Trade in Services and TFP: The Role of Regulation


  • The author wishes to thank Bernard Hoekman, Patrick Messerlin, Joe Francois, Aaditya Mattoo, Ben Shepherd, Sébastien Miroudot, Martin Roy, Lisa Anoulies and anonymous referee(s) for their very valuable comments and suggestions when writing this paper. The author also wishes to thank Stephen Golub for sharing FDI regulation data. This paper has also benefited from valuable comments and discussions from participants of the WIOD conference in Vienna, the conference on the International Political Economy of Trade Liberalisation at the Leonard Davis Institute of the Hebrew University of Jerusalem and the ETSG 2010 conference in Lausanne. The author is grateful to the GEM and the World Bank’s International Trade Department for funding and hosting while working on this paper.


What determines total factor productivity (TFP) growth in services: is it services trade or services–trade regulation? To respond to this question, we use four indicators of international trade in services since 1990 to 2005, namely foreign direct investment (FDI) inward stock, services imports, domestic sales of foreign affiliates (FATS) and FDI inflows, to examine what type of services trade forms a direct determinant. Subsequently, we analyse what type of sector-specific regulation has played an inhibiting effect on services TFP growth. Such analysis contrasts with former studies in which mainly factor inputs and economy-wide regulation are used to explain services TFP. This paper provides evidence that neither trade nor entry barriers are robust determinants to explain cross-country differences. Instead, regulations on operational procedures affecting the variables costs structure of the firm seem to play a more important role in explaining TFP growth between countries, particularly in combination with information and communication technology (ICT) capital.