Services productivity, trade policy, and manufacturing exports

Abstract

This paper analyzes the linkage between services and manufacturing productivity performance, using firm-level data for over 100 developing countries. We find strong evidence for such a linkage, although the effect is small: at the average rate of services input intensity, a 10% improvement in services productivity is associated with an increase in manufacturing productivity 0.3%, and a resulting increase in exports of 0.2%. Services trade restrictiveness indices (STRI) are found to be a statistically significant determinant of manufactured exports performance, a finding that is robust to the inclusion of the overall level of trade restrictiveness that is applied against manufactured exports directly. The main channel through which services trade restrictions negatively affect manufactured exports is through FDI, a finding that is consistent with the stylized fact in the literature that FDI is a key channel for trade in services and an important vehicle through which services technology and know-how is transferred across countries. At the sectoral level, restrictions on transport and retail distribution services have the largest negative impact on exports of manufactures.