This paper brings new evidence on the impact of services sector liberalization on performance of manufacturing firms. Using a unique database of Ukrainian firms in 2001-2007, the authors look at the effect of an external push for liberalization in the services sector as a source of an exogenous variation that allows measuring the impact of the services liberalization on the total factor productivity (TFP) of manufacturing firms.
During the investigated period, Ukraine has achieved substantial progress in opening up its services sector for competition of private- and foreign-owned firms.
The services liberalization in 2001-2007 was accompanied by a 68 percent increase in productivity of services providers. Higher TFP of exporting manufacturing firms is associated with more intensive use of more liberalized services inputs.
Results indicate that a one-standard-deviation increase in services liberalization is associated with a 6 percent increase in TFP. The effect substantially varies across manufacturing sectors and is robust to different model specifications.