastructure) to companies that use their own transit networks and a fully unbundled local 16 Source: http://www.doksinet loop to get to the end-user. Resellers might sell only calls to the end-users through indirect (calling cards, dialling a prefix) or direct access. Direct access is also called carrier pre-selection and refers to cases where the customer is billed by the pre-selected operator for the service it provides and by the incumbent for line rental and other services provided. Another possibility is that the provider also buys a wholesale line rental product and offers both line rental and calls to the customer. Alternative providers can also have their own transit network and buy call origination (and call termination) services from the incumbent and again have indirect or direct access to the

end-users. Finally, there is one more important option: the alternative provider can buy bitstream access from the incumbent to provide high speed services to customers.6 Regulatory instruments that make infrastructure sharing viable include carrier pre-selection, full or shared local loop unbundling (LLU), bitstream access, wholesale line rental and requirements to make private partial circuits available, among others. There is, usually, a non-discrimination requirement in the provision of wholesale access products. Non-discrimination means that the incumbent has to provide access on the same terms as it is providing to its downstream operation (in terms of price, quality and speed). The price of the wholesale access products is crucial and is the focus of most national regulatory authorities: if it is too high, entry will not happen; if it is too low, the incumbent is not able to re-coup its investment. It is widely argued by incumbents that network sharing is detrimental to the

building of alternative infrastructures. However, evidence seems to suggest that this is not the case: “The penetration of LLU is  found to be positively, though only moderately, correlated with the penetration of cable. We also find that those countries with some degree of fibre infrastructure or those with well publicised plans for next generation access also have higher levels of LLU penetration. This would appear to cast doubt on the argument that has been put forward by some parties that LLU is damaging to investment in alternative access technologies”.7 Network sharing is also encouraged in mobile telephony: mobile virtual network operators (MVNOs) may buy wholesale access to the public mobile telecommunications networks. In some countries this is already a reality. In others, regulators are seeking to put the necessary regulation in place in order to reduce market concentration – and thus prices – through the introduction of further competition via MVNOs. A common

way to encourage competition has been through the unbundling of the local loop (i.e allowing competitors to use the incumbent‟s local network), which has been promoted in most OECD countries. Progress in competition between local networks (ie through building competing networks to that of the incumbent operator) has been more limited in most OECD countries, except for example in Australia, Denmark, Korea, United Kingdom and the United States. Intermodal competition, notably by mobile and cable service providers, has been crucial in increasing competition pressures in telecommunications markets. Ensuring efficient interconnection Networks of different countries need to interconnect. Similarly, when there are several transit networks but bottlenecks are shared there is a need for the different sub-networks to interconnect. “Fair” interconnection agreements are difficult to reach and disputes can be lengthy. Regulation often targets origination and (national) termination charges

that can constitute and important barrier to international 6. Bitstream access usually means that the customer still needs to buy line rental from the incumbent. “Naked” bitstream indicates when this is not necessary. Naked bitstream is the only alternative to the PSTN network for calls-only subscribers by providing voice over broadband. 7. 2007 Methodology Scorecard, ECTA. 17 Source: http://www.doksinet traffic if there are high. Regulatory intervention can be price regulation (in which case the price-benchmark is often the object of disputes between the regulator and the owner of the infrastructure) or more forward looking structural intervention such as separation of the wholesale and retail operations of the incumbent in order to achieve cost orientation and non-discrimination. The separation can range from accounting separation to operational separation and structural separation. Separation (accounting or management) of the non-competitive segment from competitive

segments does not by itself guarantee non-discriminatory third-party access to the trunk network if access prices are not regulated. High access prices have been found to hinder potential competition in eg Australia, Finland, Hungary, Iceland, Ireland, Norway and Switzerland (OECD 2007a and various editions of OECD Economic Surveys). Accounting for network externalities By joining a network a user can communicate with all other users on that network and, beyond, on interconnected networks. There can also be said to be an effect in which the network itself becomes more valuable to participants as the number of users, or opportunities for communication, increases (i.e the network effect). Markets take the network effect into account in the pricing of services hence the development of prepaid cards which enable users to join a network at whatever price they are prepared to pay. This is why the traditional approach to expanding network connections to marginal users, such as through

subsidies, is not required. It is why a growing number of countries, including in the developing world, have mobile penetration rates greater than 100%. Lowering switching costs Switching costs are factors that make it more difficult for customers of telecommunications services to change suppliers. These are the actual costs of paying fees to join or install a connection, penalties to pay to the existing operator if breaching an agreement to buy the services for a certain period, the costs of unlocking mobile handsets, or the hard-to-measure costs in terms of effort and time of communicating a new phone number to friends, family and business associates, among other costs. When a rational consumer encounters switching costs, he will not migrate to the network offering the lowest price if the switching costs are greater than the price differential between the two operators. If this happens, the consumer is said to be locked-in to the supplier. Telecommunications providers are able to

increase switching costs in order to dampen competition. Mobile operators can artificially lock-in their subscribers by setting on-net and off-net prices differently. If on-net prices are significantly lower than off-net charges it can result in the formation of “calling circles” when friends and families join the same network. In this case changing operators is particularly costly because this advantageous “discount” will be lost. Regulators may target some unnecessary, competition-dampening switching costs through number portability requirements. Number portability is now widespread but it is still not uncommon that waiting times to port a number are significant and sometimes the costs of porting a number are unjustified. Similarly, many national regulatory authorities are now addressing the issue of differences in on-net and off-net national call prices as well as the lock-in through long-term contracts. Managing spectrum efficiently The possibility of congestion of the

radio spectrum creates a need for regulatory authorities to restrict access to certain frequency bands. For example, infrastructure to exploit the frequency bands of mobile telephony can only be used by operators who bought the rights to these bands. On the other hand, 18 Source: http://www.doksinet there are license-exempt frequency bands that are currently used for services such as Wi-Fi, Bluetooth, cordless phones, and baby monitors, among other local applications. Technological developments and better equipment are constantly freeing up spectrum in that the same frequency bands are less congested than before even with larger volumes of services. Similarly, the same services now might be offered several ways. As spectrum is made available, regulators may therefore seek to ensure that frequency allocation procedures and restrictions do not stifle developments that would sharpen competition and increase welfare. More efficient spectrum use can be achieved by introducing spectrum

trading in which spectrum would be transferred to the user that values it most. Regulating multiproduct firms Telecommunications service providers typically offer a range of services. This presents a special regulatory challenge: multiproduct firms may use bundling, cross-subsidisation, and complicated price structures that could dampen competition. Transparency and simplicity may need to be encouraged; leveraging market power from one market to another may need to be prevented. Some level of separation between the wholesale and retail operations of the incumbent appears to be a successful regulatory instrument against cross-subsidisation. Non-discrimination requirements are also aimed at cross-subsidies and uncompetitive bundling. Also, competition between alternative carriers might be facilitated if operators are required to have simple, transparent pricing structures (so that comparisons are possible). Providing universal service Universal Service Obligation (USO) is common

OECD-wide, in practice, however, actual providers of universal services are limited to a handful. The others usually pay into a fund to finance these services and the payments are usually determined by their sales. Liberalisation and technological progress are bringing down prices and boosting trade in telecommunication services Opening up the competitive segments of the telecommunications industry to new entrants, together with huge technological progress, have brought about lower telecommunications charges across OECD countries thereby boosting telecommunications traffic. Telephone charges for both businesses and households have sharply fallen in the OECD over the past decade,8 to a larger extent for the former. This trend masks opposing trends in the two components of overall charges: fixed costs have been rising and usage costs have been declining (Figure 8). Fixed charges, because they were traditionally geographically averaged (and still are in many cases) were set below costs in

the monopoly period with call charges above costs. Liberalisation in the market has brought about a rebalancing of prices with call charges falling toward costs and fixed charges moving up. The very recent sharp increase in the fixed component is likely to be related to the proliferation of multiple-play offers OECD-wide. 8. In the European Union, for instance, prices have fallen on average by 30% over the past decade (http://ec.europaeu/information society/policy/ecomm/tomorrow/index enhtm) 19 Source: http://www.doksinet Figure 20. Figure Residential and business telephone charges in OECD have sharply fallen over 1990-2006 A. Residential call charges 180 160 140 120 100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fixed Usage Total B. Business call charges 200 180 160 140 120 100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fixed Usage Total Note: The charges are

in index form with 1990=100 and indicate an average of OECD countries. Source: OECD-Teligen database. Price elasticities of demand for international calls appear to be close to unitary elasticity, indicating that demand for international calls follows prices closely. Agiakloglou and Yannelis (2006) find that the time-varying elasticity of demand for international calls in Greece varies between -0.23 (Germany) and 102 (Australia)9 Earlier studies show a large variation in the size of elasticities largely depending on the country and the time period. Simple log-linear elasticity estimates show that demand for international calls (as measured by the volume of calls) is highly dependent on the price of the call (Table 3). The coefficient on these crude elasticity estimates is always significant at the 1% level and the high R-squared statistics indicate that prices explain a large part of demand. The time-varying elasticity estimates of demand for outgoing international calls when show

that between 2000-2006 their size hovered around one, not surprisingly with households exhibiting higher elasticities than businesses. 9. Agiakloglou and Yannelis (2006) estimate a log-linear demand function with constant and time-varying elasticity and find that the latter has a better fit. They use per minute international call prices and the volume of international calls. 20 Source: http://www.doksinet Table 8. Simple elasticities for residential users are higher than for businesses for most years 2000 2001 2002 2003 2004 2005 2006 Residential Dependent variable: international outgoing minutes per capita Basket price for international calls (US$ PPP) -1.157* -1.179* -1.059* -0.959* -1.128* -1.094* -0.912* (0.155) (0145) (0139) (0150) (0187) (0202) (0262) Constant 4.856* 4.791* 4.714* 4.649* 4.552* 4.485* 4.087* (0.123) (0114) (0110) (0115) (0131) (0134) (0171) Number of observations R-square adjusted Business 29 0.662 30 0.693 28 0.680 30 0.579 28 0.567 27

0.522 24 0.326 Dependent variable: international outgoing minutes per capita Basket price for international calls (US$ PPP) -1.036* -1.036* -0.971* -0.886* -1.037* -0.902* -0.918* (0.142) (0142) (0131) (0152) (0207) (0218) (0293) Constant 4.447* 4.447* 4.303* 4.311* 4.182* 4.131* 3.816* (0.113) (0113) (0103) (0119) (0149) (0172) (0219) Number of observations R-square adjusted 29 0.652 29 0.652 28 0.665 30 0.533 28 0.471 27 0.383 24 0.278 Note: Standard errors are in parentheses and * indicate significance at the 1% level. The dependent variable is the logarithm of the international outgoing minutes per capita. The basket prices used are the OECD-Teligen baskets for residential and business customers, respectively and are expressed in USD with adjustment for purchasing power parities. Technological change has been a major driver of deregulation in telecommunications markets and hence a major engine driving international telecommunication traffic. Some of these

revolutionary changes include the convergence of services bringing about VoIP, mobile broadband and multiple play offers or the emergence of intelligent SIM cards that may eventually stimulate competition in the roaming market. Convergence of services is reshaping telecommunications markets A major recent technological development is the convergence of services: voice, data and broadcasting content can now be delivered to the same platforms and different technologies are capable of delivering the same content. For example, a mobile handset can receive voice calls, data, pictures, audio, video and text and, similarly, content can be accessed using a satellite connection, cable, digital terrestrial and analogue terrestrial platforms, as well as through a fixed broadband connection or over a mobile network. Convergence is bringing about new challenges for regulators and policymakers as they need to be “ahead of the game”: they have to envisage future services and their roll-out,

deciding whether there will be any need for ex-ante regulation or some change in the legislation concerning the provision of these services. Indeed, new developments in the market will bring the need to ease some regulatory policies (for example, with IP based networks the must-carry obligations of public TV channels imposed on cable TV operators might not make much sense, provided that networks do not block traffic to specific content and 21 Source: http://www.doksinet that public broadcasters can host their own content on the Internet) but there might be need to impose new obligations (like broadband universal service obligations10). Convergence is contributing to the falling prices of communication, including international traffic. VoIP telephony and multiple play offers have substantially brought down international call charges and boosted international traffic. A further spread of mobile broadband, a prime example of convergence of distribution platforms, could contribute to

an additional decrease in broadband charges and therefore to increasing international traffic. The uptake of VoIP11 has boosted international traffic and posed a challenge for fixed line operators The availability of VoIP to an increasing number of users has brought down calling charges significantly and boosted international traffic. While it is not straightforward to measure the extent of the proliferation of VoIP services, the increase in subscriber lines and in PSTN-connected VoIP minutes, as well as customer survey results, indicate revolutionary changes. The take-up of VoIP subscription has been very fast in Europe. At the end of 2004, only just over 1% of European households had a VoIP subscription, while by the end of 2007, VoIP subscribers accounted for 17% of households. This latter figure corresponded to 253 million consumer VoIP lines12 VoIP growth in France has been particularly impressive: by the end of 2007, France had 10.8 million IP telephony subscribers, accounting

for 43% of all European VoIP subscribers. Nonetheless, VoIP service take-up is very diverse by country. While 43% of French households subscribed to a VoIP telephony service at the end of 2007, only 3% of Austrian households and less than 2% of Spanish households had such a service.13 The uptake of VoIP services is stronger in Europe than in the US. This is mostly due to the different approaches in regulation. Local loop unbundling has opened the market for more intense broadband competition in Europe while in the US competition is only possible through alternative infrastructure or network independent providers. Due to more intense broadband competition in Europe, the incumbent PSTN providers also participate in the provision of VoIP services on a large scale: incumbent service providers accounted for 33% of VoIP subscriber lines at the end of 2007.14 Similarly, the incumbent providers in Japan also participate in the provision of VoIP services. On the contrary, incumbents in the US

have largely stayed out of VoIP. While VoIP subscriptions can be an important indicator of the extent of the use of this service, VoIP services can be used without subscribing to such services. Internet users can initiate VoIP calls from their computer calling another PC or making a call that terminates on the PSTN network. Computer-initiated VoIP use, however, is difficult to measure as it appears as data traffic for the network operator. Ofcom 10. Broadband is a universal service obligation in Switzerland and the European Commission is deliberating whether there is need for broadband universal service obligations in order to ensure that its goal – broadband available for all European citizens by 2010is met. (http://ec.europaeu/ireland/press office/news of the day/broadband-europe-report enhtm) 11. More discussion on VoIP services and whether they should be regulated is provided in Annex II. 12. TeleGeography European VoIP & Triple-Play Research Service,

http://www.telegeographycom/products/euro voip/indexphp 13. TeleGeography European VoIP & Triple-Play Research Service, http://www.telegeographycom/products/euro voip/indexphp 14. TeleGeography European VoIP & Triple-Play Research Service, http://www.telegeographycom/products/euro voip/indexphp 22 Source: http://www.doksinet commissioned a survey in the 3rd quarter of 2007 that asked internet users of seven developed countries about their use of internet services and specifically whether they used the internet to make voice calls. The survey found that “Consumers in Italy reported the highest levels of VoIP use, with 29% of Internet users claiming to use VoIP to make voice calls using their Internet connection, compared to 4% in Japan, the country with the lowest reported VoIP take-up. Use of VoIP ranged from 9% to 23% in the other nations [UK, USA, Canada, Germany and France][]. Use of VoIP is partly a function of the level of competition in fixed markets, as the

availability of attractively-priced offerings from [] operators will reduce consumers’ appetite for VoIP services.” Indeed, attractive offers by operators using VoIP may be related to the low usage of computer-initiated VoIP services in Japan, for instance. VoIP contributed 50% of the total increase in international voice minutes during 2006: total minutes increased from 270 billion to 298 billion over that year, from which 14 billion minutes were delivered on settlement routes and 14 billion were PSTN-connected VoIP traffic. During the same period, Skypes international computer-to-computer minutes increased 188%, from an estimated 7.5 billion to an estimated 14.1 billion minutes, a jump of 66 billion Of course, not all of those calls made using Skype would have been made over the PSTN network but the figures show some substitution.15 The number of international voice traffic minutes per telephone access path declined by an average of 12% in 2003-2005 in the OECD countries. This

trend is most likely the result of VoIP calls as it is becoming increasingly difficult to separately count international voice traffic and other data traffic on the Internet.16 VoIP not only affects telecommunications trade through international calls, but also via local calling. While in the traditional PSTN setting a customer could only choose between national operators, VoIP applications allow customers to use foreign companies even for the provision of local calling without those companies having any presence in the country. Further, VoIP is also affecting mobile telephony: Internet enabled handsets can now be used to make VoIP calls. While some mobile operators, in order to avoid revenues losses, try to stop their subscribers to use VoIP services by blocking traffic to specific sites, others are encouraging their subscribers to use VoIP. For example, 3UK introduced in October 2007 a Skype-branded phone with a dedicated VoIP key. At the same time, Vodafone Germany reportedly

planned to disable Skype calls or other VoIP providers from July 2007. The French operator SFR reportedly announced in March 2005 that it intended to block VoIP T-Mobile also announced that it would monitor usage to ensure that bandwidth is not being abused. The spread of multiple play offers has a large impact on usage patterns As a result of the convergence of service platforms, telecommunications services providers are offering packages with telephony, internet, television and sometimes even mobile services bundled together. The bundling of services increases the fixed costs of subscription and decreases the usage component as basic services such as unlimited local/national/international calls to fixed destinations and unlimited internet usage, among others, are included in the fixed costs. The emergence of these multiple play offers, therefore, makes the notion of call charges meaningless or call volumes immeasurable. Traditional operators started to offer multiple-play service

packages in order to make up for revenues lost from their traditional businesses mostly due to competition or users‟ substitution for another services (like substituting fixed calls with mobile calls). There are efficiencies in offering these service bundles. Bundling up services and billing for them together is cheaper than billing separately for each service. Similarly, there might be economies of scale in the provision of the service (especially if all 15. “Survey Reveals Skypes Impact on International Phone Business”, VoIP News, 18 December 2007, http://www.voip-newscom/feature/skype-international-phone-business-121807 16. OECD (2007b). 23 Source: http://www.doksinet services are provided over an IP-based network) and in marketing, as well. This cost saving then can be passed on to the consumers. Further, buying all services from one operator can be attractive for consumers not only because of lower prices but also because it entails less inconvenience for them. The

first market players to offer multiple-play services were cable operators using cable infrastructure to deliver voice telephony. The wide availability of broadband (both on cable and ADSL connections) brought about triple-play offers where voice is often delivered as VoIP. In general, the important difference between triple-play offers over cable and ADSL is that the latter often offers video in IPTV format whereby quality is often less reliable than in case of television over cable. Triple-play offers are also being delivered through fibre connections. When content is delivered through IP, equipment at the premises of the user needs to be more sophisticated than in traditional telecommunications equipment because it does more things: converts voice signals into packets and decodes digital TV signals, among other tasks. Dual-play and triple-play services are generally priced more aggressively in Europe than in the U.S The median price of a triple-play bundle among carriers surveyed by

TeleGeography was EUR 48, approximately 40% less than triple-play packages in the U.S17 Multiple-play offers are generally the result of fierce competition. Further, prices should fall even more as competition for multiple-play subscribers increases in a market. This makes ex-ante regulation of multiple-play unnecessary as long as there is more than one player offering multiple-play services. However, regulatory bodies will still need to be on guard against abuse of market power by firms with significant market power. Firms can also use complicated price structures together with bundling to make consumer switching more difficult and thus soften competition. Regulators are best placed to advise consumers on how to interpret such prices and if necessary, could oblige operators to simplify their pricing structure. Where more services are delivered through the same connection and these services have ever increasing bandwidth needs it is sometimes necessary to prioritise data traffic that

is time sensitive (typically voice and video). However, operators might use prioritisation to promote their own content and thus stifle competition. There is a further difficulty that multiple-play operators face when offering broadcasting services: sometimes it is difficult to obtain rights to specific video content.18 Competition authorities may wish to investigate whether such refusal to deal has some efficiency justifications and so whether it is not to the detriment of the consumer. Further, when it is found that regulation is justified in the provision of certain broadcasting content (that, in this case, constitutes a bottleneck) and an access price is selected, regulators should make sure that this price is fair for both the provider and the buyers of such content. Also, some operators block ports for security reasons while others maintain the right to block outside services in the future in order to increase security and control bandwidth usage. This might create a situation

where only the operator‟s own services would be available to subscribers and competing services are not offered. Regulators will need to ensure that consumers retain the ability to access competitive services from outside service providers, either through competitive market forces or regulation. 17. TeleGeography European VoIP & Triple-Play Research Service, http://www.telegeographycom/products/euro voip/indexphp 18. Sky in the UK, for instance, allows cable operators to broadcast their premium channels (essentially football and movies) but operators of other platforms are excluded. 24 Source: http://www.doksinet The must-carry obligations of public TV channels imposed on cable TV operators might not make much sense in a multiple-play world where most services are delivered over IP, provided that networks do not block traffic to specific content and public broadcasters can host their own content on the internet. A further regulatory challenge is that while individual

services in multiple-play bundles such as video and voice were traditionally regulated at the national level, in the future they will become increasingly provided over IP from international providers. Regulators will have to decide whether they should (and could) impose requirements on service providers whose offerings are accessible from their country but are placed abroad. Mobile broadband creates potential for international traffic increase Mobile broadband19 is a prime example of convergence of distribution platforms and it impacts on international telecommunications trade through access to content in another country and VoIP international calls. Obviously, if this trade can now take place outside the home and the workplace then total traffic volumes are expected to be higher. Further, competition between fixed and mobile broadband providers might further bring down the price of internet access thus again resulting in higher usage. Mobile subscriptions on networks capable of

delivering broadband data services are beginning to take off. Most mobile broadband users at the present use 3G mobile networks and the number of 3G connections more than doubled in the most developed countries between 2005 and 2006.20 However, currently 3G is not fast enough (usually below 384 kbit/s) to compete with fixed broadband. Nevertheless, new mobile technologies that are capable of much higher speeds are being developed. High-speed packet access (HSPA, also known as 3.5G) allows operators to offer 36-72 Mbit/s headline speeds (though the average actual speed is somewhere closer to 1Mbit/s). In the UK, the majority of mobile network operators have upgraded their 3G networks to HSPA in major urban areas. Although 3.5 networks have speeds close to that of fixed networks, it is still a very different service from fixed broadband access for the provision of video services. For example, HSPA speeds are insufficient to stream standard-definition video at full screen size. Further,

in order to avoid congestion problems, mobile operators generally cap the use of data services - with very high charges above the cap. Data intensive services thus cannot be accessed as freely as using fixed broadband connections that often offer unlimited downloads. Mobile internet so far has not drawn regulatory attention other than the need for operators to advertise their true download speeds. Bringing down roaming tariffs: relying on technological progress or regulation? High levels of call charges when abroad constrain international traffic given that the volume of international calls closely follows the movement of prices. Roaming charges are several times of the charge of an international call from a local mobile, let alone of domestic mobile charges.21 Such high levels of roaming tariffs are related to the lack of effective competition in the market, which is partly attributable to the vertically integrated structure of roaming operators. That is, both network and service

operations are carried out by the same operator, thus providing them greater control over their customers. In order to ensure seamless coverage abroad, a mobile operator usually has roaming agreements with all network 19. Broadband is defined as data connection with a speed higher than 256 kbit/s. 20. Ofcom, The International Communications Market 2007. 21. Calling from a Swiss mobile to Switzerland when in Thailand, for instance, is 7 times more expensive than calling from a Thai mobile and 80 times more expensive than a local mobile call in Thailand (Lazauskaite, 2008). 25 Source: http://www.doksinet operators in another country. These roaming agreements also specify the wholesale roaming charges (also called inter-operator tariffs or IOTs) the operators pay to each other for roaming traffic initiated in their country.22 The retail price of a roamed call, therefore, depends on the IOTs and on the retail mark-up applied by the home operator. Technological progress has created

incentives for competition in roaming, though effective competition has not emerged as yet and this was a major reason why the European Regulators Group and the European Commission have opted for regulation (i.e price caps) in 2007 Intelligent SIM cards – Over the Air Programming A new technology called over-air-programming of SIM cards has allowed operators to program the SIM cards to automatically connect to the preferred network and stay on that network since around 2001. Until around 2001, mobile operators could not actually direct their roaming traffic onto specific host operator‟s network. Even though mobile phone SIM cards had a preferred network list programmed into them, the phone only searched for this preferred network when it was first switched on in the host country. If the signal of this preferred network was not strong enough, it connected to the network (from those with an appropriate roaming agreement) that had the strongest signal. Typically, it would not try to

connect to the preferred network again. Although users could also choose a roaming network manually this was (and is) very rarely done. When network selection is largely random, operators in a given country do not have incentives to undercut their competitors by offering lower wholesale tariffs. The underlying reason is that if a particular operator offers lower IOTs, roaming customers will only perceive a lower “average tariff” for the country and would use the services of all networks more – thus benefitting more the networks where IOTs were unchanged. This left roaming customers with very high charges where the only substitute to make roaming calls was to buy a local SIM card or rent a local phone. Further, regulation by national regulatory authorities is not an option as the providers and customers of wholesale roaming products are located in different countries. However, around 2001 new technologies started to emerge that allowed operators to program the SIM cards to

automatically connect to the preferred network and stay on that network. One such technology is the over-air programming (OTA) of SIM cards. This, given that the above explained freeriding problem no longer exists, should place a downward pressure on roaming wholesale charges that, in turn, should also bring about decreases in retail roaming prices. Large mobile companies with subsidiaries in several countries can set preferential wholesale roaming charges between subsidiaries while using the improved SIM technology. Cross-border mergers in case of roaming in essence create vertically integrated firms. And in this particular case, vertical integration might eliminate double marginalisation and thus benefit the consumers by lowering prices. Vodafone, the mobile operator with the largest international footprint in Europe, first offered its Eurocall service in 2001. The Eurocall service offered subscribers the chance to program their mobile phones so they will always seek a connection

abroad from one of Vodafones European divisions, at a reduced price. Now this manual programming is substituted by automatic traffic redirection. Following Vodafone‟s move to offer preferential roaming rates, several mobile operators formed alliances to counter the perceived threat. Telefonica, Telecom Italia, T-Mobile International and Orange and all their affiliates created the Freemove Alliance in December 2003 in order to offer international roaming at preferential rates to large customers. The Starmap Mobile Alliance was established in February 2004 However, it was shut down at the beginning of 2007, possibly anticipating the European regulation of roaming charges. 22. For incoming roaming traffic these inter-operator tariffs are not relevant as its cost is based on the origination cost, the price of the conveyance into the host country and the national mobile termination charge. 26 Source: http://www.doksinet The European Regulators Group and the European Commission

concluded that while traffic steering might promote effective competition in the future it was not sufficient in 2006 and is still not sufficient in 2008 to make ex-ante regulation of roaming charges unnecessary.23 Roaming over Wi-Fi In addition to intelligent SIM cards, another alternative to mobile roaming emerged: using Wi-Fi enabled mobile handsets to switch to voice over Wi-Fi (VoWi-Fi) whenever a Wi-Fi connection is available. Dual mode handsets are able to integrate private and public wireless networks with mobile networks, enabling customers to make VoIP calls when in range of a compatible Wi-Fi network and mobile calls over a cellular network when out-of-range. British Telecom launched “BT Fusion” in June 2005 (initially over Bluetooth, but now over Wi-Fi), Orange started “unik” in September 2006 and Korea Telecom also has VoWi-Fi service called “OnePhone” (launched in June 2004). These services all offer their users the possibility to make fixed-line phone calls

with their mobile handset while at home and cellular calls outside the home.24 In October 2007, Nokia incorporated the Vyke VoIP software within its dual-mode Wi-Fi and GSM handsets.25 With these handsets, users are able to make calls without having a subscription to a mobile network in a Wi-Fi hotspot and thus can make phone calls in a foreign country without having to pay traditional roaming charges. So far, these solutions have not impacted significantly on international mobile roaming. However, if mobile roaming over public Wi-Fi networks becomes a reality, publicly funded Wi-Fi hotspots can have a large role in increasing international roaming volumes. Regulation of roaming tariffs in the European Union While the importance of new technologies to create competition in mobile roaming markets is well recognised, these technologies are not considered to have led to effective competition by European authorities, therefore the option of regulation was chosen. Years of preparatory work

preceded the introduction of price caps. In December 2005, the European Regulators Group pointed out that the existing European law was inadequate to deal with high roaming charges as the problem of roaming charges cannot be solved by ex-ante regulation imposed by NRAs in their own countries. A survey conducted by Eurobarometer on European roaming was published on the 7th of November 2006.26 The main findings of this survey were:27  A large majority (70%) of respondents expressed support for EU regulation to lower roaming costs across the EU.  68% would support EU intervention to bring down roaming charges for SMS.  44% of European citizens who have a mobile phone travel to another EU country at least once a year. 23. They also noted that the fact that incoming roaming calls were also expensive even though no IOTs were involved that would raise the underlying costs puts suggests that traffic redirection alone (and thus potentially lower IOTs) might not solve the problem.

24. Dual mode handsets so far have a very limited battery life. This is likely to be contributing to their slow takeup 25. Ofcom, The International Communications Market 2007. 26 . 24 565 people from all 25 EU countries were questioned in September 2006. 27. http://ec.europaeu/information society/activities/roaming/regulation/archives/eurobarometer/index enhtm 27 Source: http://www.doksinet  A large majority use their phone less when travelling abroad; 81% say that the high cost is the biggest deterrent.  15% of travellers either do not take their phones on holiday or switch them off completely.  21% only use SMS when roaming.  59% say they would use their phones more if charges were lower.  Around 43% of users are still confused as to the prices they pay for making or receiving calls abroad. The results of the Eurobarometer survey show that European users were concerned about the high roaming charges and used their phones less often than they would have liked

to in order to avoid very high phone bills. The European Commission, prior to regulating European roaming tariffs, found that per minute charges while roaming were up to four times higher than domestic mobile call prices. As a result of the failure of the New Regulatory Framework to deal with the problem of excessive roaming charges the Commission proposed a new regulation. The final version adopted by the European Parliament and Council came into effect at the end of June 2007. The regulation essentially consist of three elements:  Eurotariffs were introduced: initiating a roaming call cannot cost more than 49 cents and receiving one cannot cost more than 24 cents (excluding VAT). These price caps will be further lowered over a three-year period.  Wholesale charges are also capped: the average wholesale rate that one operator may charge another when a subscriber makes a call abroad cannot exceed 30 eurocents per minute. The wholesale price cap was put in place in order to avoid

small operators finding themselves in a margin squeeze.  More transparency of roaming charges: customers will be notified in an SMS when they are crossing borders within the EU of the price they will pay for making and receiving calls. This price regulation will be in place for three years, after which it will be dropped unless the Commission is not convinced that market forces alone will keep prices down. SMS and data roaming charges were not regulated in 2007. The impact on consumers of the introduction of the „Euro tariff‟ has been a significant decrease in roaming charges, which fell by up to 60% between June and September 2007. However, the Commission stated that prices for SMS and data roaming stayed very high.28 On 23 September 2008, the Commission proposed to introduce price caps for SMS roaming (11 cents per message while roaming) and measures to make data roaming prices to be more transparent. The European Parliament will vote on these proposals at a later date. While

there is no information on how the new prices impacted on roaming volumes, based on the Eurobarometer survey (which suggested that people would like to make more roaming calls were the prices lower), it is likely that volumes have substantially increased as a result of the regulatory intervention. 28. http://ec.europaeu/information society/activities/roaming/tariffs/index enhtm 28 Source: http://www.doksinet Assessing competitive pressures in telecommunications markets The structure and the regulatory environment in telecommunications markets show large differences across countries. To get a fuller picture about the impact of regulations on trade flows, it is therefore, useful to address the issue of competitive pressures in markets from both directions of top down and bottom up. The top-down approach does not look at particular regulations but attempts to capture the extent of competitive pressures in general in a market, while the bottom-up approach maps regulations that are

perceived to have a bearing on trade flows. The top-down approach: from prices to mark-ups Comparison of prices across countries may to a certain extent reflect competitive pressure; the quality of the service, however, may differ across countries, thereby making direct price comparisons less meaningful. A case to the point is the comparison of broadband pricing When looking at average broadband pricing for residential users in USD ppps, Ireland appears to have the most competitive prices and Spain is among the countries with the least competitive prices (Figure 9). Average pricing, however, masks different speeds of service. A better indicator is the price per MB, which shows that Ireland is far less competitive in pricing broadband when taking into account speed and Spain is much more competitive than it appears when only looking at prices and not connection speed (Figure 10). When taking into account speed, Japan has by far the most attractive broadband prices, followed by Korea,

Sweden, France and Italy. On the other end of the spectrum, Turkey, Mexico, Greece and Hungary offer poor quality for high prices. Figure 21. Average broadband pricing for residential users in USD ppps, 2006 160 140 120 100 80 60 40 20 MEX TUR ESP CZE HUN GRC SVK POL AUT NOR PRT USA LUX NZL AUS ISL BEL CAN KOR DNK DEU NLD GBR FIN ITA SWE CHE FRA JPN IRL 0 Source: OECD-Teligen database. 29 Source: http://www.doksinet Figure 22. Broadband pricing per MB for residential users in USD ppp, 2006 120 100 80 60 40 20 TUR MEX GRC HUN SVK CZE POL AUT ESP LUX NZL ISL IRL PRT DNK AUS CHE NLD CAN USA DEU GBR BEL NOR FIN ITA FRA SWE KOR JPN 0 Source: OECD-Teligen database. A more appropriate measure of competitive pressure in a market is the mark-up, i.e the wedge that firms charge over costs. This reflects competitive pressure better as it takes into account the different costs of different inputs to production. Competitive pressures in telecom markets appear high in Norway, UK,

Denmark and Spain (Figure 11) and much lower in France, Sweden, Italy and Iceland.29 It should be noted that the estimated mark-ups are larger in the telecommunications sector than in many other inherently competitive non-network service industries such as retail, wholesale trade, construction or computer services. This may be due to the fact that this sector, like other network industries, is characterised by large sunk and fixed costs and these need to be recovered from future earnings of telecommunications services providers. Mark-ups in telecommunications services, however, are lower than in several professional services such as legal services, where products are more customer-specified and asymmetric information is more of a problem. Figure 23. Differences in mark-ups are large across countries, 1993-2006 6 5 4 3 2 1 0 ISL IT SWE FR ESP DK GB NO Note: Mark-ups were obtained by computing the production function coefficients and using these computed coefficients as inputs

to the estimation of mark-ups. The estimated mark-ups are expressed as mark-up over average cost, including average cost (i.e to obtain mark-ups is percentages, 1 would need to be deducted from the figures in the chart). Source: Author’s estimation using the Amadeus database. 29. Mark-ups in the telecommunications sector could not be estimated for other countries owing to the insufficient number of firms by country in the Amadeus database. 30 Source: http://www.doksinet The bottom-up approach: picking regulations that may matter A readily available source of information is the OECD product market regulation (PMR) and the foreign direct investment (FDI) restrictiveness database. Both include information specifically related to the telecommunications sector and also information related to other sectors or the overall economic environment. What regulations affect cross-border trade flows? To check which regulations may be relevant for cross-border trade in telecommunications, a

simple log-linear demand regression was estimated with trade flows as dependent variable and major variables that are perceived to drive demand as independent variables. Trade flows are measured by international outgoing minutes and it is assumed that it is largely economic activity, the size of population and price that determine demand for outgoing calls. Economic activity is captured by three different variables: (i) trade with the outside world, (ii) outward and inward investments and (iii) the output gap which is an overall indicator of economic activity. Accordingly, equations 1-4 are estimated (1) (2) (3) (4) For the price variable, the international component of the OECD-Teligen business basket price is used. Several regulatory indicators were embedded in this framework to investigate their relevance for trade and hence whether they should be considered for the STRI or not. First, the sector-specific regulatory indicators were put under scrutiny, which include the overall

telecommunications PMR, entry, public ownership and market structure components. 17 different models were estimated with high levels of goodness of fit statistics and mostly significant coefficients with the expected signs (i.e population is expected to affect demand positively, so is economic activity, while higher prices are expected to imply lower demand) but not so significant results for the regulatory indices (Annex Table 1). Only when economic activity is captured by import-export flows was the coefficient on the total telecom PMR and the public ownership component significant and negative. That is, in countries, where regulation in telecommunications is relatively stringent and where there is high public ownership, there is lower demand for international calls. The results, however, can at most be as good as the underlying data. Given that an increasing share of international calls is now carried by the internet using 31 Source: http://www.doksinet VoIP services, regulation

of fixed line operators may not be relevant and outgoing fixed international minutes may only capture a tiny fracture of global telecommunications traffic. While sector-specific product market regulation did not appear to affect trade flows (except in some specifications and some components), the general economy-wide PMR and its highest level components have a negative and statistically significant impact on trade with the exception of the barriers to trade and investment component in most specifications and the outward-oriented policies in one model specification (Tables 4-5). Table 9. Economy-wide regulation and its higher-level components negatively affect trade Dependent variable: outward fixed line international calls in million minutes (1) (2) (3) (4) (5) (6) Business basket prices (in USD ppp) -0.309* -0.335* -0.331* -0.362* -0.316* -0.345* (0.0723) (0.0695) (0.0781) (0.0710) (0.0723) (0.0788) Population Total trade (in million USD) 0.379* (0.0616) 0.360* (0.0581) 0.320*

(0.0671) 0.324* (0.0587) 0.354* (0.0605) 0.299* (0.0675) 0.592* (0.0735) 0.613* (0.0692) 0.668* (0.0799) 0.646* (0.0702) 0.642* (0.0711) 0.693* (0.0803) Total FDI stocks (in million USD) Total pmr -0.443* (0.0776) Inward-oriented policies (9) (10) (11) (12) -0.171* (0.0919) -0.216* (0.0904) -0.147 (0.0970) -0.207* (0.0908) -0.204* (0.0938) -0.153 (0.0979) 0.434* (0.0575) 0.443* (0.0559) 0.378* (0.0587) 0.414* (0.0546) 0.422* (0.0589) 0.366* (0.0586) 0.451* (0.0570) 0.440* (0.0553) 0.513* (0.0577) 0.466* (0.0541) 0.472* (0.0576) 0.526* (0.0575) -0.433* (0.0627) -0.360* (0.0695) -0.188* (0.0828) State control -0.156* (0.0842) -0.251* (0.0423) Barriers to entrepreneurship -0.224* (0.0453) -0.458* (0.0813) Barriers to trade and investment No. of observations Adjusted R-square (8) -0.357* (0.0829) Outward-oriented policies Constant (7) -0.329* (0.0946) -0.120 (0.0801) -0.106 (0.0814) -5.225* -5.017* -5.753* -5.117* -5.442* -5.827* -5.661*

-5.593* -5.881* -5.546* -5.902* -5.921* (0.399) (0.391) (0.410) (0.401) (0.390) (0.410) (0.468) (0.459) (0.484) (0.464) (0.470) (0.485) 223 0.875 223 0.882 223 0.859 223 0.876 223 0.874 223 0.857 194 0.884 194 0.889 194 0.875 194 0.887 194 0.880 194 0.873 Note: All variables are in logarithmic forms except the indices. The sample includes the 30 OECD member countries and the period 1998-2007, but the panel is not balanced owing to limited availability of data. Source: Author’s estimation. 32 Source: http://www.doksinet Table 10. Economy-wide regulation and its higher-level components negatively affect trade (cont) Dependent variable: outward fixed line international calls in million minutes (1) (2) (3) (4) (5) Business basket prices (in USD ppp) -0.146 -0.187* -0.127 -0.181* -0.172* (0.0920) (0.0901) (0.0968) (0.0908) (0.0930) Population Total trade (in million USD) Total FDI stocks (in million USD) (6) 0.283* (0.0760) 0.323* (0.0696) 0.310* (0.0715) 0.267*

(0.0761) 0.241* (0.119) 0.274* (0.116) 0.244* (0.125) 0.244* (0.117) 0.321* (0.121) 0.254* (0.126) 0.342* (0.0781) 0.312* (0.0769) 0.406* (0.0796) 0.354* (0.0759) 0.316* (0.0814) 0.414* (0.0797) -0.346* (0.0824) (11) (12) 0.849* (0.0261) 0.856* (0.0283) 0.844* (0.0263) 0.859* (0.0279) 0.856* (0.0287) 0.0745* 0.0810* 0.0667* (0.0299) (0.0296) (0.0320) 0.101* (0.0300) 0.0469 (0.0319) 0.0660* (0.0325) -0.614* (0.0841) -0.360* (0.0686) -0.556* (0.0721) -0.130 (0.0846) State control -0.412* (0.0872) -0.219* (0.0449) Barriers to entrepreneurship -0.364* (0.0486) -0.354* (0.0935) Barriers to trade and investment No. of observations Adjusted R-square (10) 0.853* (0.0264) 0.343* (0.0697) Outward-oriented policies Constant (9) -0.593* -0.655* -0.636* -0.657* -0.749* -0.664* (0.0751) (0.0704) (0.0841) (0.0709) (0.0726) (0.0851) 0.343* (0.0727) Inward-oriented policies (8) -0.133 (0.0976) Output gap (as % of GDP) Total pmr (7) -0.558* (0.104) -0.0777

(0.0819) -0.345* (0.0852) -5.855* -5.803* -6.084* -5.743* -6.142* -6.131* -6.082* -5.990* -6.591* -6.014* -6.492* -6.705* (0.474) (0.462) (0.491) (0.469) (0.471) (0.493) (0.483) (0.479) (0.507) (0.482) (0.501) (0.512) 194 0.886 194 0.891 194 0.877 194 0.890 194 0.884 194 0.876 204 0.852 204 0.856 204 0.830 204 0.854 204 0.835 204 0.826 Note: All variables are in logarithmic forms except the indices. The sample includes the 30 OECD member countries and the period 1998-2007, but the panel is not balanced owing to limited availability of data. Source: Author’s estimation. At the medium level of aggregation, most indicators have a negative and statistically significant impact on cross-border trade, though the size of coefficients is smaller than in the case of the higher-level indicators (Annex Table 2-3). At the most disaggregated level, again, the majority of regulations appear to affect trade negatively and the size of coefficients is even smaller than in the case of

higher or mediumlevel indicators (Annex Tables 4-7). Among the variables that appear not to affect trade are price controls, antitrust exemptions, and administrative burdens for sole proprietor firms. The positive and highly significant coefficient on FDI in the cross-border trade equations suggests that there is rather a complementary relationship between trade and investment in the telecommunications sector. This is not surprising given that demand for international telecommunications services is derived demand and that FDI can be an important driver of such demand. What regulations affect FDI? Foreign direct investment is important to foster competitiveness in a market as very often this is the only source of competitive pressure. More competitive markets imply more competitive prices and are expected to result in higher trade. Restrictions on foreign investment in telecommunications tend to be associated with higher prices in those markets (Figure 12). 33 Source:

http://www.doksinet To check which regulations may have a bearing on inward foreign direct investment (Annex Tables 8-14), similarly to the tests conducted for cross-border trade, a simple log-linear framework is applied with FDI stocks as dependent variable and population and GDP per capita as basic control variables. This framework is then augmented with regulatory variables Equations 5 and 6 were estimated to get an insight into what regulations may affect FDI. (5) (6) Most components of the OECD product market regulation (PMR) indicators have a negative impact on cross-border trade in telecommunications services, with larger coefficients on more aggregated indicators. Sector-specific regulation, on the other hand, does not appear to affect cross-border trade in most model specifications; it has a negative impact, however, on FDI. FDI in telecommunications is not much affected by economy-wide product market regulation except some specific components related to state control, for

instance. FDI restrictions, such as ownership barriers or restrictions on the operations of foreign affiliates have a sizeable negative impact on inward foreign direct investment in telecommunications, in particular if such regulations are in the telecommunications sector. Figure 24. Higher barriers to ownership tend to be associated with higher pricing of leased lines in OECD 2006 4 POL 2006 Ownership barriers (PMR) 3.5 3 FRA 2006 CAN 2006 AUS 2006 2.5 JPN 2006 2 NOR 2006 1.5 1 DNK 2006 ITA 2006 LUX 2006 AUT 2006 CZE 2006 USA 2006 PRT 2006 SWE 2006 NLD 2006 ESP 2006 BEL 2006 0.5 DEU 2006 GBR 2006 0 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 National leased 2Mbit/s line yearly charges in US$ Source: OECD-Teligen database and OECD FDI restrictiveness database. Conclusion The telecommunications industry appears to be different from other services industries in many ways. Constant innovation in the sector necessitates rapid reaction by

regulators, while consumers have come to expect ever-decreasing charges for the service. Lower charges brought about by liberalisation and 34 Source: http://www.doksinet technological progress are undoubtedly boosting trade in telecommunications, but the exact impact is difficult to quantify due to a lack of data. Estimates of mark-ups and their comparison across industries suggest that the telecommunications industry is more competitive in general than other network industries but mark-ups are higher than in inherently competitive industries, partly owing to large sunk and fixed costs in this sector. A rigorous testing of the impact of regulations on trade flows suggests that different regulatory measures affect cross-border trade and FDI in different ways. Cross-border trade is particularly deterred by economy-wide regulations, while sector-specific regulation and restrictions on foreign ownership are more important for FDI. The relationship between the different modes of supply

of telecommunications services are not easy to test due to lack of data. Intuitively, there may be some substitution between roaming and international mobile/fixed calls or between international fixed and international mobile calls. Between international calls and sales of foreign affiliates, intuitively, there does not seem to be any relationship, except to the extent that more foreign affiliates imply more business and therefore more international phone calls. This is confirmed in the regression results when the effect of FDI on international traffic was positive and statistically significant. To focus the process of constructing an STRI, participants are invited to provide inputs on the following issues:  Are you aware of any cross-country database in addition to what is mentioned in the report?  Are you aware of any cross-country regulatory database on the telecommunications sector in addition to what is mentioned in the report?  What other regulatory issues would you

consider as important for telecommunications traffic? Both in terms of restricting traffic or boosting traffic. 35 international Source: http://www.doksinet REFERENCES Agiakloglou, C. and D Yannelis, (2006), “Estimation of price elasticities for international telecommunications demand”, International Advance in Economic Research, Vol. 12 Correia, L. (2006), “The economic impact of telecommunications diffusion on UK productivity growth”, Information Economics and Policy18. pp 385-404 Cowhey, P.F and JD Aronson (2008), “Trade in Services – Telecommunications” in A Mattoo et al (eds.) A Handbook of International Trade in Services, Oxford University Press Kelley, T. and M Woodall (2000), “Telecom traffic indicators”, Telecommunications Policy 24 Laffont, J.-J and J Tirole (2001), Competition in Telecommunications, The MIT Press Lazauskaite, V. (2008), “International mobile roaming regulation – An incentive for cooperation”, paper presented at the 8th Global

Symposium for Regulators, Pattaya, Thailand. OECD Economic Surveys, OECD, Paris, various issues. OECD (2006a), “OECD Policy considerations of VoIP”, 20 March 2006, available http://www.oecdorg/findDocument/0,3354,en 2649 34225 1 119666 1 4 1,00html at: OECD (2006b), “VoIP: Developments in the market”, http://www.oecdorg/findDocument/0,3354,en 2649 34225 1 119666 1 4 1,00html accessed on 20 October 2008. OECD (2007a), “Policies to strengthen competition in product markets” in Going for Growth, OECD, Paris. OECD (2007b), Mobile multiple play: new service pricing and policy implications, 15 January 2007. OECD (2007c), Communications Outlook, OECD, Paris. 36 Source: http://www.doksinet ANNEX 1. REGRESSION RESULTS The following tables summarise the results obtained when augmenting the simple trade demand model with regulatory indicators. The framework model explains trade flows (ie outgoing international calls) by country-specific prices (measured as the international

component of the basket price for business in the OECD-Teligen indicators), population of the country proxying the number of users and economic activity, all in logarithmic form. All estimated models include time dummies to control for technological change and country dummies to control for country-specific time-invariant characteristics. Economic activity is measures by trade flows (imports+exports), FDI (the sum of inward and outward FDI) and the output gap. All the base variables appear with the expected sign and with statistically significant coefficients in most specifications. This framework model is then augmented by the OECD PMR All components at all levels of the PMR are checked for whether they affect trade flows in telecommunications. This could serve as a first step to identify regulations that may later on be included in the STRI. In a separate framework, FDI stocks are used as dependent variable and population and GDP per capita as basic control variables. This framework

is then augmented with regulatory variables 37 Source: http://www.doksinet Annex Table 1. Sector-specific regulations adversely affect trade flows in some model specifications Dependent variable: outward fixed line international calls in million minutes (1) Business basket prices (in USD ppp) Total trade (in million USD) Population (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (15) (16) (17) -0.294* -0.287* -0.288* -0.323* -0.289* -0.108 -0.127 -0.113 -0.130 -0.115 -0.117 -0.132 -0.120 -0.843* -0.834* -0.878* -0.853* (0.0696) (0.0723) (0.0957) (0.0991) (0.0956) (0.0994) (0.0934) (0.0969) (0.0934) (0.0815) 0.810* 0.757* 0.779* 0.777* 0.786* 0.398* 0.390* 0.404* 0.382* (0.0656) (0.0696) (0.0702) (0.0672) (0.0690) (0.124) (0.119) (0.123) (0.117) (0.0717) (0.0705) (0.0728) (0.102) (0.0813) (0.0793) (0.0819) 0.199* 0.200* 0.212* 0.196* 0.201* 0.316* 0.313* 0.313* 0.316* 0.193* 0.189* 0.190* 0.194* 0.811*

0.812* 0.811* 0.802* (0.0543) (0.0563) (0.0565) (0.0549) (0.0557) (0.0531) (0.0523) (0.0514) (0.0509) (0.0644) (0.0636) (0.0624) (0.0621) (0.0362) (0.0295) (0.0322) (0.0358) 0.577* 0.573* 0.578* 0.575* 0.357* 0.376* 0.355* 0.383* (0.0591) (0.0549) (0.0550) (0.0550) (0.0895) (0.0802) (0.0867) (0.0797) 0.0658* 0.0680* 0.0668* 0.0781* (0.0352) (0.0338) (0.0345) Total FDI (in million USD) Output gap (as % of GDP) pmr telecom -0.0791* 0.0314 -0.000595 (0.0363) (0.0436) (0.0437) pmr telecom entry (0.0344) -0.0208 (0.0542) -0.0230 0.00948 0.0143 -0.0553 (0.0306) (0.0338) (0.0330) (0.0392) pmr telecom public ownership -0.0489* 0.00860 -0.0116 -0.0167 (0.0183) (0.0211) (0.0215) (0.0256) pmr telecom market structure Constant (14) -0.0410 0.00939 0.0112 -0.0486 (0.0380) (0.0420) (0.0411) (0.0511) -6.783* -4.929* -5.593* -6.323* -6.464* -5.806* -4.588* -4.651* -4.673* -6.039* -5.037* -4.904* -5.126* -6.782* -6.818*

-5.334* -5.055* (0.382) (0.510) (0.417) (0.444) (0.551) (0.538) (0.435) (0.469) (0.576) (0.530) (0.446) (0.464) (0.580) (0.662) (0.518) (0.585) (0.730) No. of observations 254 232 240 242 245 198 206 208 211 198 206 208 211 205 213 214 212 Adjusted R-square 0.860 0.842 0.841 0.847 0.848 0.850 0.853 0.855 0.861 0.857 0.860 0.862 0.867 0.799 0.801 0.800 0.799 Note: All variables are in logarithmic forms except the indices. The sample includes the 30 OECD member countries and the period 1998-2007, but the panel is not balanced owing to limited availability of data. Source: Author’s estimation. 38 Source: http://www.doksinet Annex Table 2. Mid-level components of the general PMR have a negative but smaller effect on trade Dependent variable: outward fixed line international calls in million minutes (1) (2) (3) (4) (5) (6) (7) Business basket prices (in USD ppp) -0.388* -0.333* -0.308* -0.391* -0.376* -0.346* -0.361* (0.0715)

(0.0738) (0.0760) (0.0757) (0.0766) (0.0793) (0.0773) Population Total trade (in million USD) 0.325* (0.0592) 0.291* (0.0599) 0.313* (0.0617) 0.266* (0.0613) 0.269* (0.0638) 0.300* (0.0694) 0.273* (0.0633) 0.634* (0.0714) 0.710* (0.0708) 0.687* (0.0727) 0.730* (0.0727) 0.734* (0.0746) 0.694* (0.0821) 0.723* (0.0754) Total FDI stocks (in million USD) SC: public ownership -0.195* (0.0345) SC: involvement in business operation (10) (11) (12) (13) (14) -0.211* (0.0910) -0.188* (0.0934) -0.177* (0.0959) -0.199* (0.0954) -0.186* (0.0965) -0.156 (0.0979) -0.164* (0.0971) 0.394* (0.0538) 0.408* (0.0573) 0.376* (0.0596) 0.350* (0.0553) 0.351* (0.0565) 0.367* (0.0595) 0.352* (0.0567) 0.476* (0.0536) 0.492* (0.0554) 0.517* (0.0582) 0.539* (0.0540) 0.546* (0.0546) 0.526* (0.0582) 0.540* (0.0555) -0.202* (0.0447) -0.184* (0.0518) -0.179* (0.0461) BE: Regulatory and admin. opacity -0.0805 (0.0510) -0.107* (0.0399) BE: Barriers to competition -0.104*

(0.0426) -0.0509 (0.0692) BT: Explicit barriers to trade and investment -0.0918 (0.0835) -0.0923 (0.0699) BT: Other barriers No. of observations Adjusted R-square (9) -0.174* (0.0356) BE: Admin. burdens on startups Constant (8) -0.0850 (0.0723) -0.0750 (0.0640) -0.0654 (0.0651) -5.083* -5.549* -5.816* -5.606* -5.914* -5.849* -5.850* -5.358* -6.012* -5.984* -5.861* -6.020* -5.930* -5.946* (0.408) (0.398) (0.396) (0.417) (0.409) (0.409) (0.410) (0.474) (0.469) (0.482) (0.480) (0.485) (0.485) (0.485) 223 0.875 223 0.868 223 0.865 223 0.860 223 0.856 223 0.857 223 0.856 194 0.887 194 0.881 194 0.874 194 0.876 194 0.873 194 0.873 194 0.873 Note: All variables are in logarithmic forms except the indices. The sample includes the 30 OECD member countries and the period 1998-2007, but the panel is not balanced owing to limited availability of data. Source: Author’s estimation. 39 Source: http://www.doksinet Annex Table 3. Mid-level components of the general PMR

have a negative but smaller effect on trade (cont) Dependent variable: outward fixed line international calls in million minutes (1) (2) (3) (4) (5) Business basket prices (in USD ppp) -0.184* -0.160* -0.143 -0.171* -0.157 (0.0911) (0.0933) (0.0954) (0.0954) (0.0966) Population Total trade (in million USD) Total FDI stocks (in million USD) (6) (7) -0.136 (0.0976) -0.139 (0.0969) -0.698* -0.704* -0.703* -0.856* -0.851* -0.641* -0.774* (0.0692) (0.0769) (0.0775) (0.0772) (0.0754) (0.0862) (0.0796) 0.829* (0.0265) 0.304* (0.0689) 0.311* (0.0722) 0.270* (0.0725) 0.254* (0.0710) 0.252* (0.0725) 0.265* (0.0776) 0.253* (0.0728) 0.242* (0.118) 0.262* (0.121) 0.314* (0.125) 0.262* (0.123) 0.267* (0.125) 0.256* (0.127) 0.266* (0.125) 0.365* (0.0757) 0.371* (0.0782) 0.362* (0.0841) 0.418* (0.0782) 0.422* (0.0792) 0.415* (0.0798) 0.418* (0.0794) Output gap (as % of GDP) SC: public ownership -0.170* (0.0353) 0.866* (0.0284) (10) 0.864* (0.0284) (11) 0.849*

(0.0301) (12) 0.857* (0.0301) (13) 0.859* (0.0286) (14) 0.851* (0.0294) -0.284* (0.0380) -0.181* (0.0513) BE: Admin. burdens on startups -0.273* (0.0561) -0.101* (0.0509) BE: Regulatory and admin. opacity -0.251* (0.0530) -0.100* (0.0422) BE: Barriers to competition -0.0372 (0.0552) -0.0803 (0.0829) BT: Explicit barriers to trade and investment -0.118 (0.0994) -0.0567 (0.0730) BT: Other barriers No. of observations Adjusted R-square (9) 0.0968* 0.0910* 0.0593* 0.0694* 0.0733* 0.0708* 0.0655* (0.0299) (0.0322) (0.0321) (0.0341) (0.0337) (0.0323) (0.0334) SC: involvement in business operation Constant (8) -0.320* (0.0743) -0.0536 (0.0647) -0.187* (0.0750) -5.559* -6.212* -6.226* -6.066* -6.219* -6.143* -6.156* -5.838* -6.771* -6.812* -7.373* -7.064* -7.060* -6.915* (0.479) (0.474) (0.485) (0.485) (0.489) (0.493) (0.491) (0.490) (0.499) (0.500) (0.536) (0.524) (0.510) (0.520) 194 0.889 194 0.883 194 0.878 194 0.879 194 0.876 194 0.875 194 0.875 204 0.853

204 0.831 204 0.830 204 0.811 204 0.812 204 0.827 204 0.817 Note: All variables are in logarithmic forms except the indices. The sample includes the 30 OECD member countries and the period 1998-2007, but the panel is not balanced owing to limited availability of data. Source: Author’s estimation. 40 Source: http://www.doksinet Annex Table 4. The impact of the lowest-level PMR indicators on trade is negative but relatively small Dependent variable: outward fixed line international calls in million minutes (1) (2) (3) (4) (5) (6) (7) (8) (9) Business basket prices (in USD ppp) -0.384* -0.356* -0.348* -0.340* -0.328* -0.282* -0.322* -0.294* -0.169* (0.0745) (0.0693) (0.0724) (0.0722) (0.0764) (0.0757) (0.0748) (0.0733) (0.0937) Population 0.278* (0.0599) Total trade (in million USD) 0.700* (0.0742) Total FDI stocks (in million USD) SC PO: Scope of enterprise sector 0.267* (0.0537) 0.251* (0.0560) 0.250* (0.0558) 0.225* (0.0572) 0.239* (0.0562) 0.259* (0.0586) 0.308*

(0.0590) 0.702* (0.0665) 0.724* (0.0695) 0.750* (0.0683) 0.777* (0.0703) 0.762* (0.0688) 0.736* (0.0714) 0.685* (0.0712) -0.0864* (0.0314) SC PO: Size of public enterprise sector (11) (12) (13) (14) (15) (16) -0.225* (0.0970) (10) -0.0859 (0.0882) -0.180* (0.0928) -0.146 (0.0946) -0.130 (0.0942) -0.136 (0.0943) -0.154 (0.0949) 0.334* (0.0529) 0.363* (0.0552) 0.302* (0.0482) 0.362* (0.0541) 0.297* (0.0529) 0.321* (0.0530) 0.320* (0.0538) 0.336* (0.0616) 0.541* (0.0541) 0.501* (0.0582) 0.564* (0.0489) 0.525* (0.0539) 0.582* (0.0532) 0.560* (0.0536) 0.561* (0.0542) 0.544* (0.0620) -0.0772* (0.0324) -0.142* (0.0239) SC PO: Direct control over bus. enterprises -0.0811* (0.0287) -0.0958* (0.0252) SC IBO: Use of control & command -0.137* (0.0251) -0.112* (0.0279) SC IBO: Price controls -0.107* (0.0342) -0.0559 (0.0408) BE ABS: Admin. burdens for corp. 0.0252 (0.0427) -0.129* (0.0381) BE ABS: Admin. Burdens for spf -0.0628 (0.0405) -0.0939*

(0.0391) BE ABS: Sector specific admin. -0.0485 (0.0412) -0.162* (0.0394) -0.0478 (0.0472) Constant -5.387* -5.119* -5.320* -5.560* -5.662* -5.624* -5.652* -5.783* -5.450* -5.464* -5.046* -5.758* -5.620* -5.609* -5.638* -5.714* (0.397) (0.372) (0.387) (0.375) (0.386) (0.377) (0.382) (0.373) (0.454) (0.449) (0.435) (0.443) (0.456) (0.451) (0.452) (0.457) No. of observations Adjusted R-square 227 0.862 227 0.877 227 0.866 227 0.867 227 0.858 227 0.864 227 0.861 227 0.868 198 0.876 198 0.878 198 0.890 198 0.879 198 0.873 198 0.874 198 0.873 198 0.873 Note: All variables are in logarithmic forms except the indices. The sample includes the 30 OECD member countries and the period 1998-2007, but the panel is not balanced owing to limited availability of data. Source: Author’s estimation. 41 Source: http://www.doksinet Annex Table 5. The impact of the lowest-level PMR indicators on trade is negative but relatively small (cont) Dependent variable: outward fixed line

international calls in million minutes (1) (2) (3) (4) (5) Business basket prices (in USD ppp) -0.146 -0.216* -0.0766 -0.157* -0.121 (0.0929) (0.0944) (0.0880) (0.0919) (0.0937) Population 0.235* (0.0655) Total trade (in million USD) 0.296* (0.119) Total FDI stocks (in million USD) 0.398* (0.0785) Output gap (as % of GDP) SC PO: Scope of enterprise sector (6) (7) (8) (10) (11) (12) (13) (14) (15) (16) -0.0999 (0.0927) -0.112 (0.0931) -0.135 (0.0934) -0.767* -0.822* -0.718* -0.799* -0.829* -0.764* -0.752* -0.672* (0.0736) (0.0711) (0.0762) (0.0768) (0.0817) (0.0804) (0.0801) (0.0784) 0.816* (0.0270) 0.248* (0.0638) 0.241* (0.0610) 0.263* (0.0661) 0.199* (0.0645) 0.210* (0.0638) 0.216* (0.0652) 0.239* (0.0694) 0.398* (0.119) 0.187 (0.116) 0.298* (0.117) 0.314* (0.122) 0.362* (0.121) 0.325* (0.120) 0.345* (0.121) 0.287* (0.0853) 0.473* (0.0746) 0.381* (0.0780) 0.424* (0.0809) 0.375* (0.0809) 0.399* (0.0801) 0.359* (0.0890) 0.794* (0.0268) 0.0881*

0.0633* (0.0321) (0.0314) -0.0711* (0.0320) SC PO: Size of public enterprise sector (9) 0.807* (0.0271) 0.827* (0.0284) 0.0925* 0.0642* (0.0323) (0.0332) 0.820* (0.0294) 0.823* (0.0284) 0.827* (0.0283) 0.840* (0.0273) 0.0725* (0.0349) 0.0592* (0.0334) 0.0641* (0.0332) 0.0408 (0.0320) -0.204* (0.0357) -0.0998* (0.0284) SC PO: Direct control over bus. enterprises -0.182* (0.0292) -0.128* (0.0256) SC IBO: Use of control & command -0.172* (0.0306) -0.103* (0.0338) SC IBO: Price controls -0.141* (0.0379) 0.00563 (0.0427) BE ABS: Admin. burdens for corp. -0.0603 (0.0517) -0.0844* (0.0403) BE ABS: Admin. Burdens for spf -0.161* (0.0467) -0.0544 (0.0406) BE ABS: Sector specific admin. -0.174* (0.0458) -0.0691 (0.0469) -0.266* (0.0455) Constant -5.793* -5.861* -5.293* -6.083* -5.988* -5.995* -5.996* -6.124* -5.186* -4.929* -5.356* -5.615* -5.750* -5.614* -5.658* -5.793* (0.469) (0.453) (0.459) (0.455) (0.471) (0.460) (0.464) (0.471) (0.471) (0.472) (0.466)

(0.482) (0.495) (0.484) (0.480) (0.459) No. of observations Adjusted R-square 198 0.880 198 0.884 198 0.891 198 0.882 198 0.876 198 0.879 198 0.878 198 0.878 208 0.829 208 0.833 208 0.828 208 0.813 208 0.801 208 0.811 208 0.814 208 0.830 Note: All variables are in logarithmic forms except the indices. The sample includes the 30 OECD member countries and the period 1998-2007, but the panel is not balanced owing to limited availability of data. Source: Author’s estimation. 42 Source: http://www.doksinet Annex Table 6. The impact of the lowest-level PMR indicators on trade is negative but relatively small (cont) Dependent variable: outward fixed line international calls in million minutes (1) (2) (3) (4) (5) (6) (7) (8) Business basket prices (in USD ppp) -0.375* -0.349* -0.453* -0.379* -0.361* -0.351* -0.222* -0.346* (0.0745) (0.0745) (0.0726) (0.0764) (0.0751) (0.0748) (0.0795) (0.0749) Population Total trade (in million USD) 0.232* (0.0568) 0.245* (0.0593)

0.295* (0.0583) 0.243* (0.0631) 0.194* (0.0626) 0.216* (0.0602) 0.250* (0.0559) 0.228* (0.0576) 0.766* (0.0696) 0.743* (0.0738) 0.696* (0.0691) 0.753* (0.0739) 0.811* (0.0775) 0.784* (0.0751) 0.760* (0.0682) 0.767* (0.0709) Total FDI stocks (in million USD) BE RAO: Licenses and permits system -0.0464* (0.0190) BE RAO: Com. and simplification of rules and procedures (11) (12) (13) (14) (15) (16) -0.174* (0.0939) -0.138 (0.0942) -0.301* (0.0983) -0.179* (0.0966) -0.156 (0.0947) -0.142 (0.0946) -0.0530 (0.0934) -0.137 (0.0947) 0.313* (0.0514) 0.314* (0.0530) 0.386* (0.0552) 0.342* (0.0562) 0.284* (0.0541) 0.303* (0.0524) 0.343* (0.0509) 0.306* (0.0522) 0.568* (0.0520) 0.563* (0.0543) 0.498* (0.0543) 0.549* (0.0548) 0.599* (0.0552) 0.576* (0.0537) 0.548* (0.0511) 0.573* (0.0530) -0.109 (0.0800) -0.0910 (0.0852) -0.302* (0.0527) BE BC: Antitrust exemptions -0.233* (0.0610) 0.0662 (0.0481) BT EBT: Foreign ownership barriers 0.0255 (0.0573)

0.0534 (0.0468) BT EBT: Discrim. procedures 0.0584 (0.0476) 0.0183 (0.0485) BT EBT: Tariffs -0.00487 (0.0501) -0.157* (0.0402) BT OTB: Regulatory barriers No. of observations Adjusted R-square (10) -0.0486* (0.0202) BE BC: Legal barriers Constant (9) -0.185* (0.0465) -0.0418 (0.0489) -0.0341 (0.0506) -5.561* -5.577* -5.294* -5.806* -5.795* -5.728* -5.818* -5.675* -5.633* -5.626* -5.866* -5.958* -5.711* -5.642* -5.610* -5.638* (0.386) (0.396) (0.395) (0.413) (0.394) (0.392) (0.375) (0.387) (0.447) (0.453) (0.468) (0.488) (0.455) (0.458) (0.436) (0.453) 227 0.861 227 0.858 223 0.875 223 0.857 227 0.858 227 0.857 227 0.867 227 0.858 198 0.876 198 0.873 194 0.882 194 0.872 198 0.874 198 0.872 198 0.883 198 0.873 Note: All variables are in logarithmic forms except the indices. The sample includes the 30 OECD member countries and the period 1998-2007, but the panel is not balanced owing to limited availability of data. Source: Author’s estimation. 43

Source: http://www.doksinet Annex Table 7. The impact of the lowest-level PMR indicators on trade is negative but relatively small (cont) Dependent variable: outward fixed line international calls in million minutes (1) (2) (3) (4) (5) Business basket prices (in USD ppp) -0.151 -0.117 -0.280* -0.150 -0.136 (0.0931) (0.0932) (0.0962) (0.0963) (0.0931) Population Total trade (in million USD) Total FDI stocks (in million USD) (6) (7) (8) -0.121 (0.0934) -0.0296 (0.0921) -0.116 (0.0936) -0.878* -0.761* -0.955* -0.847* -0.767* -0.806* -0.697* -0.828* (0.0807) (0.0823) (0.0712) (0.0752) (0.0859) (0.0805) (0.0833) (0.0794) 0.814* (0.0291) 0.813* (0.0285) 0.843* (0.0273) 0.845* (0.0302) 0.817* (0.0288) 0.811* (0.0289) 0.830* (0.0281) 0.815* (0.0290) 0.0619* (0.0346) 0.0745* (0.0337) 0.0801* (0.0310) 0.0713* (0.0337) 0.0640* (0.0339) 0.0544 (0.0343) 0.0824* (0.0331) 0.0612* (0.0342) 0.216* (0.0639) 0.212* (0.0657) 0.255* (0.0684) 0.236* (0.0723) 0.162* (0.0675)

0.196* (0.0657) 0.238* (0.0624) 0.204* (0.0647) 0.296* (0.119) 0.308* (0.120) 0.375* (0.120) 0.288* (0.126) 0.350* (0.121) 0.322* (0.122) 0.322* (0.115) 0.313* (0.120) 0.423* (0.0777) 0.413* (0.0791) 0.316* (0.0791) 0.414* (0.0800) 0.434* (0.0785) 0.422* (0.0788) 0.388* (0.0759) 0.419* (0.0788) Output gap (as % of GDP) BE RAO: Licenses and permits system -0.0447* (0.0200) BE RAO: Com. and simplification of rules and procedures -0.0737 (0.0842) (11) (12) (13) (14) (15) (16) -0.305* (0.0994) -0.269* (0.0607) BE BC: Antitrust exemptions -0.396* (0.0643) 0.0435 (0.0572) BT EBT: Foreign ownership barriers 0.0848 (0.0673) 0.0807* (0.0473) BT EBT: Discrim. procedures -0.124* (0.0522) 0.0158 (0.0499) BT EBT: Tariffs -0.130* (0.0591) -0.187* (0.0457) BT OTB: Regulatory barriers No. of observations Adjusted R-square (10) -0.0208 (0.0263) BE BC: Legal barriers Constant (9) -0.253* (0.0591) -0.0281 (0.0498) -0.103* (0.0625) -5.960* -5.970* -6.135*

-6.162* -6.121* -6.025* -5.965* -5.986* -5.661* -5.565* -6.946* -6.967* -5.577* -5.588* -5.748* -5.714* (0.460) (0.466) (0.465) (0.490) (0.468) (0.473) (0.446) (0.466) (0.507) (0.489) (0.488) (0.528) (0.495) (0.496) (0.475) (0.494) 198 0.880 198 0.877 194 0.887 194 0.875 198 0.878 198 0.877 198 0.887 198 0.877 208 0.801 208 0.809 204 0.842 204 0.812 208 0.806 208 0.805 208 0.817 208 0.803 Note: All variables are in logarithmic forms except the indices. The sample includes the 30 OECD member countries and the period 1998-2007, but the panel is not balanced owing to limited availability of data. Source: Author’s estimation. 44 Source: http://www.doksinet Annex Table 8. Sector-specific regulations are important deterrents of foreign direct investment in telecommunications Dependent variable: Inward FDI stock of the economy (in million USD) (1) (2) (3) (4) GDP per capita Total imports (in million USD) (5) 0.339* (0.0849) 0.328* (0.106) 0.242* (0.104) 0.486*

(0.0853) 0.327* (0.0887) 1.080* (0.0275) 1.015* (0.0320) 1.059* (0.0298) 0.971* (0.0298) 1.079* (0.0327) Population pmr telecom 0.111 (0.272) 0.467* (0.264) 0.999* (0.215) 0.891* (0.285) 0.822* (0.0745) 0.589* (0.0812) 0.705* (0.0782) 0.602* (0.0825) 0.667* (0.0989) -0.383* (0.0739) -0.0476* (0.0193) pmr telecom public ownership -0.154* (0.0558) -0.135* (0.0167) pmr telecom market structure No. of observations Adjusted R-square -0.283* (0.0505) 0.0181 (0.0392) -5.497* -4.103* -4.141* -5.057* -5.455* (0.829) (1.086) (1.073) (0.811) (1.006) 475 0.813 410 0.821 (10) 1.226* (0.221) -0.128* (0.0279) pmr telecom entry Constant Dependent variable: Inward FDI stock in the telecommunication sector (in million USD) (6) (7) (8) (9) 420 0.814 453 0.830 456 0.805 Note: All variables are in logarithmic forms except the indices. Source: Author’s estimation. 45 -0.260* (0.125) -21.80* (2.769) -4.159 (3.728) 213 0.615 168 0.671 -11.01* -12.92* -12.83* (3.435)

(2.902) (4.402) 177 0.628 202 0.670 202 0.623 Source: http://www.doksinet Annex Table 9. Economy-wide regulations are less important when deciding to invest in telecommunications Dependent variable: Inward FDI stocks of the total economy in million USD (1) (2) (3) (4) (5) GDP per capita Total imports (in million USD) (6) 0.0858 (0.146) 0.123 (0.131) 0.139 (0.152) 0.250* (0.123) -0.0728 (0.126) 0.155 (0.149) 1.008* (0.0362) 1.007* (0.0362) 1.009* (0.0363) 1.010* (0.0365) 1.019* (0.0347) 1.009* (0.0363) Total population Total pmr -0.190* (0.112) Inward-oriented policies 0.401 (0.361) 0.613 (0.369) 0.912* (0.319) -0.353 (0.329) 0.655* (0.360) 0.703* (0.0762) 0.691* (0.0764) 0.715* (0.0771) 0.707* (0.0790) 0.732* (0.0681) 0.716* (0.0773) -0.160* (0.0923) -0.542* (0.273) -0.114 (0.108) State control -0.281 (0.237) 0.000908 (0.0590) Barriers to entrepreneurship -0.0323 (0.178) -0.516* (0.113) Barriers to trade and investment No. of observations

Adjusted R-square 0.368 (0.392) -0.533* (0.290) Outward-oriented policies Constant Dependent variable: Inward FDI stocks of the telecommunication sector in million USD (7) (8) (9) (10) (11) (12) -1.578* (0.309) -0.0950 (0.103) -0.242 (0.223) -0.796 (1.616) -1.176 (1.446) -1.511 (1.641) -2.789* (1.345) 0.772 (1.360) -1.716 (1.604) -6.092 (4.691) -6.383 (4.510) -9.618* (4.253) -12.81* (4.077) 1.864 (3.917) -9.733* (4.135) 208 0.831 208 0.831 208 0.830 208 0.829 208 0.845 208 0.830 98 0.544 98 0.547 98 0.534 98 0.527 98 0.636 98 0.533 Note: All variables are in logarithmic forms except the indices. Source: Author’s estimation. 46 Source: http://www.doksinet Annex Table 10. Mid-level PMR indicators do not affect inward FDI in telecommunications except administrative barriers on start-ups Dependent variable: Inward FDI stocks of the total economy in million USD (1) (2) (3) (4) (5) GDP per capita Total imports (in million USD) (6) (7) 0.318* (0.120)

0.131 (0.119) -0.0229 (0.121) 0.242* (0.110) 0.258* (0.110) 0.117 (0.154) 0.234* (0.124) 1.018* (0.0367) 1.017* (0.0360) 1.021* (0.0348) 1.008* (0.0365) 1.005* (0.0367) 1.011* (0.0363) 1.009* (0.0364) Total population SC: public ownership 0.0644 (0.0466) SC: involvement in business operation 0.924* (0.303) 0.0433 (0.295) 0.847* (0.254) 0.935* (0.235) 0.706* (0.0807) 0.710* (0.0776) 0.723* (0.0701) 0.706* (0.0772) 0.700* (0.0781) -0.148* (0.0621) 0.662* (0.397) 0.774* (0.290) 0.725* 0.704* (0.0790) (00773) -0.0297 (0.206) -0.249* (0.0559) BE: Regulatory and admin. opacity -0.681* (0.154) -0.0322 (0.0529) BE: Barriers to competition -0.158 (0.150) 0.0832 (0.0968) BT: Explicit barriers to trade and investment 0.194 (0.228) -0.109 (0.0897) BT: Other barriers No. of observations Adjusted R-square 0.916* (0.308) -0.0247 (0.139) BE: Admin. burdens on startups Constant Dependent variable: Inward FDI stocks of the telecommunication sector in million

USD (8) (9) (10) (11) (12) (13) (14) -0.205 (0.227) -0.0214 (0.0811) -3.746* (1.319) -1.838 (1.234) 0.294 (1.272) -3.150* (1.114) -2.866* (1.125) -1.291 (1.660) -2.607* (1.295) 208 0.830 208 0.834 208 0.845 208 0.829 208 0.829 208 0.830 208 0.829 Note: All variables are in logarithmic forms except the indices. Source: Author’s estimation. 47 -0.180 (0.174) -12.45* -12.62* (4.004) (3.648) 98 0.527 98 0.527 -3.181 (3.482) 98 0.614 -11.97* -12.76* -10.31* -11.30* (3.157) (2.900) (4.412) (3.490) 98 0.532 98 0.530 98 0.531 98 0.532 Source: http://www.doksinet Annex Table 11. Some lowest level PMR components have a large negative impact on inward FDI in telecommunications Dependent variable: Inward FDI stocks of the total economy in million USD (1) (2) (3) (4) (5) GDP per capita Total imports (in million USD) (6) (7) (8) 0.322* (0.106) 0.231* (0.109) 0.390* (0.105) 0.257* (0.107) 0.151 (0.0957) 0.134 (0.111) 0.167 (0.108) -0.0986 (0.115) 1.004*

(0.0350) 0.995* (0.0350) 1.015* (0.0346) 1.004* (0.0350) 1.028* (0.0325) 1.008* (0.0343) 1.004* (0.0343) 1.017* (0.0325) Total population SC PO: Scope of enterprise sector 0.0395 (0.0397) SC PO: Size of public enterprise sector 0.454 (0.293) 1.220* (0.260) 1.032* (0.258) 0.679* (0.245) 0.701* (0.0769) 0.615* (0.0827) 0.735* (0.0764) 0.710* (0.0773) 0.751* 0.699* 0.759* 0.723* (0.0757) (00728) (00720) (00711) -0.0445 (0.0327) 0.274 (0.296) 0.242 (0.277) 0.151 (0.292) -0.304* (0.114) 0.0932* (0.0322) SC IBO: Use of control & command 0.204* (0.0928) -0.0346 (0.0404) SC IBO: Price controls 0.0790 (0.106) -0.274* (0.0454) BE ABS: Admin. burdens for corp. -0.439* (0.155) -0.144* (0.0473) BE ABS: Admin. Burdens for spf -0.457* (0.133) -0.128* (0.0459) BE ABS: Sector specific admin. No. of observations Adjusted R-square 0.745* (0.271) -0.149 (0.101) SC PO: Direct control over bus. enterprises Constant Dependent variable: Inward FDI stocks of the

telecommunication sector in million USD (9) (10) (11) (12) (13) (14) (15) (16) -0.551* (0.135) -0.264* (0.0454) -0.523* (0.128) -3.587* (1.186) -2.307* (1.205) -4.487* (1.157) -2.716* (1.147) -1.872* (0.990) -1.310 (1.196) -1.639 (1.170) 1.090 (1.222) -10.23* (3.407) -5.554 (3.939) 213 0.832 213 0.833 213 0.838 213 0.832 213 0.857 213 0.839 213 0.837 213 0.855 98 0.538 98 0.562 Note: All variables are in logarithmic forms except the indices. Source: Author’s estimation. 48 -16.88* -14.32* -10.55* (3.258) (3.188) (2.904) 98 0.551 98 0.529 98 0.567 -5.405 (3.568) -5.613* (3.208) -4.265 (3.408) 98 0.584 98 0.603 98 0.603 Source: http://www.doksinet Annex Table 12. Some lowest level PMR components have a large negative impact on inward FDI in telecommunications (cont) Dependent variable: Inward FDI stocks of the total economy in million USD (1) (2) (3) (4) (5) GDP per capita Total imports (in million USD) (6) (7) (8) 0.289* (0.101) 0.169 (0.105)

0.297* (0.105) 0.279* (0.108) 0.186* (0.112) 0.291* (0.111) 0.413* (0.144) 0.282* (0.105) 1.001* (0.0350) 0.989* (0.0342) 1.004* (0.0348) 0.992* (0.0363) 0.995* (0.0347) 1.001* (0.0353) 0.993* (0.0355) 1.000* (0.0350) Total population BE RAO: Licenses and permits system 0.00110 (0.0245) BE RAO: Com. and simplification of rules and procedures 0.687* (0.246) 0.993* (0.232) 0.906* (0.233) 0.676* (0.289) 0.709* (0.0775) 0.670* (0.0760) 0.670* (0.0789) 0.677* (0.0787) 0.725* 0.716* 0.709* 0.697* (0.0770) (00776) (00822) (00775) -0.320* (0.0962) 1.076* (0.280) 0.955* (0.378) 0.807* (0.259) -0.961* (0.359) -0.298* (0.0692) BE BC: Antitrust exemptions -0.401* (0.214) 0.181* (0.0653) BT EBT: Foreign ownership barriers 0.268* (0.158) -0.106* (0.0521) BT EBT: Discrim. procedures -0.212 (0.133) 0.00278 (0.0619) BT EBT: Tariffs 0.117 (0.145) 0.0771 (0.0640) BT OTB: Regulatory barriers No. of observations Adjusted R-square 0.922* (0.245) -0.0307 (0.0723)

BE BC: Legal barriers Constant Dependent variable: Inward FDI stocks of the telecommunication sector in million USD (9) (10) (11) (12) (13) (14) (15) (16) 0.00219 (0.159) -0.0134 (0.0611) -3.079* (1.080) -1.557 (1.137) 213 0.831 213 0.840 -3.149* -2.951* (1.034) (1.103) 208 0.844 208 0.835 -1.752 (1.243) -3.099* (1.214) 213 0.835 213 0.831 -4.343* -2.996* (1.500) (1.125) 213 0.832 213 0.831 Note: All variables are in logarithmic forms except the indices. Source: Author’s estimation. 49 -0.178 (0.140) -12.94* -9.303* -12.56* -12.50* -9.963* -14.44* -12.98* -11.57* (3.039) (3.103) (2.874) (2.896) (3.415) (3.434) (4.053) (3.189) 98 0.527 98 0.563 98 0.545 98 0.542 98 0.540 98 0.530 98 0.526 98 0.535 Source: http://www.doksinet Annex Table 13. General FDI restrictions also affect the telecommunications sector Dependent variable: Inward FDI stocks of the total economy in million USD (1) (2) (3) (4) (5) GDP per capita (6) 0.261 (0.238) 0.381 (0.382) -0.230

(0.301) 0.460 (0.318) 0.590 (0.492) 0.292 (0.339) Total population 0.606* (0.0739) 0.784* (0.102) 0.574* (0.0875) 0.540* (0.112) 0.761* (0.0928) 0.788* (0.101) FDI RI: Total economy -3.641* (0.542) FDI RI: Foreign equity of all firms in the total -6.236* economy (2.126) FDI RI: Screening and approval in the total -3.421* economy (1.280) FDI RI: Board of directors / managers in the total economy FDI RI: Movement of people in the total economy FDI RI: Input and operat. restrictions in the total economy -6.121* (1.331) Total imports (in million USD) Constant No. of observations Adjusted R-square 0.191* (0.0999) 0.246 (0.159) 0.334* (0.155) 0.565* (0.177) 0.956* (0.181) 0.299* (0.144) 0.894* (0.0360) 0.894* (0.0547) 0.893* (0.0561) 0.891* (0.0581) 0.999* (0.0467) 1.031* (0.0491) Dependent variable: Inward FDI stocks of the telecommunication sector in million USD (7) (8) (9) (10) (11) (12) -0.224 (1.094) -1.083 (1.754) -2.156 (1.644) 224 0.850 96 0.815 96

0.812 4.284 (5.321) -11.18* (2.635) -6.238* (2.604) -21.80* (7.636) 25.45* (4.889) 13.24 (13.41) -14.22* (2.933) -4.511* -10.77* (1.648) (2.010) 96 0.809 96 0.845 -8.537 (8.715) -3.335* (1.455) -3.093 (3.263) -9.365* (5.081) 1.177 (3.910) -5.209 (3.793) -11.18* (5.920) -8.022* (4.213) 96 0.840 112 0.600 47 0.589 47 0.712 47 0.653 47 0.593 47 0.592 Note: All variables are in logarithmic forms except the indices. Source: Author’s estimation. 50 Source: http://www.doksinet Annex Table 14. FDI restrictions in telecommunications are important deterrents for potential investors in this sector Dependent variable: Inward FDI stocks of the total economy in million USD (1) (2) (3) (4) (5) GDP per capita Total imports (in million USD) (6) 0.0345 (0.108) 0.210 (0.166) 0.356* (0.164) 0.445* (0.153) 0.964* (0.177) 0.377* (0.158) 0.921* (0.0351) 0.907* (0.0543) 0.953* (0.0551) 0.900* (0.0523) 1.001* (0.0462) 0.977* (0.0524) Total population FDI RI: Telecoms

-1.231* (0.199) FDI RI: Foreign equity of all firms in telecoms -0.604 (0.370) -0.229 (0.349) 0.130 (0.293) 0.641 (0.485) 0.0822 (0.381) 0.621* (0.0671) 0.599* (0.0902) 0.643* (0.0928) 0.646* (0.0853) 0.764* (0.0925) 0.705* (0.106) -0.836* (0.320) -2.416* (0.658) -0.293 (0.987) -6.646* (2.362) -5.384* (1.589) FDI RI: Movement of people in telecoms FDI RI: Input and operat. restrictions in telecoms No. of observations Adjusted R-square -0.228 (0.264) -2.735* (0.469) FDI RI: Screening and approval in telecoms FDI RI: Board of directors / managers in telecoms Constant Dependent variable: Inward FDI stocks of the telecommunication sector in million USD (7) (8) (9) (10) (11) (12) -13.32* (3.642) 26.13* (4.799) 15.17 (13.15) -2.364* (1.209) 3.075 (3.728) 0.773 (1.200) -1.090 (1.812) -3.247* (1.743) -3.366* (1.539) -10.90* (1.972) -3.679* (1.606) 1.344 (3.388) 4.661 (4.753) -0.158 (4.458) -3.782 (3.659) -11.80* (5.849) -4.778 (4.833) 224 0.846 96 0.812

96 0.797 96 0.820 96 0.848 96 0.806 112 0.638 47 0.688 47 0.652 47 0.687 47 0.596 47 0.590 Note: All variables are in logarithmic forms except the indices. Source: Author’s estimation. 51 Source: http://www.doksinet ANNEX II. WHY VOIP? VoIP: pros and cons OECD (2006b) discusses the major reasons for the widespread use of VoIP services and the major issues related to using such services. Delivering voice over the Internet has several advantages In particular:  VoIP services are cheap and cost effective. This is due to lower infrastructure deployment costs (since the infrastructure usually already exists), and to more efficient bandwidth usage (VoIP uses up to 90% less bandwidth than a traditional PSTN call). Also, using the same network to deliver voice and data results in cost savings. A further cost saving is achieved by avoiding international settlement charges, national interconnection charges and other regulatory fees.  VoIP has no geographic boundaries

unlike the PSTN. If one IP customer connects to another IP customer then there is no need for usage-related charges apart from a subscription charge. This moves the pricing of telephony services closer to the current Internet pricing trends that are not based on distances and time-related factors. However, if some part (typically the terminating part) of the call is routed through the PSTN network then interconnection charges still apply.  VoIP services are much easier to port than traditional phone services. In many cases, plugging the user‟s adapter into the network at different locations will result in the same service with the same phone number (see below implications for emergency services).  VoIP facilitates the provision of value added services that would be difficult to provide in a circuitswitched set-up. Such typical value added services are video calls and video conferencing  VoIP services may also encourage the uptake of broadband internet use because a number of

VoIP services use broadband networks including DSL, cable, fibre-optic, wireless LANs and 3G. Also, the development of VoIP services is likely to promote further deployment of various forms of broadband facilities that are capable of offering IP-enabled services, which will again increase demand for broadband connections. This process will lead to broader functionality as well as greater consumer choice at competitive prices.  VoIP services are, unlike traditional PSTN services, currently unregulated or have little regulatory requirements in a number of OECD countries. If this tendency continues, it will be much easier for operators to enter the market. Low barriers to entry in VoIP service markets will enhance competition in telecommunications services thus leading to lower prices and better service offerings. VoIP providers can differentiate their services not only by pricing but also offering completely new services. Also, enhanced competition might allow for lower regulatory

costs as the need to regulate traditional services will be less pressing. However, there are also several important challenges in providing VoIP services.  The first problem is the quality of service. Overall, the quality of some VoIP services is still inferior to traditional PSTN at the current technological level. This voice quality problem had been a great challenge for VoIP in the past, but it has been improving in recent years and is expected to improve further. In addition, it is difficult to provide some services over VoIP, such as call waiting or telefax services, whereas these are available through PSTNs. 52 Source: http://www.doksinet  The second challenge is reliability. The major reliability issue is that the quality of the VoIP application depends on the quality of the underlying network. As VoIP (unlike normal data traffic) is time sensitive, some providers, most likely network operators, will seek to differentiate their VoIP products by offering quality service

at a higher price, making use of managed networks, while other operators will offer lower prices coupled with lower call quality.  Unlike PSTN services, VoIP services are not fully compatible with emergency services. As geographical location is irrelevant for VoIP it is often difficult for emergency services to locate the call (especially when numbers have been ported). However, the low cost of GPS devices led to cooperation between GPS and telephone equipment manufactures to develop handsets that facilitate the localisation of people calling emergency services.  VoIP services mostly operate using electricity of the mains or on batteries. Therefore, they are more prone to electrical outage than PSTN services. This might cause some inconvenience for regular calls and might be a serious problem for emergency calling.  Incompatibility may also be an issue for VoIP services. Some VoIP providers, especially for PC-toPC services, require that both the caller and the receiver

subscribe to their service, and some software programmes require that both parties have the same software installed. VoIP: Regulate or not? The emergence of VoIP services poses new challenges to regulators. Should VoIP services be subject to the same regulatory framework as PSTN services? Some of the questions regulators need to answer are:  Should VoIP service providers be required to offer emergency services? If not, should they be obliged to warn users that emergency calling is not supported by their services?  Should they contribute to universal service funds?  Should they be subject to ex-ante regulation? Should carrier selection and carrier pre-selection be imposed on VoIP operators?  Should VoIP services have geographical numbers, given that often they are independent of location? If VoIP services are allocated geographical numbers and PSTN numbers can be ported to VoIP lines people will regard them more as substitutes of PSTN lines and thus the increase in

competition that VoIP brings will be more significant.  Should broadband providers be required to allow customers unrestricted access to internet applications including VoIP? In some countries, national regulatory athorities (NRAs) are still deliberating the answers to the above questions. Where decisions were already made regarding some parts of the legislation, the rules applied vary significantly depending on market characteristics. The OECD‟s recommendations regarding the regulation of VoIP are:30  30. “Ensuring that broadband Internet access operators allow consumers unrestricted access to and use of Internet applications and services including VoIP. Where broadband markets are competitive, market forces should produce this result without the need for regulation. OECD (2006a). 53 Source: http://www.doksinet  Ensuring that outgoing calls from VoIP service providers are not subject to carrier selection and carrier pre-selection obligations, given that customers

can easily change VoIP applications even on a call-by-call basis.  Excluding VoIP applications from particular ex-ante regulation for the retail voice market, taking into account effectiveness and sustainability of VoIP service (or voice service in case VoIP can replace traditional voice) competition considering entry barriers to VoIP market, and the degree of platform competition (VoIP service is decoupled with its underlying network) and whether the underlying wholesale broadband Internet access market is competitive.  Where numbering is regarded as a policy tool, either allocating numbers in the geographic range with restrictions compatible with the VoIP’s nomadic nature or adding new number ranges for nomadic services.  Where public safety considerations may make it necessary, mandating access to emergency services for VoIP calls, taking into account technical feasibility of implementing the service and allowing appropriate time for development and deployment of

the technology.” The OECD‟s approach is, therefore, that in a competitive market very little regulatory intervention is necessary regarding VoIP. The main problems NRAs need to solve concern the appropriate numbering of VoIP services in a way that suits the country and how to ensure that every telecommunications user has access to emergency services. 54