Both empirical research and the experience of WBG SIRM pilots depicted in Box 2 highlight the relevance of addressing questions of FDI retention and expansion within any broader discussion of investment facilitation. Doing so would require no changes to existing host country legislation on investment protection. On the contrary, this approach would entail only pragmatic solutions to ensure the effective implementation of norms and disciplines already in force and agreed to by governments applicable in their respective jurisdictions.

# **4.2.4 Regulatory heterogeneity**

Cross-country differences in how countries regulate the provision of the same service create additional costs for suppliers that need to adapt to new sets of rules in a multiplicity of markets. Addressing trade costs stemming from regulatory heterogeneity through strengthened international cooperation has taken center stage in the latest generation of preferential trade and investment agreements (Polanco-Lazo and Sauvé, 2017). This is so even as evidence of regulatory convergence, proxied as it can be by the conclusion of mutual recognition agreements, remains generally scant.

Regulatory cooperation makes doing business easier for exporters, and available research shows that it has a relatively large impact on trade conducted through a commercial presence. Based on an OECD data set of services trade policy heterogeneity, Nordås and Kox (2009) estimate that if all countries harmonized or recognized each other’s regulations to the extent that the heterogeneity index took its lowest bilateral value for all country pairs, total services trade through commercial presence could increase by between 13 and 30 percent depending on the country. Likewise, if the business environment became more similar among the countries in the sample, total services trade through commercial presence could increase by between 2 and 60 percent, with the largest gains in India, the Republic of Korea, Poland and China (WTO, 2019).

The OECD estimates that trade costs imposed by cross-country differences in regulation range from 20% to 80%. It further recalls that lifting existing discriminatory restrictions where they are still high should be a policy priority, as the gains from regulatory harmonization, convergence or approximation are far greater when the countries engaging in such cooperative activity have already lowered their barriers to trade and investment in services (OECD, 2017). Importantly, as services restrictions are lowered and regulatory cooperation registers tangible gains, micro-, small- and medium-sized firms (MSMEs) gain proportionally most. This is so because the fixed costs of regulatory compliance weigh most heavily on smaller firms.

Much empirical research has shown how regulatory heterogeneity can represent a significant cost component for trade in services under Mode 3. However, it is worth noting that this issue, although clearly identified in the agenda of the WTO’s Working Party of Domestic Regulation (WPDR) and in discussions proceeding under the Joint Statement Initiative on Domestic Regulation at the WTO, has been practically absent from discussions on investment facilitation, both at the G20 and in JSI talks at the WTO. In part, this stems from the decision to eschew the market access dimension of ongoing discussions of trade and investment facilitation, including in services. To be sure, not all sources of cross-country regulatory heterogeneity involve the maintenance of explicitly discriminatory measures (see section below), but the discussion above suggests the importance of ensuring greater substantive convergence, mutual learning and better coordination among both negotiating groups where trade and investment facilitation in services is being considered.

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