# **1. Introduction**

Services inputs play an important role in many economic activities. It is difficult to think of any firm in either industry or services that would not rely on telecommunications services, financial services, or energy. Yet, access to reliable services of adequate quality varies substantially across countries, and often presents difficulties for firms in Sub-Saharan Africa.

The tradability of services inputs across national and even regional borders is quite limited, in spite of the increasing scope for electronic delivery. Whereas physical inputs can be imported from other parts of the country or world, firms are more reliant on the state of _locally_ produced services inputs in telecommunications, banking and electricity distribution, the three services on which we focus in this paper. As a result, difficulties in procuring adequate services inputs locally may constrain firm performance.

There are several channels through which inadequate services inputs could affect the performance of firms. If telecommunication services are unreliable, firms may find it difficult to communicate and coordinate with clients and suppliers, and lose staff time in the process. Difficulties in obtaining credit or other inadequacies in banking services may prevent a firm from exploiting productivity-enhancing investment opportunities, and create unnecessary friction in the financial functioning of the firm. Inadequacies in power provision may disrupt the production process, cause productive assets to lie idle and thus decrease productivity.

Many African countries have been engaged in trade liberalization in recent years. But successful participation by African producers in export markets may be constrained by the difficulty in accessing services inputs at home. In fact, unless African firms are able to access services inputs of competitive quality and prices, they may find it difficult to compete even in the domestic market. In many African countries, firm expenses on services inputs constitute a considerably larger fraction of total costs than in other parts of the world, and often dwarf labor costs (Eifert et al. 2005). Hence any improvement in the conditions at which these services inputs can be purchased is likely to have at least as much of an influence on total costs as a change in labor costs.

This paper investigates the extent to which the productivity of African manufacturing firms is related to difficulties in procuring services inputs, using firm-level data from 10 Sub-Saharan African countries. The source of this data is the World Bank Enterprise Surveys, which include over 1,000 firms in Ethiopia, Kenya, Madagascar, Mali, Mauritius, Senegal, South Africa, Tanzania, Uganda and Zambia. We use information on firm inputs and outputs to calculate total factor productivity of firms. The Enterprise Surveys also contain unique measures of the performance of communications, electricity and financial services. The availability of these measures at the firm level, both as subjective and objective indicators, allows us to exploit the variation in services performance at the sub-national regional level. By using the regional variation of services performance, we are also able to address possible endogeneity concerns about the services variable.

Our results show a significant positive association between the performance of manufacturing firms in a region and indicators of the availability of services in the region. The findings are consistent with the view that services matter for the productivity of firms, and provide evidence