particular the stance of policy reform in the sector. In section 4, we present the data used and the empirical methodology. Section 5 discusses the results and section 6 concludes.

# **2. Related Literature**

To date, and to the best of our knowledge, research centering on Indonesia has focused exclusively on the impact of trade and investment liberalization in goods on economic performance. Notable contributions include Amity and Konings (2007), Blalock and Gertler (2008), and Blalock and Simon (2009). The first study examined the differential effects on total factor productivity of lowering tariffs on final goods and lowering tariffs on intermediate goods, finding the latter effect substantially larger, both from an economic and statistical point of view. Blalock and Gertler (2008) found evidence of vertical spillovers from increased FDI in the manufacturing sector. They found strong evidence of total factor productivity gains, greater competition and lower prices among local firms in markets that supply foreign entrants. In a related piece, Blalock and Simon (2009) found that the vertical spillovers from increased FDI in the manufacturing sector in Indonesia accrued disproportionately to firms with greater absorptive capacities.

When zooming out and looking at the international evidence, it is possible to find research on services trade, although, as noted by Hoekman (2006), it is only a small share of the total output in international economics literature, reflecting the scarcity of data on policies and flows. The existing work linking service sector reform and performance focuses on different channels: (i) services reform and economy wide gains, (ii) services reform and service sector performance, (iii) services reform and manufacturing export competitiveness, and the most closely related to our study, (iv) services reform and manufacturing productivity.

Exploring the first channel, Mattoo, Rathindran and Subramanian (2006) look at whether the impact of liberalization of services sectors on output growth is different from that of liberalization of trade in goods. The authors found that countries with open financial and telecom sectors grew faster than other countries. Eschenbach and Hoekman (2006b) used an index of quality of policy for different services sectors in 20 transition economies and found that policy improvements attract FDI, and are associated with the post-1990 growth performance in these economies. Previously, Robinson, Wang and Martin (2002) had used a ten region, eleven sector CGE model to evaluate the impact of service sector liberalization on the world economy, finding that the effects were not only directly on increased services production and trade, but also indirect, by affecting production in other sectors of the economy.

Exploring the second channel, Fink, Mattoo and Rathindran (2003) use data for 86 developing countries during the period 1985-1999 and find that privatization and competition improved performance in the services sectors. Comprehensive reforms, they claim, bring the largest gains, and the sequence of reforms matters. In particular, their results suggest that competition policies should be incorporated simultaneously with privatization.

Fink, Mattoo and Neagu (2005) and Francois, Manchin and Pelkmans Balaoing (2009) focused on the effects of service sector reform on manufacturers’ export competitiveness, in particular 4