Services, firm performance, and exports

Recent research has analysed the links between services sector trade and investment policies and the impact of liberalisation of services trade barriers on the productivity of manufacturing. Francois and Hoekman (2010) and Christen, Francois, and Hoekman (2013) survey much of the extant literature in this area. This direction of research has revealed that sector-level measures of services trade and FDI policies are positively associated with manufacturing productivity. There is a strong case for expecting such a link to exist. OECD-WTO Trade in Value Added (TiVA) data reveal that services inputs account for 43% of the gross value of manufacturing goods exports for the countries (mostly developed and emerging economies) for which data are available. Given that firm productivity is a key determinant of export performance, a two-stage relationship is likely to exist, with services productivity in part determining the productivity of “downstream” sectors that buy services as part of their production process, and the productivity of the downstream sectors determining firm export performance.

This project examines both linkages—from services productivity to manufacturing productivity, and then between manufacturing productivity and export performance—for all African countries for which data are available, with specific attention being given to East African Community (EAC) member countries (all of which are in the sample). We use a mix of firm-level data and information on services trade and investment policies, the presumption being that trade and investment policies will impact on average productivity by affecting competition in markets. Firm-level data from the World Bank Enterprise Surveys are used to calculate average measures of firm-level services productivity at the level of sub-national regions. These are then related to firm-level productivity in agri-business and manufacturing sectors, controlling for a variety of firm-level variables that may affect performance. The second stage of the analysis relates agri-business and manufacturing firm productivity to exports, taking into account the first stage determination of that variable by (in part) services sector productivity, as well as firm characteristics such as the intensity of services input use.

In a separate part of the analysis we use a gravity model to examine the impacts of services sector policies on manufacturing exports, based on the mechanisms analysed in the first two stages. The end results of the analysis will be an assessment of the linkage between productivity in the services sectors and manufactured goods export performance, and an assessment of the effects of service sector policies on economic performance.