ture places emphasis on direct linkages between productivity and liberalization. A key feature of papers embodying this approach is to allow for imperfect competition and to consider the role of FDI in increasing competition and productivity. This includes for example changes in domestic transport margins, and general productivity and pricing changes in margin sectors like transport and financial intermediation. Examples include Rutherford, Tarr and Shepotylo (2005; 2008), and the FTAP model (Dee and Hanslow, 2001). This approach fits well with recent evidence that greater cross border competition in service sectors leads to increased competitive pressure and lower price-cost margins in services.<sup>22</sup> A starting point in much of the FDI modeling is Petri’s (1997) assumption that some share of capital is sector and country specific (essentially a variation on the Armington assumption), and that FDI allows firms in country _r_ to employ some of their country/sector capital in country _s_ . This can follow, for example, from affiliates serving as bridgeheads for import of home country _r_ primary factors, embodied in imports of intermediates, that are then combined with local primary factors and other inputs to provide services locally in destination market _s_ . Indeed, this is consistent with recent evidence (Fillat-Castej ́on et al., 2008; Christen and Francois, 2009) that establishment sales are linked to both FDI levels and cross border sales through affiliates.

Whether models emphasize cross-border trade with implicit sales through affiliates, or a mix of direct cross-border sales and explicit modeling of affiliates, it is important to accurately model the extent to which policies raise costs for all firms competing in a market as opposed to creating rents for a subset of (local) firms, and to accurately model where rents, if any, accrue. Rents under imperfect competition can be highly relevant. Theoretically, it is possible that liberalization of a highly concentrated market leads primarily to a shift of domestic rents to foreign providers, with a resulting loss in domestic welfare (Francois and Wooton, 2001b). An extreme example would be a situation where liberalization entails a shift from a domestic monopoly to foreign monopoly. Less extreme would be a shift from a purely domestic monopoly or oligopoly duopoly to a situation where the market remains highly concentrated but with ownership now shared between domestic and foreign firms. Such outcomes can in fact be the objective of a specific policy reform if this is conceived and implemented as part of a bilateral or regional preferential trade agreement.<sup>23</sup> Of course, this is not a services-specific issue, but

> 22See for example Molnar and Bottini (2006). Working with firm-level data for the OECD, they find large variations over industries and across countries in estimated mark-ups that are associated with differences in the restrictiveness of policies in these sectors. See also Inklaar, Timmer and van Ark, 2008.

> 23Jensen and Tarr (2011) and Balistreri and Tarr (2011) find exactly this type of result in their modeling of liberalization in Armenia and Kenya, respectively, where the potential gains for Armenia from preferential liberalization with the EU proves lower if Armenians lose rents from barriers against foreign service-providers that are then shifted abroad. See also Konan and van Assche (2007) for an analysis of telecommunications in Tunisia.

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