process and are typically high-skill intense. _Fifth_ , our estimates from interacting GVC integration with service imports indicate that firms that are more deeply integrated in GVCs benefit more from importing services. Firms that are integrated at an intermediate level into GVCs have, on average, a 12 percent higher TFP than purely domestic firms. If these firms also import services, the total productivity premium reaches around 28 percent. Firms importing services and highly integrated into GVCs have on average a 54 percent higher productivity than purely domestic firms.

Indian firms integrated in GVCs play an important role in India’s economy. They account for a disproportionate share of total output and exports. However, there is scope for Indian firms to further participate in GVCs and to increase overall productivity. Opening domestic markets to foreign services suppliers is likely to facilitate India’s participation in GVCs through the improved provision of services. As countries liberalize their services markets, firms are able to source improved quality services at more competitive prices, which improves firm performance. Given the dual role of services in GVCs as an input as well as a coordination facilitator, relaxing services markets restrictions is also likely to further increase the GVC participation of Indian firms through these backward linkages in services, which in turn is expected to further increase their productivity performance. As services have increasingly become tradable due to lower trade costs and technological progress such as digital infrastructures, the services sector has also benefited from the possibility of increased specialization of production as part of GVCs. In this context, policy makers from developing countries may want to tap into the potential of new trade opportunities and firms’ participation into GVCs.

Since FDI is largely associated with higher levels of GVC participation (UNCTAD, 2013), opening markets for FDI in both manufacturing and services warrants special focus. The access to services through allowing foreign affiliates to enter and sell services in the domestic market (Mode 3) and reforming FDI restrictions are important for the effective provision of network services that connect the various stages of the production process. India’s level of FDI restrictions in services is relatively high compared to the OECD average and even some non-OECD countries.<sup>9</sup> Reducing services policies’ restrictiveness could potentially improve the country’s participation in services GVCs.

Additional focus on other types of policy barriers in services is also needed. An enabling environment is essential to accompany regulatory policy reforms. Generally, strong factor endowments can enable participation in more sophisticated GVCs as they allow for more skills and capital to be exploited in the production process. Once regulators achieve this goal, services are most likely to be used as inputs further downstream by firms, which in turn makes these firms more productive (van der Marel 2016; Beverelli et al. 2017).<sup>10</sup> The role of domestic institutions becomes even more important for services when it comes to regulators and the regulatory quality.<sup>11</sup> Services markets often suffer from market failures, such as

> 9 These include Brazil, Cambodia, China, the Lao People’s Democratic Republic, South Africa, Vietnam etc., as per the OECD FDI restrictiveness index.

> 10 Besides regulations and domestic institutions, additional factors such as human capital, particularly know-how and managerial capabilities are also important to foster better linkages of services with other sectors and facilitate integration into global markets. For a discussion on the role of these enabling factors, we refer the interested reader to Huria et al. (2019).

> 11 While the reforms introduced in 1991 in India considered the establishment of specialized regulators, the required institutional modernization of the country, which plays a critical role in a market economy, has been lagging (Lateef 2017). Roy et al. (2019) provide a road map to strengthen specialized regulators, starting with a better organizational design that fosters accountability under an active checks and balances system, and regulatory capabilities which induce regulators to do “the right things”.

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