Increasing productivity is an essential feature of economic growth and development. A large fraction of productivity growth originates in the manufacturing sector and depends, among others, on the availability of high-quality upstream inputs. These include machinery and intermediate parts and components, as well as a range of services inputs. Trade is an important channel through which firms can improve their access to services inputs, resulting in lower prices and/or higher input variety. Therefore, the extent to which policies restrict foreign access to upstream services markets is relevant for downstream productivity.
This paper studies the effect of services trade restrictions on manufacturing productivity for a broad cross-section of countries at different stages of economic development. Decreasing services trade restrictiveness has a positive impact on the manufacturing sectors that use services as intermediate inputs in production. The authors identify a critical role of institutions in importing countries in shaping this effect. Countries with high institutional quality benefit the most from lower services trade restrictions in terms of increased productivity in downstream industries. The paper shows that the conditioning effect of institutions operates through services trade that involves foreign establishment (investment), as opposed to cross-border arms-length trade in services.