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OECD Experts Meeting on Construction Services
Paris, 11 December 2008
TRADE AND REGULATION: THE CASE
OF CONSTRUCTION SERVICES
by Massimo Geloso Grosso, Anna Jankowska and Frédéric Gonzales*
OECD Trade and Agriculture Directorate
*The authors wish to thank Eduard Eykelberg for helpful research assistance
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TABLE OF CONTENTS
I. Introduction .......................................................................................................................................... 5 II. Characteristics of construction services ............................................................................................ 6 III. Trade patterns .................................................................................................................................... 9
The OECD services trade database ........................................................................................................ 10 OECD FATS statistics ........................................................................................................................... 12
IV. Regulation of construction services ................................................................................................ 13 Main types of regulatory measures ........................................................................................................ 13 Regulation in OECD countries ............................................................................................................... 15
V. The relationship between regulation and trade in construction services ......................................... 26 The Spearman rank correlations ............................................................................................................. 26 The regulatory heterogeneity indicator .................................................................................................. 28
VI. Conclusions ..................................................................................................................................... 30
REFERENCES .............................................................................................................................................. 32
ANNEX I. TOP INTERNATIONAL CONTRACTORS 2008 ..................................................................... 34
ANNEX II. METHODOLOGY FOR ESTIMATING THE GRAVITY MODEL ....................................... 35
ANNEX III. THE PMR STRUCTURE ......................................................................................................... 36
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EXECUTIVE SUMMARY
This study provides a detailed analysis of construction services as part of the OECD project on
developing a services trade restrictiveness index (STRI). The primary objective is to identify the most
relevant regulations affecting trade in construction services, to be included in the STRI for the sector. The
analysis is based on four main elements: 1) a discussion of the economic importance and characteristics of
the sector, including through mini company case studies; 2) a description of trade patterns; 3) a detailed
analysis of regulations in these services; and 4) statistical and econometric estimates on the impact of
regulations on trade and investment flows.
Construction services have historically played a key role in the functioning of economies, providing
the infrastructure for other industries. These services account for a considerable share of GDP and
employment in OECD countries and generate significant economic activity through linkages with other
industries. The nature of the construction business requires local production which, coupled with its high
labour and material intensity, help to explain why the industry remains mainly oriented towards domestic
markets. The sector is characterised by a large number of small firms, with a few large-scale contractors
dominating the international market.
The local characteristics of the construction product imply that establishment abroad is the preferred
mode of supply in the sector, often a necessity to conduct trade in these services. The manner in which
construction firms enter a foreign market varies from the duration of a particular project to a more
permanent presence in overseas markets. It is likely that commercial presence and the movement of
natural persons are complementary in construction services. However, the importance of the latter may
vary depending on the entry strategy adopted, with generally more expatriates sent abroad in the case of
short-term establishment.
The modal nature of trade in the sector is reflected in trade statistics. In the OECD trade in services
by partner country (TiSP) database, the construction services sector represents an exception in that the
predominant mode of supply covered is establishment abroad, through short-term presence. The pattern of
trade over time appears in line with the cyclical nature of the construction industry. FATS statistics are
regarded as the closest proxy for more permanent commercial establishment. It is likely that the latter
represents the preferred entry strategy by contractors in OECD countries, as indicated by the trade data and
interviews with the private sector. However, further research is needed in this area.
Construction services trade is affected by a variety of regulations, including building and product
standards, specific restrictions on establishing a commercial presence and on the movement of personnel.
Government procurement is an important driver of demand for the sector, representing a considerable share
of construction activity in OECD countries. Procurement practices can thus have a significant impact on
trade in construction services. Public-private partnerships (PPPs), such as concessions, have also emerged
to facilitate private participation in infrastructure development and represent an increasingly important
component of the operations of international contractors.
Creating and updating the STRI over time requires periodic surveys of the main restrictions put in
place by members. The OECD Product Market Regulation (PMR) indicators are the obvious candidates
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for this purpose. This study identifies other sources of information that could be used to complement
existing data for the development of the STRI. The analysis reveals considerable heterogeneity of
regulatory measures across OECD countries. Members have preferred to maintain regulatory flexibility in
the GATS context, though more progress in disciplining construction-related measures has been achieved
at the regional level and in the WTO Agreement on Government Procurement (GPA).
Although not originally designed for trade-related regulation, the PMR indicators include many
measures identified in the literature as the most significant restrictions to trade in the construction sector.
This is particularly the case for the latest version of the survey, to be released later this year. The empirical
analysis undertaken in this study supports the inclusion of these measures in the STRI when constructed
“bottom up”. Preliminary evidence is found that these regulations and their heterogeneity are negatively
associated with trade in construction services, particularly through long-term establishment. The results
hold for a number of more disaggregated measures of the PMR.
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TRADE AND REGULATION: THE CASE OF CONSTRUCTION SERVICES
I. Introduction
1. As part of the broader project on developing a services trade restrictiveness index (STRI), this
paper presents a detailed analysis of the construction services sector. The objective is to develop in the
field of these services the initial steps outlined in the Road Map for work in this area presented to the Trade
Committee in June 2007 (OECD, 2007a) and a subsequent document presented to the first Services
Experts Meeting on the STRI in September of that year (OECD, 2007b). This study aims in particular at
identifying the most relevant regulatory measures affecting trade in construction services. These would
then be included in the STRI for these services.
2. The coverage of construction services is broadly comparable in international standard
classifications.1 The Extended Balance of Payments Services classification (EBOPS 249) covers site
preparation and general construction for buildings and other structures, construction work for civil
engineering, as well as installation and assembly work. It also includes repairs, renting services of
construction or demolition equipment with operator, and exterior cleaning work of buildings. Table 1
shows that the sector coverage is similar in the International Standard Industrial Classification (ISIC
Rev.3) and the WTO services sectoral classification list (W/120), which is based on the UN Provisional
Central Product Classification (CPC).
Table 1. Construction services in standard international classifications
51. Construction and related engineering services
512. General construction work for buildings
513. General construction work for civil engineering
514+516. Installation and assembly work
ISIC Rev. 3
45. Construction
Table 1. Construction services in standard international classifications
455. Renting of construction or demolition equipment with
operator
W/120 (Prov. CPC)
517. Bulding completion and finishing work
511+515+518. Other*
451. Site preparation
453. Building installation
454. Building completion
452. Bulding of complete constructions or parts thereof; civil
engineering
Note: * covers pre-erection work at construction sites; special trade construction work; and renting services related to equipment
for construction or demolition of buildings or civil engineering works, with operator.
1 The construction services sector is viewed as consisting of two sub-sectors: 1) architectural and engineering
design; and 2) construction and related engineering services, also termed “physical construction” (UNCTAD,
2000). This study focuses on the latter since architectural and engineering design services are regarded as
professional services. In the context of the STRI project, these services were already discussed in detail during
the Services Experts Meeting on Business Services held in June. This focus has modal implications, since mode
1 is less relevant for construction and related engineering services.
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3. The next section of the paper discusses the economic importance and principal characteristics of
construction services and provides mini company case studies on the driving forces and main obstacles to
trade in the sector. Section III describes international trade patterns in construction services. Section IV
then discusses the range of regulatory measures potentially affecting trade in these services, and presents
and analyses available information on regulation in OECD countries. Section V provides statistical and
econometric estimates on the impact of regulations on trade and investment flows. The last section
concludes discussing the implications of the study for the development of the STRI for construction
services. Questions for further discussion are included at the end.
II. Characteristics of construction services
4. Construction services have historically played an important role in the functioning of economies,
providing the infrastructure for other industries. The industry has typically been considered as strategic in
light of its close links to public works and hence the implementation of fiscal policy. Increased spending
on infrastructure and non-residential development is probably the most important driving force for
construction activity in OECD countries (Butkeviciene, 2005). On the supply side, demographic changes
have recently been significantly affecting the industry. In particular, the aging population in OECD
countries represents a challenge for the sector, leading to increasing shortages of labour (KPMG, 2008).
5. The construction sector accounts for a considerable share of OECD economies and employment.
Table 2 indicates that the sector contributes between approximately 4 and 6% of GDP in some of the
largest OECD countries and between 6 and 9% of employment. The share of GDP has generally been
declining in the five OECD countries over the last two decades. This trend is consistent with work by
industry specialists which suggests that construction’s share of GDP first grows at an increasing rate and
then decreases with the level of economic development (Bon and Crosthwaite, 2000).
Table 2. Economic importance of construction services in selected OECD countries
1980 2005 1980 2005 1980 2005 1980 2005 1980 2005
Share of total value added
Construction 7.4% 3.9% 7.7% 5.8% 9.4% 6.2% 6.4% 4.6% 5.1% 5.1%
Manufacturing 29.7% 22.5% 24.7% 13.0% 28.2% 20.8% 24.5% 19.7% 23.7% 13.8%
Share of total employment
Construction 8.6% 5.6% 8.9% 6.4% 9.9% 8.8% 6.6% 5.5% 5.8% 6.1%
Manufacturing 30.6% 19.3% 22.9% 13.3% 23.3% 17.2% 23.8% 16.5% 19.6% 10.6%
Table 2. Economic importance of construction services in selected OECD countries
DEU FRA JPN SWE USA
Source: EU KLEMS database.
6. Construction generates significant economic activity in OECD countries through linkages with
other industries. Recent linkage analysis using OECD input-output tables shows that construction has one
of the highest backward linkages among all sectors in selected OECD economies, reflecting its importance
as a demander of inputs from other industries (Pietroforte and Gregory, 2003). Another trend shown in the
study is the transformation of construction technologies, with a decreasing share of manufacturing inputs
and growing services inputs. This could partly result from the increasing complexity of construction
processes, with modern construction firms outsourcing a growing number of knowledge-based services.
7. Construction services are a relatively labour-intensive sector (both skilled and un-skilled), which
is reflected in a higher share in employment than in GDP for all five countries shown in Table 2. In light
of the nature of construction activities, the potential for mechanisation and automation, and therefore
capital-intensive production, remains limited. The local characteristics of the construction product (see
below), and its high labour and material intensity, are also among the factors explaining why the industry
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remains mainly oriented towards domestic markets (European Foundation for the Improvement of Living
and Working Conditions, 2005).
8. The sector is characterised by a large number of small firms generally specialising in certain
fields or operating in small geographic areas. According to the European Construction Industry Federation
(FIEC), for example, out of a total 2.9 million EU construction companies in 2007, 95% were SMEs with
fewer than 20 employees (FIEC, 2008). In value terms, companies with fewer than 50 employees
undertake around 60% of European construction work.2 Industry sources indicate a recent trend towards
consolidation and the creation of larger firms, providing the whole array of construction-relates activities.
Furthermore, the international market for these services remains mostly dominated by a few large
contractors and typically relates to large-scale projects (see Annex I).
9. For the most part, the nature of the construction business requires local production; it is the
production process that is exported, the final output must be totally constructed in the host country
(exceptions include off-shore oil platforms and some types of thermal plants). Establishment abroad is
therefore generally necessary to conduct trade in these services. The manner in which construction firms
enter a foreign market varies from the duration of a particular project to a more permanent presence in
overseas markets. Recent literature has attempted to shed light on evolving patterns of permanent versus
short-term commercial presence.
10. According to Chen (2008), from the 1990s there has been a tendency of market establishments
aiming at a more permanent presence in new markets and both entry strategies are now widely used. One
important difference between permanent and short-term entry is that in the former entrants tend to source
staff locally, while in short-term entry more expatriates are sent overseas. Hence, the significance of mode
4 may vary depending on the entry strategy used. Short versus long-term entry can also be differentiated
by whether an entrant has ownership in a permanent organisation (e.g. a joint venture company or a branch
office). The study finds empirical evidence indicating that when the host market entails high entry
restrictions, contractors are more likely to use short-term than permanent entry.
11. Construction services trade is affected by a variety of regulations, including building and product
standards, restrictions on establishment and on the movement of personnel (see Section IV). A prominent
source of market failure associated with their provision relates to externalities. Inappropriate performance
of contracts between sellers and buyers of these services can give rise to negative externalities to third
parties and society in general, e.g. the pollution of a river or of an open public space resulting from the
construction process. Asymmetric information represents a further potential concern. Purchasers of
construction services may roughly know what they aim to accomplish, but they have to rely on the
knowledge and experience of the builder to specify exactly what needs to be done (Myers, 2008).
12. Government procurement is an important driver of demand for the sector, representing a
considerable share of construction activity in OECD countries. In 2005, for example, it accounted for
around 35% in Germany and the UK and for almost 50% in the US3. Procurement practices can thus have
a significant impact on trade in construction services. Public-private partnerships (PPPs), such as
concessions and build-operate-transfer contracts, have also emerged to facilitate private participation in
infrastructure and service development and release pressure on governments’ budgets (see Box 1). PPPs
2 Figure reported by the EC DG Enterprise & Industry Construction Unit.
3 Government share of construction investment calculated from the EU KLEMS database. It refers to investment
in the public administration, defence, compulsory social security, education, and health sectors in non-
residential construction. For the latter two sectors the figures may include some private investment. The gross
fixed capital formation figures also include purchases of "second-hand” assets, which may have been built prior
to their acquisition.
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differ from traditional procurement by linking private sector returns to long-term service provision and
maintenance of projects in contrast to traditional asset delivery (PriceWaterhouseCoopers, 2005).
Box 1. Driving forces and prominent obstacles to trade in construction services: private sector perspective
Skanska AB
Skanska AB ranked 3
rd among the Top International Contractors 2008 by the
Engineering News Record, with 75% of revenue coming from international sales. It builds a diverse array of structures with emphasis on the commercial
and infrastructure segments (see Figure 1), and is active in 13 markets in Europe, the US, and Latin America. The majority of its construction output is generated from European operations, but the US represents the largest single market by revenue share (see Figure 2). The firm’s focus is on long-term presence in the form of subsidiaries, since local knowledge and experience are viewed as important in facing heterogeneity of regulations across markets. Skanska reports that 39% of construction revenue comes from public clients. PPPs are also becoming a stronger component of operations, with the majority of project volume occurring in the UK, but increasing across Europe and in North America. The estimated value of PPP projects grew by almost 50% between 2006 and 2007, and Skanska foresees steady expansion in its Infrastructure Development segment.
Increased infrastructure investment is a prominent driver of demand for construction services, particularly in Europe. Skanska identifies diverse building codes and limitations on legal structure as key obstacles to international operations, including by limiting the transfer of technology and know-how across markets. Regulatory transparency was also noted as a critical factor in light of the importance of public procurement and related measures in the sector. Restrictions on the movement of persons represent an additional constraint, particularly in light of skilled labour shortages in the industry. Notably, the absence of these barriers within the EU, which allows for the free movement of capital and labour, is reported as a facilitating factor. Strabag SE
Strabag SE is one of the leading international contractors ranking 4
th on the
Engineering News Record Top International Contractor 2008 list, with 80% of output from international operations. Most of it (94%) is generated in Europe (see Figure 3) and a significant share is derived from transport infrastructure (see Figure 4). In addition, approximately 50% of output comes from public funding and this share may increase with growing utilisation of PPPs. Strabag currently has 19 PPPs across the world, representing a combined project volume of €6.5 billion, up from €4.3 billion in 2006. The firm’s market entry strategy tends to favour strategic mergers and acquisitions, which are reported to facilitate company operations by providing local knowledge, experience and materials.
Headquarters Stockholm
Employees 60,000
Revenue 2007 $18.5 billion
Headquarters Vienna
Employees 61,125
Output 2007 $15.8 billion
Commercial 57%
Civil, 35%
Residential, 4%
Other Services, 4%
Figure 1. Construction by segment
15%13%
32%
37%
3%
SWE Other Nordic Countries
Other European Countries
USA Latin America
Figure 2. Output by geographic location
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Strabag’s success has been in part driven by strategic positioning in markets with growing infrastructure demand. This has been particularly the case in Eastern Europe, with the opportunities created by the EU Cohesion Fund, which is expected to total €177 billion by 2013. The firm’s international operations are influenced by several factors including physical distance and regulatory measures. Shortage of skilled labour and constraints on access to raw materials are highlighted as primary concerns; these are among the reasons leading to growing M&A activity and the development of a new training programme for staff members. Strabag highlighted lack of transparency in licensing and procurement procedures, as well as red tape and administrative bureaucracy as additional bottlenecks.
Source: Information contained in the companies’ websites and annual reports, complemented by information provided by the companies through semi-structured interviews.
13. According to Transparency International (2003), corruption in the construction sector is higher
than in any other sector of the economy. The industry is particularly prone to corruption due to the large
size of infrastructure projects allowing contractors to hide bribes and inflated claims. The uniqueness and
complexity of many projects, involving a range of participants in an elaborated contractual structure,
provide further opportunities for bribes at different stages of a project. These difficulties are compounded
by the fact that construction brings together a wide range of different stakeholders, and there is often no
single organisation overseeing the industry (Stansbury, 2005).
III. Trade patterns
14. The analysis is based on the OECD database on bilateral services trade flows and on Foreign
Affiliates Trade in Services (FATS) statistics recorded in the OECD Globalisation Indicators database.
The OECD services trade database includes trade flows as defined in EBOPS. Construction services
represent one exception in EBOPS in that the predominant mode of supply covered is mode 3 (and partly
mode 4), rather than mode 1.4 This results from the nature of the construction business discussed in the
previous section, which often entails a short-term presence for the duration of a specific project.
Technically, project work lasting up to one year is covered in the database (beyond that it becomes a
resident establishment so it is no longer captured in BOP statistics).
15. FATS statistics are regarded as the closest proxy for mode 3 and capture trade through
construction establishments continuing for over one year. FATS data are however more limited than cross-
border trade data. All OECD countries except Mexico and Switzerland report trade data on construction
services (EBOPS 249); only about 20 members report FATS statistics on these services (ISIC 45) and the
quality of the data is poorer, with only very few countries reporting a relatively long time series.
4 For a recent discussion on the coverage of services trade statistics in available datasets, see Miroudot and Lanz,
2008.
35%
20%
31%
8%6%
0%
5%
10%
15%
20%
25%
30%
35%
40%
DEU AUT Central and Eastern Europe
Western Europe RoW
Figure 3. Revenue by geographic area
Tunneling services
6%
Transportation infrastructure
43%
Building construction
and engineering
services50%
Other
1%
Figure 4. Output by segment
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The OECD services trade database
16. Figure 5 presents total exports and imports of construction services for OECD countries for
which data are available. The pattern of trade over time through short-term commercial presence appears
in line with the cyclical nature of the construction industry. The dip in 2000-2001 probably reflects the
economic slowdown during that period, which significantly hit some large OECD economies. Although an
important sector in most economies, construction services account for a small share of total services trade,
representing about 1.8% of OECD services exports and 1.4% of services imports in 2005. This supports
the finding in the previous section that the construction sector generally remains a local activity.
10000
15000
20000
25000
30000
35000
40000
Figure 5. OECD trade in construction services via short-term presence (USD millions)
Imports Exports
Note: OECD countries for which data are available. Source: OECD TiSP database.
17. Bearing in mind the country coverage of the data, figures 6 and 7 below indicate that the largest
OECD exporters and importers of construction services via short-term commercial establishment are
Germany and Japan. Construction services trade accounts for a significantly larger share of total services
trade than the OECD average in these two leading markets. In 2005, exports of construction services
represented roughly 5% and 6.5% of total services exports in Germany and Japan, respectively;
construction services imports accounted for about 3.2% of total services imports in Germany and over
3.5% in Japan in the same year. Surprisingly, the US does not have a prominent position, perhaps due to
the type of entry strategy covered by the data.
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0
1000
2000
3000
4000
5000
6000
7000
8000Figure 6. OECD construction services exporters via short-term presence, 2003-2005 (USD millions)
Note: Latest year available between 2003 and 2005. Source: OECD TiSP database.
0
1000
2000
3000
4000
5000
6000
7000
Figure 7. OECD construction services importers via short-term presence, 2003-2005 (USD millions)
Note: Latest year available between 2003 and 2005. Source: OECD TiSP database.
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OECD FATS statistics
18. Figures 8 and 9 present outward and inward sales of foreign affiliates in the construction sector
for the years 2003-2005. Keeping in mind the limited country coverage of the data, the two countries that
dominate exports through long-term establishment are Germany and the US, while imports are highest in
the US and UK. Inward sales in the US are more than twice larger than outward sales; as in the case of
trade via short-term presence, on the other hand, Germany and Japan are net exporters of construction
services through long-term commercial presence. FATS in the construction sector also represent a small
share of total FATS in the leading markets, at about 2% of Germany and the US outward and inward sales.
19. Comparing trade patterns through short versus long-term commercial presence, there is some
evidence that the latter is the preferred entry strategy of construction contractors in the OECD economies
covered in the analysis. This is particularly apparent for the US and Germany, especially in the case of
outward sales. However, there are exceptions and most notably Japan where trade through short-term
establishment appears to be considerably higher.
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
Figure 8. Outward FATS of construction services, 2003-2005 (USD millions)
Note: Latest year available between 2003 and 2005. Source: OECD Globalisation Indicators database.
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0
5000
10000
15000
20000
25000
30000
35000
40000
Figure 9. Inward FATS of construction services, 2003-2005 (USD millions)
Note: Latest year available between 2003 and 2005. Source: OECD Globalisation Indicators database.
IV. Regulation of construction services
Main types of regulatory measures
20. The construction sector is subject to a wide range of regulatory measures. As seen earlier,
construction services are primarily supplied through the establishment of service suppliers abroad. Most of
the restrictions thus have a particularly strong impact on trade through commercial presence, be this on
entry of firms or their on-going operations. Some measures represent outright discrimination, while others
although non-discriminatory, are generally viewed to weigh more heavily on the ability of foreign firms to
compete for a national market. In addition to restrictions specific to construction services, several
measures applicable to all sectors of the economy are also relevant for the construction industry.
Health, safety, environmental and land planning
21. A first set of construction regulations relates to measures aimed at ensuring the safety of the
objects constructed, implementing urban and land use planning and preserving the environment
(Butkeviciene, 2005). The construction sector is characterised by the importance of building regulations
and technical requirements to meet these objectives. As construction companies depend on bringing their
capital equipment and materials to the project site, measures affecting the mobility of construction products
are also relevant to the sector. In addition, regulations often mandate regular inspections of plants and
machineries for conformity with technical specifications and standards.
22. Contractors and proprietors typically have to comply with multiple authorisation requirements
and procedures prior to service provision or pre-qualification requirements, such as past experience of
working in the country. Guarantee and liability insurance related to construction work also need to be
taken into account. Restrictions on land and real estate use or ownership are normally applied to all
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sectors, but typically have direct bearing on the provision of construction services. For example, property
developers may not be able to own real estate under construction until completion of the project.
23. These regulations are generally applied on a non-discriminatory basis but may prevent foreign
construction companies from penetrating the domestic market; some technical standards or restrictions on
land ownership may also specifically target foreign providers. From a trade perspective, the main question
surrounding these measures relates to whether they are more burdensome than necessary to achieve their
objectives. The fundamental impediment here arises from the heterogeneity of standards, processes and
procedures faced by construction firms in different export markets.
Commercial presence and the movement of people
24. Another set of measures explicitly restricts trade through modes 3 and 4 (WTO, 1998). Foreign
ownership or equity measures (e.g. if only minority ownership is allowed for foreign providers) are often
not sector specific but may apply to construction services as part of the general investment legislation.
Quantitative restrictions can also be relevant for the construction sector and so are economic needs tests,
which include a wide range of criteria for allowing foreign provision from the perspective of how the local
community would benefit (e.g. when resources are not available domestically). Foreign contractors may
further be required to source personnel and products locally.
25. Other measures affecting commercial presence are restrictions on the types of legal entity
allowed. These can for example take the form of local incorporation requirements or prohibitions to
establish branches. Joint venture requirements can help foreign contractors overcome a number of
regulatory hurdles since local firms are accustomed to work in the domestic environment; but requirements
to do so can create a burden on foreign construction firms’ ability to make their decisions based on market
conditions. Similar issues arise with respect to regulations mandating foreign construction contractors to
use local agents.
26. Given its intensive use of labour and the recent industry trend of labour scarcity, construction can
be significantly affected by limitations on the movement of natural persons. Short-term presence, in
particular, requires frequent visits by managerial and professional staff, as well as longer stay for those
implementing the physical construction. The movement of foreign nationals may be subject to quotas,
nationality, residency or other staffing requirements, even for project-related work of short duration. Other
restrictions relate to labour market tests, which are sometimes referred to as economic needs tests, though
they focus on the likely impact of foreign providers on the local labour force.
27. Since the provision of construction services requires the movement of qualified personnel, non-
recognition of their qualifications emerges as another prominent constraint. Horizontal immigration and
labour legislation are also relevant for the construction industry. Visas and entry permits, as well as related
administrative procedures can affect the movement of natural persons at all skill levels. Regulations
extending minimum wages, rules on working hours of foreign workers employed temporarily at
construction sites, and requirements on foreigners to participate in social security systems can reduce the
cost advantage of foreign providers.
Government procurement and subsidies
28. In light of the importance of public procurement for construction services (see Section II),
regulations adopted in this area can significantly affect trade in the sector. The main restrictions relate to
discrimination towards foreign providers, inadequate procurement procedures (e.g. with respect to criteria
for awarding contracts and procedures for opening tenders) and lack of transparency throughout the
procurement process (from publication of conditions for suppliers’ qualifications to information on
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contract award). Providing the opportunity for suppliers to challenge the due process of procurement
conduct is another important element. Many of these issues are also relevant for different kinds of PPPs.
29. Subsidies and tax incentives granted only to local providers of construction and related services
can further have a bearing on the international provision of these services. Such incentives are provided in
many countries to promote construction work or to encourage the development of the national industry.
Regulation in OECD countries
The OECD Product Market Regulation (PMR) indicators
30. The OECD Economics Department (ECO) PMR database represents an important source of
information on regulation in the services sector. It is compiled using information from official government
responses to the OECD Regulatory Indicators Questionnaire, which covers economy-wide as well as
sector-specific indicators (as defined in ISIC Rev. 3). The indicators are calculated using a methodology
which involves several steps (see Conway and Nicoletti, 2006). The country answer to each question is
coded and ordered in a scale ranging from 0 to 6, with lower scores corresponding to more liberal regimes.
Scores on individual regulatory items are aggregated into low-level indicators, mid-level indicators and
broader aggregates.5
31. Trade in construction services can be affected by generic regulation (see Section V below). In
addition, although construction is not covered as a separate sector, a number of specific questions for the
sector have been included in the indicators of economy-wide regulation. This is particularly the case in the
latest version of the questionnaire to be released towards the end of the year. The questionnaire is
structured around three main sections: 1) general policies; 2) regulatory and administrative policies; and 3)
administrative requirements for business start-ups. The questions on regulation relating specifically to
construction are contained in the first two parts, particularly under firm ownership, control and legal status,
and treatment of foreign parties (see Table 3).
5 Through 2003, the PMR was aggregated using principal component analysis; for the recent update equal
weights have been used instead.
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Table 3. OECD questionnaire for construction services
Q 1.1.3 Q 2.2.3
If so: a) Q 2.2.4
Q 1.1.4
a)
b)
Q 1.1.5Q 2.2.7
a)
If so: b) Q 2.2.7
b)
Q 1.1.6
Q 1.1.7
Table 3. OECD questionnaire for construction services
1.1 Firm ownership, control and legal status 2.2 The treatment of foreign parties
Are potential new entrants permitted to freely enter
at least some markets in the construction sector?
Is the number of foreign firms in the construction
sector permitted to practice restricted by quotas,
economic needs tests or labour market tests?
Has your country engaged in Mutual Recognition
Agreements (MRAs) in the construction sector with
any other country?
Do national, state or provincial governments control
at least one firm in the construction sector?
What is the number of publicly-controlled firms in the
construction sector?
any legal or constitutional constraints to the sale of
the stakes held by government in these firms?
Is the number of foreign professionals permitted to
practice in the construction sector restricted by
quotas, economic needs tests or labour market
tests?
Do national, state or provincial governments have
special voting rights (e.g. golden shares) in any
construction firm?
when can these special rights be exercised? i)
merger with or acquisition by another company; ii)
change in controlling coalition; iii) acquisition of
equity by foreign investors; iv) choice of
management; v) strategic management decisions.
Are foreign suppliers in the construction sector
subject to: i) residency requirements; ii) differential
tax treatment and/or differential eligibility to
government subsidies as compared to domestic
suppliers; iii) other regulations which do not
recognise national treatment principles; iv) different
provisions concerning participation in public
procurement.
Q 2.2.5
Q 2.2.7
c)
any statutory or other legal limits to the number or
proportion of shares that can be acquired by foreign
investors in them?
Are there laws or regulations restricting, in at least
some markets, the number of competitors allowed to
operate a business in the construction sector?
Are there any specific provisions that require
regulators to recognise the equivalence of regulatory
measures in construction services in other
countries?
Are there any specific provisions that require
regulators to use internationally harmonised
standards and certification procedures in
construction services wherever possible and
appropriate?
If national, state or provincial governments control
any firm(s) in the construction sector are there:
The OECD FDI Regulatory Restrictiveness Index (FDI RRI)
32. The Directorate for Financial and Enterprise Affairs (DAFFE), in cooperation with ECO, has
developed indexes of FDI restrictiveness for OECD countries (Golub, 2003; and Koyama and Golub,
2006). The analysis includes construction services and is largely based on the OECD Code of
Liberalisation of Capital Movements. The methodology used for creating the indexes is a variant of the
one employed by Hardin and Holmes (1997). Restrictiveness is measured on a 0 to 1 scale, with the
former representing full openness and the latter a prohibition of FDI. Ownership restrictions (foreign
equity limits) receive a substantial weight in light of their perceived importance. The following FDI
regulatory measures are included in the restrictiveness indicators:
Foreign Direct Equity Investment Limits (from 0 to 99%).
Screening and Approval (subject to proving economic benefits, approval unless contrary to
national interest or notification).
Restrictions on Board of Directors/Managers (nationality, residency or licensing requirements).
17
Restrictions on the Movement of People (from no entry to three to four years).
Input and Operational Restrictions (domestic content of more than 50% or other).
33. Regulatory data on specific FDI measures are not publicly available. Nonetheless, composite
indicators for construction services are included in Golub (2003) for the period 1998/2000 and in Koyama
and Golub (2006) for 2005/2006. Figure 10 shows that the OECD countries with the highest levels of
regulatory restrictiveness in construction are Iceland, Mexico, Turkey, Canada, Australia and Austria.
Significant progress has been made in easing restrictions in some countries during the period covered by
the two studies; as pointed out by the authors, though, care must be exercised in comparing results from the
two years as they may be related to changes in information sources. In general, construction is one of the
least restricted services sectors, consistently below a simple average of all the other services sectors.
0.000
0.050
0.100
0.150
0.200
0.250
0.300
0.350
Figure 10. OECD FDI Regulatory Restrictiveness Index for construction services
1998/2000 2005/2006
Source: Golub, 2003; and Koyama and Golub, 2006.
The World Bank Doing Business
34. The Doing Business report, released annually by the World Bank, ranks countries according to
the ease of operating a business within the economy. Several topics are covered throughout the process
from starting to closing a business, including employing workers, registering property, paying taxes and
protecting investors. The index ranges between 1 and 181, with first place being the most business
friendly. It is calculated for each economy as the ranking of the simple average of the topics covered and
of the components for each topic.
35. One of the topics deals specifically with construction permits, by recording all procedures
required for an entrepreneur in the construction sector to build a warehouse. These components include
submitting project documents (e.g. building plans) to the authorities, obtaining all necessary licenses and
permits and receiving all necessary inspections. Procedures for obtaining utility connections (e.g.
18
electricity and telephone) are also covered. The cost and time to complete each procedure are calculated,
including all official fees associated with legally completing the procedures. The time is recorded in
calendar days and the costs are estimated as a share of GDP per capita.
36. Figures 11 and 12 below present the time and costs involved in obtaining construction permits in
OECD countries, indicating that these vary substantially. The OECD average required length of time is
161 days, but ranges from 328 days in Portugal to 34 days in Korea. Similarly, the average OECD costs
amount to 57% of GDP per capita, but the share is over twice as much for Korea, Italy and Finland, and
considerably lower for Hungary and the US.
0
50
100
150
200
250
300
350
Days
Figure 11. Time for construction permits in OECD countries, 2008
Source: World Bank Doing Business.
19
0
20
40
60
80
100
120
140
160
180
Sh
are
pf G
DP
per cap
ita
Figure 12. Cost of construction permits in OECD countries, 2008
Source: World Bank Doing Business.
The WTO Trade Policy Reviews (TPRs)
37. The TPRs contain detailed information on actual regulation in a wide range of services sectors
well beyond OECD membership and over time. The information collected during the reviews is coupled
with data from other sources such as international organisations and academic research papers and its
factual accuracy has been checked by the country under review. However, the construction sector is not
thoroughly covered in OECD countries, with only the TPRs of Japan (1998), Korea (1996) and
Switzerland (1996) presenting specific information on construction services (see Box 2). Other
information can be found in the horizontal part of the reports for specific measures (e.g. government
procurement), at times with explicit reference to construction.
Box 2. Construction services in the TPRs of selected OECD countries
Japan’s main requirement governing access to the construction market relates to obtaining permission from either the
Ministry of Construction or prefectural government, which entails mandatory commercial presence in the form of a branch or local subsidiary. Construction firms subcontracting above a certain threshold have to apply for a separate permit. Construction companies are also required to have: 1) a sound financial base; 2) at least one of the board members with five years experience in the relevant type of construction business; 3) at least one employee with a certain educational background at each branch or local subsidiary; and 4) employment of a certain type of engineer in each office. Far-reaching mode 4 regulations stemming from the Immigration Control and Refugee Recognition Law apply to construction-related labour. In particular, different categories of construction work require entry permits granted on the basis of detailed criteria. In Korea, possession of a license for general construction work is required to access the market, for which a
commercial presence in the form of a branch or local subsidiary is mandatory. General construction companies are also submitted to a compulsory subcontracting system, requiring them to subcontract at least 30% of the contract value to special construction companies. Construction entities have to further comply with minimum capital requirements and employ at least four domestically qualified engineers. A variety of Switzerland’s construction activities require permits or authorisations. For example, for electrical work
authorisation is given to companies having among their staff a qualified member of the profession (one “personne de
20
métier” per 20 workers); or to persons having diplomas recognised by the competent authorities and two years of professional experience. Property purchases by non-residents is restricted, posing difficulties for foreign property developers as it is common practice to own apartments under construction until completion. In general, approval procedures for infrastructure projects (e.g. roads), where environmental and general land use considerations play a role, are seen as lengthy. National construction standards set by the Swiss Society of Engineers and Architects are also described as strict and costly. Detailed labour market regulations further apply to the construction sector, where about two-thirds of all Swiss employees are foreigners. There is a global quota of permits distributed to cantons with allocation by firms made on a historical basis. Foreign construction companies have to obtain a temporary permit for each “imported” worker, generally only valid in sites for which they have been delivered. In some cantons, prior to delivery of permits, established firms are submitted to consultations by tripartite commissions comprising employers, workers and government representatives.
Note: The regulations may have been changed since the time of the reviews. Source: WTO, 1998b; WTO, 1996a; and WTO, 1996b.
WTO commitments
38. WTO commitments resulting from the Uruguay Round provide an additional source of
information on regulation in construction services by country. The shortcomings of this information are
widely acknowledged. The documents are now quite old and in any event they may have not reflected the
regulatory stance of a country even back in 1994 when they were largely compiled. This is because
countries may choose to bind at less than the status quo to allow for regulatory flexibility. In addition, care
must be taken in comparing schedules for analytical purposes. Lack of restrictions in a particular sector
may reflect no commitments in that sector or a related subsector, rather than a liberal regime.
39. Nevertheless, it seems useful to review this information by way of background to get a sense of
what member countries have bound in the area of construction services. The analysis includes regulations
which are mostly considered as domestic regulatory measures under the GATS and do not generally need
to be scheduled (e.g. licensing and qualification requirements). Similarly, the review covers procurement
measures although they are currently outside the scope of the agreement. Some countries have included
these regulations in their schedules either for transparency purposes or in the additional commitments
column (relating to GATS Article 18).
40. Table 4 shows that, although members are not always required to schedule them, licensing and
qualification requirements are quite common in the construction sector. Licensing and registration
requirements include liability insurance, exclusive rights to perform certain activities (e.g. maintenance and
management of highways) and membership in a professional body. Residency requirements are also often
scheduled, indicating that countries have preferred to maintain flexibility to use these measures. Similarly,
FDI restrictions, controls on land and real estate and labour market tests for natural persons are not
infrequent and are generally scheduled as horizontal limitations. For the construction of the STRI, this
underlines the need to consider services regulations in a holistic manner.
21
Table 4. Measures contained in OECD countries’ GATS schedules
AU
S
AU
T
BE
L
CA
N
CZ
E
DN
K
FIN
FR
A
DE
U
GR
C
HU
N
ISL
IRL
ITA
JP
N
KO
R
LU
X
ME
X
NLD
NZ
L
NO
R
PO
L
PR
T
SV
K
ES
P
SW
E
CH
E
TU
R
GB
R
US
A
Construction (UN Provisional CPC 512-518)
FDI/ownership restrictions H H H X H H H H
Restrictions on legal entity HX √ H X H H
Nationality requirements H X H H
Residency requirements H H H√ H H HX H H H X
Quotas/economic needs tests X H H X
Labour market tests H H H H H
Qualification requirements X X X X X X X
Licensing/permits and registration requirements √ X X X X X X
Controls on land use/real estate H H H √ H H H H H H H H √
Discriminatory procurement √ X
Discriminatory subsidies and taxes H X H H H
Table 4. Measures contained in OECD countries' GATS schedules
Note: X indicates that a sectoral measure exists; √ a sectoral measure is applied only in some states or provinces within a country with a federal system; H a horizontal measure exists. Source: OECD based on GATS schedules.
22
The WTO Government Procurement Agreement (GPA)
41. Most OECD countries have adopted disciplines on procurement regulations as parties to the
WTO GPA. The agreement prohibits the use of measures discriminating against foreign providers and
addresses various aspects of procurement procedures. This includes criteria for the qualification of
suppliers and technical specifications of products and services; and the whole array of tendering
procedures, from invitations to participate in a given procurement to opening of tenders and award of
contracts. There are also provisions for transparency at all stages of the procurement process and
concerning the opportunity of aggrieved private bidders to challenge procurement decisions and obtain
redress. Yet, divergence in procurement and related measures among OECD countries could result from
the following:
Australia, Mexico, New Zealand and Turkey are not parties to the agreement (though Australia,
New Zealand and Turkey are observers).
The disciplines apply only above a certain threshold, which for construction is generally set at 5
million SDRs (currently around USD 8 millions).
While all procurement of goods is covered, for services and construction services only those
specified in positive lists are covered. All OECD countries cover construction services (UN
Provisional CPC 511-518).6 However, in varying degrees infrastructure services such as
transport and energy are excluded in many OECD countries.
Positive listing also applies to entities and not all GPA parties cover sub-central entities. Most
OECD countries have also committed on the basis of reciprocity considerations.
PPPs’ practices have similarities with traditional procurement measures, but may be outside the
scope of the agreement.
Regional Trade Agreements (RTAs)
42. Regional preferences represent an increasingly important feature of trade in the construction
sector. Several regulatory spheres relevant to construction services are addressed in the growing number of
RTAs featuring disciplines on trade and investment in services (see Table 5 below). In the area of mode 3,
discriminatory establishment measures have been prohibited in several groupings, including local content
and nationality requirements. Quantitative restrictions and labour market tests for some, generally highly-
skilled categories of service providers have also been removed. Although visa requirements remain largely
in place, rules limiting related processing fees have been adopted.
43. The approach taken with respect to qualification and licensing requirements is broadly similar
across RTAs. Members should ensure that such measures do not constitute unnecessary barriers to trade
(e.g. they are objective and transparent), and mutual recognition agreements by the accredited professions
are to be encouraged. NAFTA and agreements modelled on it (e.g. the Australia-US FTA) have eliminated
citizenship and permanent residency requirements for the licensing and certification of professionals. The
EU, as part of its process of deep integration, has adopted a system of mutual recognition of professional
qualifications and is harmonising standards for buildings and construction products.
6 The only exception is Korea which excludes renting services related to equipment for construction or demolition
of buildings or civil engineering works (518).
23
44. Procurement provisions in the RTAs reviewed share many common elements with those
contained in the WTO GPA, prohibiting discriminatory treatment and requiring the establishment of
objective and transparent procurement procedures. The thresholds are also broadly similar, in the range of
USD 6-8 millions. The only significant variation across RTAs relates to the coverage of procuring entities;
the EU and the Australia-New Zealand Government Procurement Agreement (ANZGPA) generally cover
all entities, while the other agreements adopt a positive list approach whereby only listed entities are
covered. Regional progress on limiting subsidies for services in general remains limited.
24
EU NAFTA ANZCERTA Australia-US Japan-Mexico EU-Mexico
Mode
3/investment
The EC Treaty prohibits
restrictions on the freedom of
establishment and on the free
movement of capital.
Prohibits discriminatory
investment measures and
commits parties to make
transparent and to best
endeavour to dismantle (non-
discriminatory) quantitative
restrictions. Parties also agree
not to impose performance
requirements (e.g. local content)
and limit scope for nationality
requirements for senior
management and board of
directors.
Prohibits discriminatory
establishment measures and (non-
discriminatory) quantitative
restrictions. Parties also
exchange the right to select their
preferred form of commercial
presence.
Prohibits discriminatory
investment measures and
commits parties to make
transparent and to best
endeavour to dismantle (non-
discriminatory) quantitative
restrictions. Parties also agree
not to impose performance
requirements (e.g. local content)
and limit scope for nationality
requirements for senior
management and board of
directors.
Prohibits discriminatory
investment measures and
commits parties to make
transparent and to best
endeavour to dismantle (non-
discriminatory) quantitative
restrictions. Parties also agree
not to impose performance
requirements (e.g. local content)
and limit scope for nationality
requirements for senior
management and board of
directors.
Prohibits discriminatory
establishment measures and
pursues a GATS-like positive list
approach for (non-discriminatory)
quantitative restrictions.
Labour
mobility
Provides for the broad right to
labour mobility: EU citizens can
move and reside freely within the
territory of members. Treaty
provisions also apply to
movement of workers, including
through access to employment in
other members, right to work as a
self-employed person and the
freedom to provide services under
the same conditions of nationals.
No visas or work permits are
required.
Access is limited to temporary
entry and to four higher-skilled
categories: traders and investors,
intra-company transferees,
business visitors and
professionals. Labour
certification/market tests are
removed for all four groups and
work permits have been lifted for
business visitors. Visas are still
required but there are rules on
limiting processing fees.
Does not cover explicitly labour
mobility but the agreement covers
all service suppliers, without
distinguishing between different
modes of delivery. In addition,
under the Trans-Tasman
Arrangement (although not part of
ANZCERTA) citizens are free to
live and work in each other's
countries for an indefinite period.
No specific disciplines. Access is limited to temporary
entry and to four higher-skilled
categories: business visitors, intra-
company transferees, investors
and professionals. Approval
procedures and quantitative
restrictions are removed for all
four groups. Visas may still be
required but processing fees have
to take into consideration the
administrative costs involved.
The presence of natural persons
is explicitly mentioned as one of
the modes of service delivery, so
disciplines on services are
extended to mode 4. The
Agreement is not intended to
cover movement beyond service
suppliers under the GATS and
excludes access to the labour
market.
Qualification,
licensing and
standards
Members have adopted a system
of recognition whereby they
recognise the comparability of
higher education diplomas for
granting authorisation for exercise
a regulated profession. Under the
Construction Products Directive,
members are also implementing
harmonised technical standards
for construction products. In
addition, the EU is working
towards the implementation of
Euro codes, harmonised building
design codes which stipulate
structural safety and material
content. They will become
mandatory for all publicly
procured contracts in 2010.
Members are to ensure that
licensing and certification do not
constitute unnecessary barriers to
trade and agree to eliminate
citizenship and permanent
residency requirements. They are
also to encourage the accredited
professions to conclude
agreements on mutual recognition
of licensing and certification
requirements.
Members endeavour to ensure
that licensing and certification
measures are not discriminatory
and do not restrain market access
of persons. Each member is also
to encourage the recognition of
qualifications obtained in the other
member for the purpose of
licensing and certification
requirements.
Members are to ensure that
qualification requirements and
procedures, technical standards
and licensing requirements do not
constitute unnecessary barriers to
trade. They are also to encourage
the accredited professions to
conclude agreements on mutual
recognition of licensing and
certification requirements.
Additional transparency provisions
apply to regulations in general
(e.g. on advance notice and
opportunity to comment by
interested parties).
Members are to ensure that
licensing, certification or technical
standards of service suppliers do
not constitute unnecessary
barriers to trade.
Parties undertake that, in principle
no later than three years following
the entry into force of this
decision, the Joint Council is to
establish the necessary steps for
the negotiation of agreements
providing for the mutual
recognition of requirements,
qualifications, licensing and other
regulations.
Table 5. RTAs among OECD countries with provisions relevant to construction services
25
EU NAFTA ANZCERTA Australia-US Japan-Mexico EU-Mexico
Government
procurement
Public procurement of supplies,
works and services (including in
the water, energy, transport and
telecoms) is subject to rules
providing for non-discrimination
(whether or not of EU origin),
procurement procedures and
transparency. All entities at the
State, regional and local level are
covered.
Public procurement of goods and
services (including construction)
is subject to rules providing for
non-discrimination, procurement
procedures and transparency.
The agreement adopts a positive
list approach to covered entities
(though a negative list approach
to the coverage of services
procured by listed entities).
Under the ANZGPA, the parties
have adopted rules on non-
discrimination, transparency and
due process (through mutually
agreeable outcomes). With some
exceptions, the agreement covers
all goods, services and
construction activities, as well as
all contracting entities, unless
specifically exempted (negative
list).
Public procurement of goods and
services (including construction)
is subject to rules providing for
non-discrimination, procurement
procedures and transparency.
The agreement adopts a positive
list approach to covered entities
(though a negative list approach
to the coverage of services
procured by listed entities).
Public procurement of goods,
services and construction is
subject to rules on non-
discrimination, procurement
procedures and transparency. A
positive list approach is adopted
for both entities and services.
Public procurement of goods,
services and construction is
subject to rules on non-
discrimination, procurement
procedures and transparency
(Mexico adopts NAFTA's rules
and the GPA provisions are
applicable to the EU). A positive
list approach is adopted for both
entities and services and
thresholds correspond to those of
NAFTA for contracts awarded in
Mexico and to those of the GPA
for contracts awarded in the EU.
Subsides Prohibits members from granting
state aid that distorts competition
affecting trade flows.
No specific disciplines Prohibits members from
introducing new or expanding
existing export subsidies,
incentives and other assistance
measures having a direct
distorting effect on trade between
them. Members are also to work
towards the elimination of any
such measures by 30 June 1990.
No specific disciplines No specific disciplines No specific disciplines
26
V. The relationship between regulation and trade in construction services
45. This section applies statistical and econometric techniques in order to explore the linkages
between regulation and bilateral trade flows in the construction sector. The focus is on mode 3 (and partly
mode 4) which as seen earlier is the preferred mode of supply in these services and is sufficiently covered
by trade and investment data in the sector. The interest in this study is primarily on finding answers to the
following questions:
To what extent do particular types of regulation inhibit trade?
Do regulatory impacts differ across entry strategy (i.e. short-term versus more permanent entry)?
46. Two instruments are employed in the analysis: Spearman rank correlations between different
types of regulatory measures and trade and investment flows; and the gravity model, which explains
bilateral flows as a function of the market size of trading partners, the distance between them and other
geographical and institutional variables. The study focuses on the OECD PMR indicators as these are
among the few indexes of regulations for which comparable data are readily available for statistical
analysis. It is envisaged to expand the analysis to cover the FDI RRI and the World Bank Doing Business
index at a later stage.7
47. In estimating the now standard gravity equation derived by Anderson and Van Wincoop (2003)
with fixed effects, the PMR indicators could not be retained as they do not vary across partner countries
(see Annex II for the details on the methodology used in this study). To address this issue, this study
employs measures of the bilateral heterogeneity of these indicators.8 In an attempt to capture the potential
importance of regional preferences, an indicator is also constructed which is equal to one if the exporting
and importing countries both belong to one of the following: EU, NAFTA or ANZCERTA.
48. Data on short-term commercial presence are from the OECD TiSP database (see Section III).
Since FATS data on construction services on a cross-country basis are currently limited, stocks of foreign
direct investment estimated from the OECD FDI database are used as a proxy for more permanent
commercial presence. It is likely that capital stocks and sales volumes move together but this and broader
trade data limitations for the sector both in terms of scarcity and quality need to be borne in mind. GDP
data are from the World Bank World Development Indicators. Data for distance and other geographical
and historical variables are from CEPII.
The Spearman rank correlations
Table 6 below presents Spearman rank correlations between the PMR regulatory hierarchy and
imports (EBOPS 249) and inward FDI stocks (ISIC 45) of construction services. The correlations include
the aggregate PMR and the 20 types of measures in its five levels of disaggregation (see Annex III); and a
7 Initial work was conducted using the FDI RRI and the impact of restrictions resulted often insignificant and not
robust to different specifications. These results will require further work but they could be related to the nature
of measures contained in the FDI RRI, which fall short to include issues related to their implementation.
8 This indicator, developed by Kox and Lejour (2004 and 2005), is based on detailed comparisons between
individual country pairs for the PMR. These yield binary information per policy item (from a total of around
130 items) equal to one if two countries have a different policy in place and zero if otherwise. The scores per
country pair are averaged to generate an average policy heterogeneity indicator for each pair. The value of the
average indicator ranges between one in case of complete dissimilarity and zero in case of identical regulations.
27
construction-specific PMR indicator newly created by aggregating the measures contained in Table 3.9
Correlation analysis needs to be interpreted with caution since it does not imply causality and it is not
possible to conclude from the results that the indicators included in the table restrict trade. Nevertheless, it
can point to candidate measures for further investigation of whether they may have a negative impact. It
should also be noted that although the indicators included in Table 7 are statistically significant, they are
quite small, in absolute value generally below 0.3.
With this in mind, a result immediately apparent is that regulations seem to affect permanent
establishment considerably more than short-term presence. This finding is consistent with business
strategies by international construction contractors favouring short-term commercial presence when entry
restrictions are high in the host country (see Section II). Inward oriented policies relating to state control
and public ownership are negatively and significantly related to short-term presence; while outward
oriented policies under which barriers to trade and investment fall, as well as the construction specific
indicator do not have a negative impact. By contrast, inward, outward oriented and sector-specific
regulations are negatively associated with FDI in construction services.
Level Indicator EBOPS 249 ISIC 45
1 PMR x
2 PMR inward x
PMR outward x
3 State control x x
Barriers to entrepreneurship x
Barriers to trade and investment x
4 Public ownership x x
Government involvement in business operations x
Administrative burdens on start-ups x
Barriers to competition
Explicit barriers to trade and investment x
Other barriers x
5 Direct control of business enterprises x x
Size of public enterprise sector x
Scope of public enterprise sector x x
Communication and simplification of rules and procedures x
Use of command and control regulation x
Administrative burdens for corporations x
Administrative burdens for sole proprietor firms x
Discriminatory procedures x
Foreign ownership barriers x
Regulatory barriers x x
PMR construction x
Table 6. Regulatory measures negatively and significantly associated with commercial presence
(1998, 2003 and 2007)
Note: The latest year available for data on imports is 2006 and on inward FDI stocks is 2005.
9 The indicator is calculated as the simple average of the country answers to the questions for construction
services listed in the latest PMR questionnaire.
28
The regulatory heterogeneity indicator
49. Gravity estimates on the impact of regulatory heterogeneity on FDI stocks are shown in Table 7
below. The results suggest that for long-term investment decisions, having a common language is more
important than sharing a border. The estimations produced an insignificant effect of membership in an
RTA.10
The aggregate indicator of regulatory heterogeneity, measures relating to government involvement
in business operations, barriers to competition and explicit barriers to trade and investment have a negative
and statistically significant impact on FDI stocks. The model predicts that an increase in regulatory
heterogeneity from the 25th
percentile (HG_PMR = 0.35) to the 75th
percentile (HG_PMR = 0.43) would
reduce inward FDI by more than 27%.
50. Regulatory heterogeneity does not seem to be negatively correlated with trade through short-term
commercial presence. In estimates from the gravity model using different specifications, the regulatory
heterogeneity indicator does not have a statistically significant negative impact on trade via this entry
strategy.11
Since regulatory heterogeneity is explicitly mentioned by the private sector and industry experts
as a source of trade restriction, this result will require further investigation.
10
To check the robustness of the results, the regressions were estimated without fixed effects and in some cases
the RTA dummy is negative and significant. This result is puzzling and will require more research to
investigate the underlying reasons. One possibility is that the regional indicator currently used does not
adequately capture trade and FDI preferences between trading partners.
11 In OLS and Poisson pseudo maximum likelihood estimates, with and without fixed effects, the indicators of
regulatory heterogeneity at the aggregated and disaggregated levels are not significant.
29
Log distance -0.658*** -0.549*** -0.659*** -0.670*** -0.541*** -0.529*** -0.679*** -0.657*** -0.672*** -0.642***
(0.170) (0.155) (0.171) (0.171) (0.154) (0.153) (0.172) (0.169) (0.171) (0.171)
Contiguity 0.0620 0.198 0.0793 0.0578 0.203 0.213 0.0629 0.100 0.112 0.104
(0.355) (0.354) (0.356) (0.356) (0.352) (0.348) (0.358) (0.353) (0.358) (0.355)
Common language 0.843** 1.162*** 0.879** 0.822** 1.167*** 1.209*** 0.864** 0.844** 0.897** 0.924**
(0.393) (0.367) (0.394) (0.395) (0.367) (0.364) (0.395) (0.391) (0.395) (0.394)
Colony 0.161 0.0533 0.161 0.127 0.0630 0.198 0.103 0.196 0.114 0.140
(0.399) (0.388) (0.401) (0.400) (0.387) (0.387) (0.401) (0.398) (0.401) (0.400)
RTA -0.0356 -0.0288 0.0259 -0.00594 -0.0715 -0.0635 -0.00786 0.000901 0.0223 -0.0871
(0.387) (0.355) (0.388) (0.388) (0.351) (0.345) (0.391) (0.385) (0.388) (0.392)
HG_PMR -3.372**
(1.512)
HG_BE 0.382
(1.152)
HG_BT -1.266
(0.972)
HG_SC -1.927
(1.275)
HG_PO -0.436
(0.859)
HG_IBO -1.560**
(0.639)
HG_ABS -0.383
(0.553)
HG_BC -2.893***
(1.050)
HG_RAO 0.653
(0.701)
HG_EBT -1.267*
(0.698)
Observations 452 325 452 452 325 325 452 452 452 452
R-squared 0.548 0.578 0.544 0.545 0.579 0.587 0.543 0.551 0.546 0.543
Table 7. The effects of regulatory heterogeneity on FDI stocks, OLS reporter, partner and time fixed effects (1999 and 2003)
Dependent variable: Log inward FDI stocks. Statistical significance indicated as follows: *** (1%), ** (5%), and * (10%). BE indicates barriers to entrepreneurship; BT barriers to trade and investment; SC state control; PO public ownership; IBO government involvement in business operations; ABS administrative burdens on start-ups; BC barriers to competition; RAO regulatory and administrative capacity; and EBT explicit barriers to trade and investment.
30
VI. Conclusions
51. This study has sought to prepare the ground for the development of the STRI for construction
services. The industry plays an important role in the functioning of economies and accounts for a
significant share of GDP and employment in OECD countries. The main implications of this report for the
STRI include:
Establishment abroad is the preferred mode of supplying construction services, often a necessity
for trade to take place. This can take the form of short-term commercial presence usually for the
duration of a given project, or more permanent presence in overseas markets. It is likely that the
latter represents the preferred entry strategy by contractors in OECD countries, as indicated by
the trade data and interviews with the private sector. However, further research is needed in this
area.
Construction services trade and investment are affected by a wide range of regulatory measures,
which can have a different impact on business strategies and operations. Creating and updating
the STRI over time requires reliable and periodic surveys of the main trade restrictions put in
place by member countries. The PMR indicators are the obvious candidates for this purpose. In
addition, this study identifies other sources of information that could be used to complement
existing data for the construction of the STRI.
Although not originally designed for trade-related regulation, the PMR indicators include many
measures identified in the literature as the most significant restrictions to trade in the construction
sector. The empirical analysis undertaken in this study supports the inclusion of these measures
in the STRI when constructed “bottom up”. Initial evidence is found that these regulations and
their heterogeneity are negatively associated with trade in construction services, particularly
through long-term establishment. The results hold for a number of more detailed measures.
It is likely that commercial presence and the movement of natural persons are complementary in
construction services. However, the importance of the latter may vary depending on the entry
strategy adopted, with generally more expatriates sent abroad in the case of short-term
establishment. The modal focus of trade restrictiveness for this sector should thus be on mode 3.
The ability to bring in personnel at different skill levels, though, may be part of the binding
restrictions to this mode of supply.
Questions for further discussion:
What are the major driving forces for trade in construction services? How significantly is the
recent trend of labour scarcity affecting the industry?
What is the preferred entry strategy by international contractors? How have patterns of short
versus longer-term establishment evolved over time?
Are the regulations affecting trade in construction services identified in Section IV appropriate?
Are some of the measures discussed no longer relevant for construction services?
Are there information sources, in addition to those presented in this paper, which could be used to
assemble data on construction services regulations in OECD countries?
31
To what extent is the growing utilisation of PPPs creating new regulatory challenges? Have there
been recent discussions clarifying the scope of international agreements in relation to PPPs?
The empirical results in this study support the view of industry specialists that regulations seem to
affect longer-term commercial presence to a higher degree. What is the institutional, legal form
generally required to establish abroad for short-term project work?
32
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34
ANNEX I. TOP INTERNATIONAL CONTRACTORS 2008
Rank Firm Headquarters Revenue (USD
millions)
% Intl
1 Hochtief AG Germany 23861 89%
2 VINCI France 41716 35%
3 Skanska AB Sweden 18547 75%
4 Strabag SE Austria 15797 80%
5 Bouygues France 32062 38%
6 Bechtel USA 17696 66%
7 Saipem Italy 11757 96%
8 Technip France 10004 98%
9 Bilfinger Berger AG Germany 12642 67%
10 Bovis Lend Lease Australia 9649 83%
Source: Engineering News Record, 2008.
35
ANNEX II. METHODOLOGY FOR ESTIMATING THE GRAVITY MODEL
The gravity model used in this paper is based on the now standard gravity equation derived by Anderson
and Van Wincoop (2003) where the “multilateral resistance term” is taken into account by augmenting the
model with country and time fixed effects. Thus, the basic empirical specification of the gravity equation
estimated in this study is the following:
Log Iijt = 0 + 1 log distance + 2 contiguity + 3 common language + 4 colony + 5 RTA
+ HG_PMRij + i + j + t + ijt
Iijt refers to imports or inward FDI stocks in construction services to country i from country j in time period
t. Distance, contiguity, common language and colony are geographical variables commonly used in gravity
regressions. They capture respectively bilateral distance, geographical contiguity, a common official
language, and a past colonial connection. RTA is a dummy variable equal to unity only if the exporting and
importing country belong to the same regional trading arrangement. Due to incomplete data on the
provisions of such agreements affecting construction services, RTA at this stage only captures joint
membership in the EU, NAFTA, or ANZCERTA.
HG_PMR is a bilateral variable which measures the regulation heterogeneity between two trading
countries i and j at different levels of the PMR regulatory hierarchy (as presented in Annex III). I, j and
t denote reporter, partner and time fixed effects respectively. Country-specific variables which do not
vary across partner countries have to be dropped from the estimating equation as these are accounted for in
the respective fixed effects.
36
ANNEX III. THE PMR STRUCTURE
The 2003 aggregation system
Product market regulation
Inward-oriented policies Outward-oriented policies
State control Barriers to Entrepreneurship
Explicit barriers to trade and investment
Public ownership Involvement in business operation
Administrative burdens on
startups
Regulatory and admisnitrative
opacity
Barriers to competition
Other barriers
Barriers to trade and investment
Scope of public enterprise
Size of public sector
Direct control over business enterprises
Price controls
Use of command and control regulation
Licenses and permits system
Communication and simplification
of rules and procedures
Administrative burdens for corporation
Administrative burdens for sole proprietor firms
Sector specificadministrative
burdens
Legal barriers
Antitrust exemption
Foreignownership
barriers
Discriminatoryprocedures
Tariffs
Regulatoryprocedures
Source: OECD International Regulation Database.
37
The 2007 aggregation system
Product market regulation
State control Barriers to Entrepreneurship
Explicit barriers to trade and investment
Public ownership Involvement in business operation
Administrative burdens on
startups
Regulatory and admisnitrative
opacity
Barriers to competition
Other barriers
Barriers to trade and investment
Scope of public enterprise
Direct control over business enterprises
Governmentinvolvement in
network sectors
Price controls
Use of command and control regulation
Licenses and permits system
Communication and simplification
of rules and procedures
Administrative burdens for corporation
Administrative burdens for sole proprietor firms
Sector specificadministrative
burdens
Legal barriers
Antitrust exemption
Barriers in network sectors
Barriers in services
Barriers to FDI
Tariffs
Discriminatoryprocedures
Regulatorybarriers
Source: OECD International Regulation Database.