Services Development and Comparative Advantage in Manufacturing

III. Empirical analysis

In this section, we test empirically the following two hypotheses. 

Hypothesis 1: the effect of domestic services development on manufacturing export competitiveness is larger (more positive) for manufacturing sectors that use services as inputs more intensively. 

Hypothesis 2: the effect of embodied foreign services inputs on manufacturing export competitiveness is more positive in countries with lower levels of domestic services development, especially for manufacturing sectors with high services input intensity.  

Although the above two hypotheses seem to be straightforward, the theoretical predictions are actually not certain, as discussed in the introduction section. The development in services can draw resources away from manufacturing sectors and can also enhance the productivity of manufacturing when more productive services are used as inputs. Whether the net effect is positive or negative becomes an empirical question. As for the second hypothesis, the effects of foreign services on domestic manufacturing sectors can also be manifold and conflicting among them. The net effect depends on many factors, such as the development level of domestic services sectors. We expect to see a more beneficial role of imported services inputs in countries with less efficient services sectors. 

In the following, we will lay out our empirical strategy, explain the measures of the key variables, describe the data, and discuss the regression results.