How does service trade openness promote the green transformation of manufacturing firms? Evidence from China

Service intermediate inputs are generally more environmentally friendly and knowledge-intensive compared with goods. As China has continued to promote high-quality development and expand high-standard opening up, this paper aims to investigate how service trade openness of China provides a green upgrading path for manufacturing firms. We first construct a micro theoretical model and deduce three influence channels through which service trade openness can reduce pollution intensity of manufacturing firms: technological progress, cost reduction and efficiency improvement of resource allocation. Then, we estimate the trade costs in service sectors based on the service trade data in OECD database and the structural gravity model, and empirically verify the emission reduction effect of service trade openness with our estimation and China's firm-level data from 1999 to 2007. The results show that service trade openness can effectively reduce the pollution emission intensity of Chinese manufacturing firms through these three channels. And it is noteworthy that the technological progress is mainly due to the improvement of innovation quality, rather than the innovation quantity. In addition, this paper also finds that: (1) Emission reduction effect brought by trade openness in producer services is more significant, while trade openness in non-producer services actually increases firms' pollution intensity due to the crowding-out effect; (2) Emission reduction effect of service trade openness on non-SOEs and non-exporting firms are more manifest. This paper provides feasible paths for China and other developing economies to the achievement of green transformation.