countries like the United States and the United Kingdom, but also in developing countries like India (see, for example, Kochar et al. 2006).

Some early studies examined the link between services as inputs in manufacturing and the pattern of manufacturing exports using single national input-output tables. For example, Francois and Woerz (2008) find significant and strong positive effects of increased business services openness (greater imports) on some industries. Their reliance on national data means that inputs cannot be broken down according to their origins, and services <mark>inputs are mismeasured due to two-way trade in intermediate products</mark> . More recently, Stehrer, Foster, and de Vries (2012), Timmer et al. (2013), and Liu et al. (2017) used the newly constructed international input-output tables to measure more precisely the embodied services and indirect trade through other sectors.

Liu et al. (2017) focus on two key services sectors: financial services and business services. Wellfunctioning financial sectors are critical in mobilizing resources, stimulating investment, and helping firms (and households) manage risk. Business services cover a variety of critical activities, from software consulting and data processing to management consultancy, engineering, and R&D. Intensive use of these modern services can help manufacturing firms increase productivity, reduce the cost of doing business, expand their input choices, differentiate their products from those of competitors, and strengthen their after-sale customer services. But these are the services that most strongly provoke deindustrialization concerns, such as financial services in industrial countries like the United States and the United Kingdom and business services in developing countries like India and the Philippines.

Liu et al. (2017) quantify the indirect role of services in international trade in goods and construct new measures of revealed comparative advantage based on domestic value added in gross exports. Embodied services in manufacturing sectors are computed using a method developed by Koopman, Wang, and Wei (2014) and Wang, Wei, and Zhu (2013) that generalizes the vertical specialization measures proposed by Hummels, Ishii, and Yi (2001). Revealed comparative advantage (RCA) is calculated based on domestic value added in gross exports, as in Koopman, Wang, and Wei (2014) and Wang, Wei, and Zhu (2013), who improve on the traditional (Balassa 1965) measure of RCA by taking into account both domestic production sharing and international production sharing.<sup>16</sup> In Liu et al.’s econometric analysis of the impact of services development on RCA in manufacturing sectors, the key explanatory variable is the interaction between a measure of the development of financial (or business) services and the financial (or business) services intensity of each manufacturing sector. Domestic services development has a mixed effect on the RCA of manufacturing exports: services development reduces the RCA of manufacturing exports in manufacturing sectors with low embodied services (basic and fabricated metals) but increases it in sectors with a high degree of embodied services (food, beverages and tobacco) (figure 7).

> 16 Note that RCA based on gross exports (used as a dependent variable) can cause an endogeneity problem because the embodied services (used as explanatory variables) are part of gross manufacturing exports. Liu et al. (2017) avoid this problem because manufacturing RCA is based on the value added created by the factors employed in manufacturing sectors, excluding the embodied services in gross exports contributed by the factors employed in services sectors.

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