information gives us a certain average over all firms belonging to a similar NACE 2‐digit category.<sup>16</sup> Clearly we are presented with a trade‐off between precision and exogeneity, but feel that the latter is well‐suited since Amadeus does not report any information on service input usage. Moreover, and as previously explained, instead of our country‐sector specific _φcjs_ , we also use common input‐output coefficients from the EU as a whole and check for entirely exogenous US‐specific input coefficients as well. Of note, equation (2) is also used to distinguish the overall index of regulatory barriers into two indexes that covers entry and conduct regulations separately.

# **3.2 Baseline Specification**

Equation (2) is used in our baseline regression and measures the extent to which firm‐level TFP are affected by the regulatory linkages in previous years. In other words, we regress the logarithm of our four TFP measures of a manufacturing services firms _i_ in country _c_ in industry _j_ in time _t_ on the services linkages which are lagged over two years. Our motivation for lagging is related to the fact that we believe that on a wider EU market scale it takes time before downstream firms across all member states benefit from opening services markets for entry and increased competition. As such our baseline specification takes the following form: ������� ����������� ��� � ���� ϛ�� ������ (3) In equation (3) the terms �� , ��� and ϛ�� refer to the fixed effects by, respectively, firm, country‐year and sector‐year. This very stringent specification is possible since our variable of interest, ������� varies by country‐sector‐year and only variation in the data from this perspective will be picked up in the regressions. Last, ����� is the residual. Regressions are estimated with standard error clustered by country‐sector‐year. Finally, for all regressions we take the years 2006‐2013, which at first sight may be affected by the global financial crisis but we are not too much concerned about this since extremely restricted time fixed effects are applied, in combination with our country and sector dimension. However, in subsequent robustness checks we also correct for later time periods post‐2008.

Lastly, equation (3) could also control for other policy influences. In previous works such correction was comprised of a variable that measures the within industry tariff and input‐tariff reductions, the latter following similar strategy of multiplying input‐output coefficients as in our case of input services. Furthermore, another control variable present in previous works is one that measures, over time, the

> 16 This is different compared to Fernandes and Paunov (2012) who use firm‐specific services inputs coefficients. Although further endogeneity issues may be solved by using input‐output tables from the first year in our analysis, i.e. 2008, these were unfortunately not available. Similarly, one could also think of applying completely exogenous input‐output tables from, for instance, the US. Two problems may actually arise with such approach. One, the US economic structure may be entirely different compared to some of the EU economies which are still categorized as upper‐middle income countries, which in particularly may affect their services input reliance for each sector. Second, reclassification schedules from the US system of sector classification, namely NAICS, to the European NACE scheme may result in an imprecise consistency across the two schedules. All former studies take country‐specific input‐output tables.

13