How services liberalization shapes functional specialization in developing countries?

Abstract

How does services liberalization in developing countries shape their functional specialization, i.e. does it cause relatively more domestic value added in exports attributed to fabrication (and to R&D)? This paper empirically shows that services liberalization primarily reinforces specialization in fabrication. We find that the mechanism is the reduction in the cost of services used as the input of manufacturing sectors after services liberalization. We also document the impact is mainly driven by services liberalization in sectors of business and telecommunication and more prominent in sectors characterized by low labor cost, low labor productivity, and low technology levels and in developing countries located in the European production network. Moreover, we show that services liberalization has no discernible impact on specialization in R&D within developing countries. Our results suggest that developing countries, opening up their domestic services market, are seemingly incapable of upgrading functional specialization towards R&D from fabrication, but become more deeply entrenched in fabrication within the global production network.