Cross-country Services Versus Manufacturing Activity of Multinational Firms in Response to Services Versus Goods Policy

This paper assesses the consequences of trade costs on goods and services for the distribution of foreign direct investment (FDI) across goods and services as well as across countries. The paper employs data on the universe of German FDI abroad which are collected at the firm level and aggregated for the purpose of this paper to two sectors - goods and services - and 79 countries, using data for the year 2005. Key findings are that services trade costs as reflected in the services trade restrictiveness index and bilateral investment treaty membership are the most important policy drivers of the activity of German-owned multinational firms in both goods and services. An increase in services trade restrictions raises goods activity at the expense of services activity. This effect is more pronounced the more important host countries in terms of the German FDI are.