different compared to including manufacturing as a downstream sector only. Surprisingly, for manufacturing firms entry barriers are the main regulatory barrier for better productivity performance. From a wider perspective this suggests that the relative importance between conduct and entry barriers is moving along shifts that the domestic economy makes into services.

The rest of this paper is organized as follows. The next section discusses the data and gives an overview of the various productivity measures, liberalization reform indicators and input‐output coefficients used for this paper. Section 3 presents the estimation strategy, and Section 4 reviews the estimation results. Finally, the last section concludes by interpreting the results in a wider European context.

# **2 Data**

As in all previous papers which are very close to our line of research, one needs to have three types of data in order to perform our empirical analysis, namely services reform indexes, TFP performance at the firm level, and finally input‐output coefficients measuring the extent to which downstream (services and manufacturing) industries use services as inputs. These latter coefficients will be interacted with the reform indexes so as to have a “weighted” score of services reform.

# **2.1 Services Reform**

The EU has a long history regarding its integration process of services. Next to goods, capital and skills, the EU strives for the free flow of services across member states’ borders which was initially defined in the Treaty of Rome in 1957. Together this objective of free factor movement is more commonly referred to as the “four freedoms” or, in other words, the EU’s internal market. Although legislation in the areas of goods and capital has progressed over the years, reforms in services regulation appear to be difficult. For instance, the recent passing of the Services in the Internal Market Directive (2006/123/EC) in 2006 did not happen without fierce public opposition and was eventually significantly watered down by the European Parliament with many sectors such as broadcasting, audio‐visuals and postal services being excluded.

Although the EU strives for reforms of services markets to make them explicitly more tradable across countries, the reform indexes taken up in this study are closely linked to the domestic regulatory setting within each European economy.<sup>8</sup> Our index proxies for services reform are taken from the OECD’s PMR database which are known as the Non‐Manufacturing Regulations (NMR) in services as explained in Koske _et al_ . (2013) and which have been used in previous industry‐level studies such as Barone and Cingano (2011). The database covers 12 services sector‐specific reform barriers such as in electricity, post and telecommunications, transportation and professional services. The main reason for using these indicators is because of their multiple year coverage. In fact, the PMR database provides good time‐ 8 Hence, these measures take up not only the foreign entry of firms into the domestic economy, as otherwise trade restrictiveness indicators would do, but also domestic entry _in addition to_ the potential of foreign entry. Moreover, it should be stressed that our reform indicators are really measuring regulations at the (unilateral) domestic level and therefore reflect within country scenarios as opposed to indicators that measure the cross‐border regulations. Partly, our indicators will pick up some elements of the latter, but as to date no precise reform indexes exist at the EU‐level which takes up the pure trade‐related aspects for reform in a longer time‐series.

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