Multinational production and trade in services

Using the OECD analytical AMNE database, this paper provides new evidence on the services activities of multinational enterprises (MNEs) and discusses the relationship between cross-border trade in services and the production of services through foreign affiliates (“mode 3” trade in services in the General Agreement on Trade in Services). An econometric analysis indicates that policies restricting trade in services (as captured in the OECD Services Trade Restrictiveness Index) are associated with a lower output of foreign affiliates not only in services industries but also in the manufacturing sector. Moreover, services trade restrictions also impact the choice of firms when it comes to engaging in exports or in foreign direct investment to serve foreign markets. Overall, the results in this paper demonstrate the intertwined nature of manufacturing and services activities in global value chains.