Given that we allow for a lagged effect of restrictiveness in services on manufacturing TFP, we have three overlapping periods on which the model is estimated. In the first period, the matching data are the restrictiveness index for 1997 with firms’ productivity averages for 1998, 1999 and 2000. In the second, the restrictiveness index for 2003 with firms’ productivity averages for 2004, 2005 and 2006. In the third, the restrictiveness for 2006 with firms’ productivity averages for 2007, 2008 and 2009.

The X vector includes controls for other factors related to integration with the global marketplace that may affect performance.<sup>14</sup>

- (1) Policy restrictiveness in upstream manufacturing sectors, as this may also affect a firm’s TFP in addition to that in service sectors. Here, we rely on the OECD restrictiveness indices for manufacturing, and weight them in the same way as in ‘rest’, using inputoutput coefficients.

- (2) The level of tariff protection in upstream manufacturing sectors (again weighted by the input-output coefficients).

- (3) The degree of competition faced by firms, proxied by (a) the level of tariff protection and (b) the share of output produced by foreign firms operating in the same sector (which in turn also captures potential horizontal spillover effects).

We consider five variations of our baseline specification above, to obtain answers to the following specific questions:

- (1) Is the effect of ‘rest’ on firm’s TFP different for domestic and for foreign firms?  For this, we estimate equation (2) on the subset of domestic firms only, following Arnold et al (2011).

- (2) Is ‘policy restrictiveness’ capturing the effect of restraining FDI flows from coming in? To answer this, we replace ‘rest’ with FDI flows in equation (2).

- (3) Are the effects of ‘rest’ on firms’ TFP the same for firms at the bottom, at the middle, or at the top of the TFP distribution? To answer this question, we interact the ‘rest’ variable with dummies for firms in the top 25% and bottom 25% of the distribution of TFP.

- (4) Given a firm’s position in the productivity distribution, are gains due to relaxation of restrictiveness in the services sector different for firms that produce more sophisticated goods, for those that make research and development investments, or for those that train their workers?  We measure product sophistication using unit values of the firm’s main product defined at 9-digit in the ISIC 3 classification, relative to the median unit value in the same sector (defined at 5-digits of the ISIC 3 classification)). For research and development investments, we define a dummy that takes value 1 when the firm has a research and development unit, zero otherwise, and similarly with training of workers, by defining a dummy taking value 1 when the firm declares expenditure in workers’ training, and zero otherwise.<sup>15</sup>

- (5) Is restrictiveness in specific service sectors particularly relevant for manufacturing performance? For this, in equation (2), we replace the aggregate ‘rest’ indicator with sector-specific indicators.

> 14 Standard errors in the estimation are adjusted to allow for correlation between observations belonging to the same industry in the same year, given that the variables of interest are defined at the sector level while the dependent variable is defined at the firm level.

> 15 Data on R&D units and workers’ training are only available for 2006, so we are forced to assume time invariance in these characteristics.

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