Trading Firms and Trading Costs in Services: Firm-Level Analysis

This paper is draws on detailed firm-level data from 7 countries to analyse the importance of services trade restrictions for cross-border exports of services and foreign affiliate sales. A novel contribution is to analyse the role of services trade restrictions in shaping not only cross-border trade but also the establishment and activity of foreign affiliates. The descriptive analysis of firm-level services exports and foreign affiliate sales confirms and extends the findings of the literature. It reveals in particular the different choices of modes of supply across services, the interdependence between goods and services trade and the importance of export platforms in some services sectors. The main analytical findings are: 1. Firms export significantly less through all modes to countries with higher restrictions; 2. Not only the volume of international activities is lower, but also a lower number of firms exports to or invest in these countries; 3. Small and medium sized firms incur the most significant costs when faced with services trade restrictions; 4. New exporters are disproportionately affected by restrictive policies in their target export markets highlighting the importance of sunk costs; 5. Foreign networks help alleviate the costs of regulatory restrictions in export markets. Those costs are generally lower for foreign-owned firms when their headquarters or ultimate parent are located in the export destination.