Does FDI in Manufacturing Cause FDI in Business Services? Evidence from French Firm-Level Data
This paper uses a large French firm-level dataset to evaluate the determinants of location choices in services. In a first step, estimates for four broad services sectors are compared with the estimates for the manufacturing sector in a gravity type of framework. Using a discrete choice model it is found that this framework does fairly well in explaining location choices in services and that the parameter estimates for services are close to the ones for manufacturing. It is then investigated whether the similarity in estimated parameters is due to a complementarity between location choices in manufacturing and in services, in the sense that manufacturing location choices may cause the location of services. A particularly appropriate services sector for this purpose is the business services sector for which input-output linkages with the manufacturing sector are particularly strong. It is found that the downstream demand of French manufacturing firms has a positive effect on the location choice probabilities of French business services firms. This effect is robust to controlling for unobserved determinants of the choice probabilities that may possibly be correlated with the downstream demand variable.
FDI; services; gravity model; discrete choice model; international firms; international trade models and databases
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