DP10116 From Selling Goods to Selling Services: Firm Responses to Trade Liberalization

Author(s): Holger Breinlich, Anson Soderbery, Greg C. Wright
Publication Date: August 2014
Keyword(s): services trade, trade liberalization
JEL(s): F12, F15, F23
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10116

In the face of trade liberalization domestic firms are often forced out of the market, whereas others adapt and survive. In this paper we focus on a new channel of adaptation, namely the shift toward increased provision of services in lieu of goods production. We exploit variation in EU trade policy to show that lower manufacturing tariffs cause firms to shift into services provision and out of goods production. Additionally, we find that a successful transition is strongly associated with higher firm-level R&D stocks whereas higher physical capital stocks slow the shift into services provision.