extent to which firms have a foreign share. In our case, information on both variables are hard to find. Ideally, we would need tariffs at 2‐digit NACE level, but this information is not directly reported at Eurostat or WITS. On the other hand, since a long time tariffs within the EU have been set at community level encompassing all member countries. Even though these EU‐wide tariffs are available in WITS, they only have a time‐varying dimension and would therefore drop out from the regressions due to our sector‐year fixed effects.

Similarly, although input tariffs are multiplied with country‐sector varying input‐output coefficients and should therefore not be dropped from our regressions, since tariffs are measured at EU‐level what we would measure otherwise is precisely these coefficients and not any country‐sector variation stemming from restrictiveness. Furthermore, regarding the foreign share of firms, unfortunately the Amadeus database does not report time‐varying information on this variable, which means that this variable remains constant throughout our period selection. It therefore does not allow for any variation over time at the level of the firm, country and sector and so this variable would be dropped from our regressions as well. Taken together, all our control variables are regrettably omitted in our specification.

# **3.3 Baseline Extension**

In a next step, we would also like to expand our baseline specification to take into account any differential impact of services reform on TFP of firms located in a country that is institutionally strong. The recent empirical services literature has found that domestic institutions matter as a type of governance for services reform because of a variety of reasons. First, Van der Marel (2016) shows that domestic institutions in terms of strong regulators are essential in terms of “shaping” domestic competitive markets after services liberalization has taken place. Merely opening up a services sector would not suffice due to the many market failures from which services sectors suffer and which therefore requires additional design of regulations in order to create markets that are _effectively_ competitive. Setting this regulatory framework should ideally be done by competent regulators. Consequently, countries that are institutionally strong are most likely to be well‐placed to have these qualified regulators. In his work, Van der Marel (2016) uses rule of law as a proxy for institutions from the World Bank governance indicators database following standard practice.

In a second work, Beverelli _et al_ . (2015) take a similar stand but from the trade perspective. They argue that the institutional capacity of countries is important in order to attract foreign services suppliers into the domestic market. Most services are supplied through a foreign affiliate that carries along a so‐called proximity burden in which the foreign services provider needs to be on the domestic market. Only the best services firm will be able to detect institutionally strong countries as a sort of natural self‐selection, which in turn has an effect on downstream productivity for firms using services from those firms. In their work, the authors use the level of corruption from the World Bank governance indicators database. Interestingly, in our regressions we use the FDI restrictiveness index which could test for such channel of proximity by foreign affiliate as the former is closely associated with foreign affiliate sales.<sup>17</sup>

> 17 Note, however, that FDI is an imperfect variable for foreign affiliate sales, and so therefore FDI restrictiveness is an imprecise variable for regulations in services trade through foreign affiliates, which would not directly confirm the results of Beverelli _et al_ . (2015). Yet, since the majority of FDI takes place in services it could stand for a rough proxy variable. Note that their regulatory services variable is for one‐year only which is therefore cross‐sectional.

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