**Figure 3.9 Results of benchmark regression analysis for production stages (2007‐2014)**

<!-- Start of picture text --> Benchmark against goods firms Benchmark against goods exporters<br>12.3<br>-1.5<br>-5.4 -6.6 -4.4<br>-13.8 -14.0 -14.4<br>-20.2 -18.6 -18.7<br>Establish Pre-man Manu Post-man Post-sales Back-office Establish Pre-man Manu Post-man Post-sales Back-office<br>50 50<br>25 25<br>0 0<br>Percentage difference Percentage difference<br>-25 -25<br>-50 -50<br><!-- End of picture text --> Source: EIS database; author’s calculations using TFP based on Ackerberg et al. (2015). For pre‐manufacturing services in the left‐hand panel, no significant coefficient result was obtained. For back‐office services a negative but only slightly significant coefficient result was found in the left‐hand panel when using ACF TFP only. Similarly, for manufacturing services in the right‐hand panel, only using ACF a slightly negatively significant result was obtained.

# **4. Regulatory Restrictions on Services**

**The previous sections have shown that services are not living up to their potential in Turkey.** The services sector and the interaction between services and the manufacturing sector fall short of what can be expected from an economy like Turkey that is approaching high‐income status. Peer countries tend to have larger services economies and more trade in services both in gross terms and value‐added. An ailing services sector has widespread consequences, since services are used as inputs throughout economy. Moreover, manufacturing firms today do not only produce goods; they are increasingly also producing and selling services. Turkey also shows signs of this servicification process, but very slowly. While servicification has the potential to increase firm performance, this does not appear to be happening in Turkey: manufacturing firms with services tend to be less productive, particularly the ones that produce establishment and post‐manufacturing services. This section looks at regulatory restrictions as a potential explanatory factor.

**Removing regulatory restrictions on services can increase the contribution of services to productivity growth.** Services that are either used as inputs or performed internally by manufacturing firms can be a driver of downstream productivity when effectively enabled by policy reforms (Arnold et al., 2011; 2015). Moreover, whether input markets are well integrated with downstream industries and face relatively low policy distortions can partially explain cross‐country differences in economic and productivity performance (Bartelme and Gorodnichenko, 2015). Regulatory restrictions on services input markets deserve special attention, as they have historically been subject to policy distortions.

**Higher services restrictions are correlated with lower productivity of manufacturing firms.** Previous firm‐ level studies across developed and developing countries show that removing obstacles in services markets has a direct impact on productivity in downstream industries. Arnold _et al_ . (2011) found that increased foreign participation of firms in services sectors caused an improvement in downstream manufacturing sectors in the Czech Republic; Arnold et al. (2015) found a similar result for India. They also show that regulatory reform in services in India had a positive impact on downstream manufacturing firms.

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