Does Services Liberalization Benefit Manufacturing Firms? Evidence from the Czech Republic

Abstract

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.

Trade volume and economic growth in the MENA region: Goods or services?

“…A new strand of the literature investigates the effect of service liberalization on the productivity of manufacturing firms. Arnold et al (2011) show a strong positive relationship between FDI in services and total productivity growth of manufacturing firms in Czech Republic. Arnold et al (2012) show a significant positive relationship between Indian policy reforms in banking, telecommunications and transport and the productivity of manufacturing firms.…”

“…For this reason services trade restrictions have caught the attention of services trade negotiators. A new strand of the literature shows that countries with open services markets tend to be more competitive in manufacturing (Francois and Woerz, 2008;Nordås, 2010), and that services sector reform is associated with productivity gains in downstream manufacturing firms (Arnold et al, 2011). This paper explores the effects of trade in goods and trade in services on the economic performance of Middle East and North Africa (MENA) countries.…”

Foreign direct investment in services and manufacturing productivity: Evidence for Chile

“…Our service FDI linkage measure is inspired by the measures used by Arnold et al (2007), Blalock and Gertler (2008), and Javorcik (2004), but differs from those by relying on a firm-level measure of service usage instead of service usage measures based on input-output coefficients at the 4-digit industry level. The latter measures provide information on average industry usage which does not identify the heavy users of services within an industry.…”

“…2 At the industry level, Francois and Woerz (2008) show that the increased openness of business services through exports and FDI has strong positive effects on exports, value added, and employment of manufacturing industries in the OECD while Fernandes (2009) estimates positive and significant effects of liberalization of finance and infrastructure on labor productivity of downstream manufacturing industries in Eastern European countries. At the firm-level, Arnold et al (2007) show significant positive effects of services liberalization in the Czech Republic on manufacturing firms' TFP while Arnold et al (2010) find significant positive effects of banking, telecommunications, and transport reforms on Indian manufacturing firms' TFP. Finally, Javorcik and Li (2008) estimate a positive effect of FDI in Romania's retail sector on the TFP of manufacturing suppliers to that sector.…”

Impact de la libéralisation des échanges de services sur les échanges de produits non agricoles

“…Une étude a été conduite en République tchèque sur la relation entre libéralisation et réforme dans des secteurs essentiels de services et ses effets sur les performances des secteurs manufacturiers, par une analyse des données au niveau des entreprises (Arnold et al, 2006). Les auteurs ont constaté qu'il existait une relation positive entre les performances des entreprises manufacturières, l'évolution globale des réformes des politiques (mesurée par la Banque européenne de reconstruction et de développement dans son rapport sur la transition), et la présence de fournisseurs de services étrangers.…”