Does services liberalization benefit manufacturing firms?

While there is considerable empirical evidence on the impact of liberalizing trade in goods, the effects of services liberalization have not been empirically established. This study examines the link between services sector reforms and the productivity of manufacturing industries relying on services...

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Bibliographic Details
Published in:Journal of international economics 2011-09, Vol.85 (1), p.136-146
Main Authors: Arnold, Jens M., Javorcik, Beata S., Mattoo, Aaditya
Format: Article
Language:English
Subjects:
Czech Republic
Exports
Foreign acquisitions
Foreign direct investment
Foreign trade
Industrial productivity
International trade
Privatizations
Productivity
Services liberalization
Trade flows
Trade in services
Trade models
Trade policy
Trade relations
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Summary:While there is considerable empirical evidence on the impact of liberalizing trade in goods, the effects of services liberalization have not been empirically established. This study examines the link between services sector reforms and the productivity of manufacturing industries relying on services inputs. Several aspects of services liberalization are considered, namely, the presence of foreign providers, privatization and the level of competition. The results, based on firm-level data from the Czech Republic, show a positive relationship between services sector reform and the performance of domestic firms in downstream manufacturing sectors. Allowing foreign entry into services industries appears to be the key channel through which services liberalization contributes to improved performance of manufacturing sectors. This finding is supported by evidence that foreign acquisitions of Czech services providers result in profound changes in the labor productivity and sales of acquired firms. As most barriers to foreign investment today are not in goods but in services sectors, the findings of this study may strengthen the argument for reform in this area. ► We study the link between services reform and the productivity of manufacturing firms. ► We use firm-level data from the Czech Republic. ► We focus on foreign direct investment, privatization and competition in services. ► Services reforms positively affect domestic firms in downstream industries. ► Foreign entry is the key channel through which the benefits of reforms are felt.
ISSN:0022-1996
1873-0353
DOI:10.1016/j.jinteco.2011.05.002