Services trade policy and manufacturing productivity: The role of institutions

We study the effect of services trade restrictions on manufacturing productivity for a broad cross-section of countries at different stages of economic development. Decreasing services trade restrictiveness has a positive impact on the manufacturing sectors that use services as intermediate inputs in production. We identify a critical role of institutions in importing countries in shaping this effect. Countries with high institutional quality benefit the most from lower services trade restrictions in terms of increased productivity in downstream industries. We show that the conditioning effect of institutions operates through services trade that involves foreign establishment (investment), as opposed to cross-border arms-length trade in services.