WPS4109

**Does Services Liberalization Benefit Manufacturing Firms?** Evidence from the Czech Republic

Jens Arnold<sup>*</sup> Beata S. Javorcik<sup>**</sup> Aaditya Mattoo<sup>***</sup>

## **Abstract**

While there is considerable empirical evidence on the impact of liberalizing trade in goods, the effects of services liberalization have not been empirically established. Using firm-level data from the Czech Republic for the period 1998–2003, this study examines the link between services sector reforms and the productivity of domestic firms in downstream manufacturing. Several aspects of services liberalization are considered and measured, namely, the increased presence of foreign providers, privatization and enhanced competition. The manufacturing-services linkage is measured using information on the degree to which manufacturing firms rely on intermediate inputs from services industries. The econometric results lead to two conclusions: First, we find that services policy matters for the productivity of manufacturing firms relying on services inputs. This finding is robust to several econometric specifications, including controlling for unobservable firm heterogeneity and for other aspects of openness. Second, we find evidence that opening services sectors to foreign providers is a key channel through which services liberalization contributes to improved performance of downstream manufacturing sectors. This finding is robust to instrumenting for the extent of foreign presence in services industries. As most barriers to foreign investment today are not in goods but in services sectors, our findings may strengthen the argument for reform in this area.

Keywords: services liberalization, productivity, foreign direct investment JEL Codes: L8, F2, D24 World Bank Policy Research Working Paper 4109, January 2007 _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._

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> * OECD Economics Department, 2 rue André Pascal, 75116 Paris, France. Email: jens.arnold@oecd.org. ** World Bank and CEPR, 1818 H Street, NW; MSN MC3-303; Washington, DC, 20433. Email: bjavorcik@worldbank.org. *** World Bank, 1818 H Street, NW; MSN MC3-303; Washington, DC, 20433. Email: amattoo@worldbank.org. This paper is part of the World Bank’s research program on trade in services, which is supported in part by the United Kingdom’s Department for International Development. We thank Bruce Blonigen, Balázs Muraközy, Clinton Shiells and seminar participants at the World Bank, the European Bank for Reconstruction and Development, the London School of Economics, the Joint Vienna Institute, the University of Michigan, the George Washington University, the NBER Summer Institute 2006, the NBER Universities Research Conference, the Third CEPR Conference on "Trade, Industrialisation and Development" in Chianti, and the Empirical Investigations in International Economics Conference in Isola for helpful comments.