for the World Economy
Availability of business services and outward
investment: Evidence from French firms
Holger Görg
Kiel Institute for the World Economy,
University of Kiel and GEP
Liza Jabbour
Birmingham Business School and GEP
Introduction
• Developed countries are increasingly services
economies
– Services account for 74 % of GDP in 2007
• Link between services and manufacturing activities
still in its infancy
– Firm level: what do firms produce?
• Hijzen et al., CJE 2011; Kelle, WP 2012
– Sector level: how services impact manufacturing?
• Arnold et al., JIE 2011; Fernandes and Paunov, JDE
2012; Debaere et al, CJE 2012
This paper
• Investigate whether local availability of services
impacts a manufacturing firm’s decision to become
a multinational
• Look at this empirically using rich firm level data for
France
• Brings together insights from “heterogeneous firm”
and “new economic geography” literatures
Motivation
• Decision to invest abroad involves sunk costs,
these are mainly related to services activities
• Greater local provision of services
 larger variety
 lower prices
 better ability to overcome sunk costs of investing
abroad
• Why local provision? Services require face-to-face
contact and customer interaction (Davis and
Henderson, RSUE 2008)
Data description
• Merge two databases for period 1990 to 2001
• Financial Links Survey
– Survey of large firms (e.g., more than 500 emp.)
– Firms report financial links with other firms and
affiliation to a group
– Also identity and location of any affiliates
– Plus identity and location of parent
– Can identify single firms, affiliates and parents of
domestic groups, affiliates and parents of
multinationals
Data description
• Firm Annual Survey
– Covers all firms with more than 20 emp.
– Information on activities of firms: production, sales,
investment, employees…, industry and region
• Combined data set includes over 200,000 firms for
1990 – 2001 in manufacturing and services
• Large share of firms (23%) are active in “business
services” (accounting, advertising, market
research, consulting, IT services) and “operational
services” (14%) (e.g., recruitment)
Data description
• We distinguish three types of firms
– Single firms (more than 90 percent)
– Domestic parent (2700 firms)
– French multinational parents (923 firms), of which
463 are “new multinationals”
• Domestic parents are “control group” in
econometric analysis
• Aim is to check whether decision to become
multinational is affected by local provision of
services
Measuring the local availability of services
• Business Services
– Number of firms (n) in BS/OS sector within the
geographic region, multiplied with input coefficient α
(Debaere et al., 2013)
– α is purchases of inputs from the business services
sector (s) used by industry j as a share of the total
output of industry j
• Region is French département
Top five regions
Region
Nord
Bouches
du Rhone
Rhone
Hauts de
Seine
Paris
Business Region
Services
Firms
1058
Val de
Marne
1174
Nord
Multinational Region
Parents
13
Rhone
2
13
Val de
Marne
Bouches
du Rhone
Hauts de
Seine
Paris
3
1325
Rhone
15
2886
Hauts de
Seine
Paris
63
6569
New
Multinationals
118
Shows co-agglomeration of BS and multinational firms
3
7
11
Empirical model
• Pr(new multinational = 1) = f(business services,
firm characteristics, region/industry/time controls)
• Firm controls: size, productivity
• Region controls: agglomeration (3-digit industry
employment in region / total 3-digit industry emp.),
dummies for Port and International Airport,
multinational presence
• Time, departement, three-digit industry dummies
• Estimated using complementary log-log model
(probit for robustness)
Baseline results
No Colony
0.88***
(3)
No Common
Language
0.95***
Closed to BS
1.34***
(0.2)
1.3***
(0.2)
1.24***
(0.2)
1.25***
(0.3)
1.5***
Multinationals_Regions
(0.08)
-0.35***
(0.09)
-0.2
(0.1)
-0.31**
(0.1)
-0.6**
Multinationals_Industry
(0.13)
-0.55***
(0.14)
-0.5***
(0.13)
-0.53***
(0.2)
-0.86***
Labour Productivity
(0.1)
0.28***
(0.1)
0.3***
(0.1)
0.32***
(0.1)
0.57***
Scale
(0.09)
0.28***
(0.09)
0.35***
(0.1)
0.36***
(0.16)
0.55***
Agglomeration
(0.05)
-0.002
(0.06)
-0.008
(0.05)
-0.01
(0.06)
-0.006
Nb of observations
Predicted Probability
(0.01)
5184
0. 13***
(0.01)
5115
0. 09***
(0.01)
5011
0. 1***
(0.01)
3707
0.03***
(0.009)
0.09***
(0.02)
(0.008)
0.08***
(0.02)
(0.009)
0.09***
(0.02)
(0.005)
0.05***
(0.01)
Effective Business Services
Nb Local Affiliates
Business Services (Marginal effect)
(1)
(2)
All Countries
0.8***
(4)
Note: All specifications include constant, time, region and 3-digit industry fixed effects. In all specifications standard errors are clustered at the region-industry level.
Summary
• Local services matter particularly when the host
country market is closed to trade in services
• Internationalisation linked to size of “network”
• Do firms with large internal network also internalize
services provision?
7:
Business Services and New Multinationals – Including Interactions
Effective Business Services
Nb Local Affiliates
EBS*Nb Local Affiliates
(1)
All
Countries
(2)
No
Colony
(3)
No Common
Language
(4)
Closed to
BS
1.05***
(0.2)
2.2***
(0.17)
-0.2***
(0.03)
1.14***
(0.2)
2.3***
(0.2)
-0.24***
(0.04)
1.2***
(0.2)
2.3***
(0.17)
-0.25***
(0.03)
1.58***
(0.2)
2.7***
(0.23)
-0.27***
(0.04)
Robustness
• Additional estimations
– Excluding Ile-de-France
– Only Ile-de-France
– Distance weighted measure of services availability
(using inverse of the road distance as weight)
provide similar results
Extension
• Endogeneity?
– Control for various time varying firm and region
characteristics
– Plus fixed effects at region and industry level
– New multinationals as identification strategy
• Also turn to IV strategy
– Instruments are
• historic information on 1968 population size in region
IV regressions
Effective Business Services
Nb Local Affiliates
EBS*Nb Local Affiliates
(1)
All
Countries
(2)
No Colony
(3)
No Common
Language
(4)
Closed to
BS
0.05**
0.04
0.05**
0.021
(0.02)
(0.02)
(0.02)
(0.02)
0.25***
0.24***
0.27***
0.16***
(0.03)
(0.03)
(0.03)
(0.03)
-0.01*
-0.01**
-0.02***
-0.01
(0.007)
(0.008)
(0.007)
(0.007)
cannot reject H0 of exogeneity of regressors
Conclusion
• Local availability of services eases firm’s process
of investing abroad / become multinationals
• In particular for “small” multinationals
• In particular in countries that are relatively closed
to trade in services
• Highly policy relevant as services increase in
importance world-wide