Trade in Services and TFP: The Role of Regulation

What determines services TFP: Is it services trade or services‐trade regulation? To respond to this question I use four indicators of international trade in services since 1990 to 2005 – namely FDI inward stock, services imports, domestic sales of foreign affiliates (FATS) and FDI inflows – to examine what type of services trade directly affects services TFP. Such analysis is done both for the level and growth rate of TFP in each of the 14 selected services sectors. Subsequently, we analyze what type of sector‐specific regulation with respect to each of the four indicators of services trade has played an inhibiting effect on both the level and growth of services TFP. Such analysis contrasts with former studies in which mainly factor inputs and economy‐wide regulatory variables are used to explain services TFP. We provide evidence that services trade has a direct effect on the level of services TFP, but this effect is inhibited as soon as the regulatory variables are included. As for services TFP growth, we find that neither trade nor entry barriers are robust determinants to explain cross‐country differences over time. Instead, regulation on operational procedures affecting the variables costs structure of the firm play a much more important role in explaining TFP growth between countries.