One Way to the Top: How Services Boost the Demand for Goods

In this paper, we take advantage of a uniquely detailed dataset on firm-level exports of both goods and services to show that the provision of services increases firms' manufacturing export values, quantities and prices. The services provision accounts for up to 22.4% of the manufacturing exports of bi-exporters (i.e. the firms that export both goods and services), and 11.8% of overall goods exports from Belgium. To rationalize these findings, we propose a model of oligopolistic competition in which, by supplying services with their goods, firms increase their market share, and hence their market power and markup. This is possible because services act as a demand shifter for firms, thus increasing the perceived quality of their products. Our data provides compelling evidence in this direction. We finally also discuss the relevance of other theoretical rationalizations.