The results suggest that procompetitive reforms in banking, transport, insurance, and telecommunications boosted the productivity of both foreign and locally owned manufacturing firms. A one-standard-deviation increase in the aggregated index of services liberalization resulted in a productivity increase of 11.7% for domestic firms and 13.2% for foreign enterprises. The largest additional effect was for transport reforms, followed by telecommunications and banking reforms.

Several other studies show that access to low-cost and high-quality (domestic or foreign) producer services can promote productivity and economic growth (Hoekman and Mattoo 2008). Using firm-level data for the Czech Republic for 1998–2003, Arnold, Javorcik, and Mattoo (2011) find a positive effect on the productivity of domestic firms in downstream manufacturing as a result of services sector reforms leading to greater FDI. Using the annual manufacturing survey of Chilean firms, Fernandes and Paunov (2012) find a positive effect of substantial FDI inflows in producer services sectors on the total factor productivity of Chilean manufacturing firms. Their findings also suggest that services FDI fosters innovation in manufacturing and offers opportunities for laggard firms to catch up with industry leaders.<sup>14</sup> These benefits arise not just from foreign investment but also from cross-border trade in services. For example, Amiti and Wei (2009a) find that services offshoring by high-income countries tends to raise their manufacturing sectors’ productivity.<sup>15</sup> To investigate whether regulations in domestic services markets have an effect on industries that rely on GVC linkages in services to generate value added, Van der Marel and Sáez (2016) differ from the earlier studies in looking at all downstream sectors rather than just manufacturing. They examine the impact on domestic value added rather than on productivity and on the link to upstream services sectors through backward foreign and domestic linkages. Their key interactive variables are a product of the foreign and domestic backward linkages of services for each downstream sector with services-specific regulatory policies. Both entry restrictions and policies affecting the operations of firms matter, but the strength of their impact depends on the type of backward linkages that are more important for the industry in question. Industries that rely more on backward foreign linkages of services are adversely affected by entry barrier regulations, while those that rely more on backward domestic linkages of services are more sensitive to behind-the-border regulations.

# **_For comparative advantage_**

Since a large part of goods trade includes trade in embodied services, the development of the domestic services sector and access to imported services inputs can be expected to influence comparative advantage in manufacturing trade. The impact of services development on manufacturing trade is not straightforward. Since services are used as inputs in the production of manufactured goods, their development can increase manufacturing production. But since services and manufacturing compete for resources, the development of services can be at the expense of manufacturing. For example, the development of the services sector has drawn resources away from manufacturing not just in industrial

> 14 Similar results have been found for Sub-Saharan Africa (Arnold, Mattoo, and Narciso 2008) and Indonesia (Duggan, Rahardja, and Varela 2013).

> 15 While services offshoring has both positive and negative effects on domestic employment, Amiti and Wei (2009b) show, at least for the United States, that it tends to enhance domestic employment on average.

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