concentration patterns hold in Europe (Christen and Francois, 2009). As such, an oligopoly approach to trade and FDI in services is likely to offer a better mapping than the large group, monopolistic competition approach now followed in the literature. Given the importance of large firms, there ought to be substantial payoff from more explicit modeling of services firm behavior in CGE models. While the recent body of theory on firms and trade focuses on goods producing firms, the same basic theoretical framework also promises valuable insights for service firms, once we reinterpret physical transport costs as the costs that are associated with overcoming the proximity burden (see Helpman, 2006). The first insight relates to ”natural” elements of firm costs (those that are independent of policy). Where the most efficient firms engage in internal trade and FDI, since in heterogeneous firm models market share primarily goes to the more efficient firms, we should see most cross-border services trade taking place within multinational firms rather than through unaffiliated (arms-length) sales. Going further, such ‘establishment transactions’ should be more important than unaffiliated sales for the same reasons. Another insight relates to the impact of policy. In the theoretical literature, internalization hinges on a mix of costs affecting internal and arms-length delivery, as well as multi-plant versus single plant costs and distance costs. If we map these to the different modes of supplying services, concessions made in trade agreements or unilateral changes in national policies that affect these different costs should affect the choice of modes, the relative importance of establishment sales and arms-length versus internal cross-border sales in predictable ways. This suggests potentially fruitful application of the recent theory on goods-producing multinational enterprises and internalization of transactions costs to formulate questions that map to observed patterns in the services trade and policy data.

Yet another area where further research is a priority concerns explicit modeling of regulation that affects all firms in a sector or industry in addition to analysis of the impacts of discriminatory trade and FDI entry barriers. As noted previously and has been stressed in the policy literature, the measures that affect the contestability of services markets are often a mix of discriminatory and nondiscriminatory taxes and regulation. The latter cannot be (are not) captured by tariff-equivalents-cum-estimates of price wedges. More important, a focus on discriminatory policies – while the focus of trade negotiations and thus of interest – to policymakers and stakeholders may neglect the fact that the nondiscriminatory regulatory policies that prevail have a greater impact on welfare. One reason is that the latter have the potential of generating greater ‘waste’ than discriminatory measures – which by their nature can be expected to generate rents for the domestic industry.

There are a number of papers in the literature that focus on the effects of – domestic regulation as well as the impacts of discriminatory policies e.g., Kox and Lejour (2006) and Lejour, Rojas-Romagosa and Verweij (2008), as well as much of the Australia-based research covered above. Doing more to accurately 36