Service trade liberalization has been a highly controversial subject in the World Trade Organization (WTO). This controversy is exacerbated by the narrow focus of its negative effects of service openness on services industry itself. Yet given the fact that manufacturing industries rely on services intermediate inputs, large gains could potentially be achieved through liberalizing services sectors. Thus the aim of this paper is to investigate the effects of service trade liberalization on manufacturing productivity. This topic sounds more important in China for two reasons. First, China is the “world factory” and famous for the manufacturing products of “made in China”; Second, China has made extraordinarily deep and wide ranging commitments in the services area as part of WTO accession. But, little is known about the productivity effect of China’s service trade liberalization for manufacturing industry. I aim to close the gap.
The emerging literature on the relationship between service trade liberalization and manufacturing productivity mainly focuses on the effect of FDI in services on productivity. Fernandes (2007) [18]estimates positive and significant effects of liberalization of finance and infrastructure on labor productivity of downstream manufacturing industries in Eastern European countries. Arnold et al. (2007a)[7] use the presence of foreign service providers, privatization and the level of competition to proxy for service trade liberalization and find foreign entry into services industry is the key channel through which service liberalization contributes to improvement of firm-level manufacturing TFP. Arnold et al. (2007b)[6] find significant and positive productivity effects of banking, telecommunications, and transport reforms on manufacturing firms in India. All these studies capture the dependence of manufacturing on services using industry level data from input output table. Fernandes and Paunov (2008)[17] use firm-specific time varying measures of the intensity of service usage and find forward linkage from FDI in services accounts for almost 5% of the manufacturing productivity growth in Chile from year 1992 to 2004. Javorcik and Li (2008)[25]estimate a positive effect of FDI in Romanian retail sector on the TFP of manufacturing suppliers (food industry)to that sector. Arnolda, Mattoob and Narcisoc (2008)[8]show a significant and positive relationship between firm productivity and service performance in communications, electricity and financial sectors by using its variation at the sub-national regional level of Sub-Saharan Africa.
There are two limitations on this research. One is that FDI in services is not the only way for intermediate service inputs to affect TFP in manufacturing. Cross-border trade and service provided through movement of people are also important modes of supply for services trade. Moreover, technology spill-over from foreign service providers to domestic ones and competition-enhanced productivity due to the exit of the less productive firms are also not accounted. Secondly, the reliance of manufacturing on service intermediate inputs is not accurately measured by all these FDI policy indicators. A more direct measure is outsourcing intensity for individual manufacturing firms. Thus another strand of literature is productivity effect of the disintegration of production. When service outsourcing is concerned, most papers emphasize the productivity effects of service (offshoring) outsourcing on TFP in developed country. Amiti and Wei (2006)[3], using industry data, find that service offshoring has a significant positive effect on productivity in the US. Mann (2003)[33] calculates that offshoring in the IT industry led to an annual increase in productivity of 0.3 percentage points for the period 1995 to 2002 in US. Görg and Hanley (2007)[20] utilize plant-level data for manufacturing industries in Ireland, and find positive effects from international outsourcing, in particular of services inputs. However, these productivity benefits accrue only to exporters. This suggests that plant-level heterogeneity, especially for contacts in foreign markets are important in evaluating the productivity effects of international outsourcing. Positive relationship of services outsourcing and manufacturing TFP is also obtained by Gözig and Stephan (2002) for Germany, Tomiura (2005, 2006)[44][1] for Japan, Girma and Görg (2004)[19] for chemical, electronic, mechanical and instrument engineering industries in UK and so on.
When material outsourcing (imported inputs) and input tariffs are considered, more literature contributes. Feenstra, Markusen, and Zeile (1992)[16] estimate at the industry level, TFP is positively related with the introduction of new inputs in Korea. Yasar and Morrison (2007)[48]find a positive relationship between firm productivity and firm-level imports of materials in a production function framework using data for Turkey. Kasahara and Rodrigue (2008)[28] find that foreign inputs increase plant productivity in Chile by 2.3 percent, and Halpern, Koren, and Szeidl (2005)[23] show that imports contributed 30 percent to growth in aggregate TFP in Hungary during the 1990s. Amiti and Konings (2007)[2]relate manufacturing productivity to trade liberalization, and show that a 10 percentage point fall in input tariffs leads to a productivity gain of 12 percent for firms that import their inputs in Indonesia from year 1991 to 2001. However, It is hard to find a direct and satisfactory measure of service trade barriers (liberalization), like goods tariffs.
Contents
1 Introduction
2 the Model
2.1 Country h – host country
2.2 Country f – source country
2.3 Services trade liberalization, services reallocation margin and productivity
3 China’s services trade liberalization
3.1 China’s WTO commitments and implementations
3.2 China’s FDI and trade in services
3.3 Services FDI penetration
3.4 Productivity comparison of services industry
4 Empirical Model
4.1 Description of Data
4.2 Empirical methodology
5 Empirical analysis
5.1 Main estimation results
5.2 Robust checks
- 5.2.1 Potential endogeneity problem
5.2.2 Heterogenous industrial TFP
5.2.3 Additional controls and Outliers
5.2.4 Policy indicators
5.2.5 Second difference
6 Conclusions
Download
Productivity Effects of Services Trade Liberalization: Evidence from Chinese Firm-level Data
