Service sector regulation and exports: Evidence from Spain

Rafael Doménech, Mónica Correa-López

Exporting goods requires services. This column discusses new evidence showing that the improvement in services regulations that took place over the 1990s and 2000s in Spain substantially increased the volume of exports of manufacturing firms, especially of large corporations.

During the crisis, recommendations to improve market functioning in advanced economies have ranked consistently high in the policy portfolio of international institutions (OECD 2014, Buti and Padoan 2013). Among the guidelines, the removal of anti-competitive regulations in the provision of key services that are inputs to other stages of production may be especially relevant to firm performance. By reducing input prices or, more generally, by improving the negotiated terms and conditions of exchange between service suppliers and manufacturing producers, service sector deregulation may deliver a pro-competitive cost effect. This would be particularly evident where the competitiveness of firms is most relevant; namely, in foreign markets. We have quantified the impact of the improvement in services regulations on the volume of exports of manufacturing firms by focusing on the case of Spain (Correa-López and Doménech 2014).

The services regulations across the OECD

The study of the effects of anti-competitive service sector regulation on economic performance has gained recent attention in the literature. Within this framework, the new studies have focused on the impact of service regulation on downstream activities, especially on manufacturing (e.g., Barone and Cingano 2011a and 2011b, Arnold et al. 2011, Bourlès et al. 2013). For example, Barone and Cingano (2011a) find that countries with lower service regulation experience faster value added, productivity, and export growth in manufacturing industries that use services more intensively. That is, service sector regulation influences the pattern of specialization and trade.

To facilitate the study of the economic consequences of an anti-competitive regulatory framework in services, the OECD has produced a quantitative measure of its knock-on effects. The OECD Regulation Impact Indicator (RII) combines country-specific information on both the level of regulation in various service activities and the extent and composition of service dependence across manufacturing to produce an indicator that is specific to each manufacturing industry. Figure 1 illustrates the variation of the RII of four manufacturing sectors for a sample of 20 OECD countries. Note that a higher value of the indicator captures higher potential costs of anti-competitive service regulation. Albeit the extent and composition of service dependence may vary somewhat across advanced economies, the figure shows that Spain is one of the countries that most improved its services regulations from 1991 to 2007.

Figure 1. The OECD Regulation Impact Indicator, selected manufacturing sectors, 1991-2007

Aside from the deregulatory effort, there is another reason why Spain is an interesting case to focus on. In the decade before the crisis, the Spanish economy recorded a remarkably stable share of exports in world trade and in terms of its GDP at the back of an unprecedented expansion of construction and real estate activities that drew on a large quantity of domestic resources and underpinned competitiveness losses. Service sector deregulation may have held the key to support export performance during the boom years.

Database

The source of firm-level data is the Survey on Business Strategies, an annual survey conducted by the Fundación SEPI that provides detailed information on manufacturing companies since 1990. In an attempt to evaluate whether the impact of deregulation on the volume of exports varies with firm size, we work with two separate samples of exporters: 647 large firms (over 200 employees) and 848 SMEs (10 to 200 employees) for the period 1991-2008. Since the database is very rich at the firm level, the dependent variable is real exports.1 Finally, our regulatory measure combines information on the ex-ante restrictions to competition in the markets for energy, transport, communications and professional services (OECD Non-Manufacturing Regulation database) and the service dependence by manufacturing sector (OECD Input-Output database).

In addition to the regulatory measure, our model explains the volume of foreign sales in terms of a rich set of firm attributes, including TFP, size, capital intensity and financial health (see, e.g., Berman and Héricourt 2010, Minetti and Zhu 2011), while it also accounts for the role of the lagged dependent variable.

Results

We find a negative and significant effect of anti-competitive regulation in the provision of services on the volume of exports of large manufacturing firms. The magnitude of the effect is sizeable, with an estimated baseline elasticity of exports to regulation of -0.43%. Furthermore, we present evidence supporting the notion that being a multinational corporation reinforces the positive effect of service sector deregulation on export volumes, when the extra benefit of deregulation reaches 0.26% in elasticity terms.

For the case of SMEs, the beneficial effect of deregulation appears weaker since the impact of the aggregate regulatory measure on exports fails to reach statistical significance. However, if we consider each regulated service input separately, we find that reducing anti-competitive regulation in the provision of energy increases the volume of SMEs' exports, with an estimated elasticity that can reach -0.21%.

To have a sense of the quantitative effect of service sector deregulation in Spain, we carry out a number of simulations on our baseline estimation. For large corporations, we find that large firms increased their volume of exports by an average of 49% as a result of deregulation, such that the industries that benefited the most were typically more dependent on service inputs. Additionally, we have calculated the potential firm-level export gains from Spain’s adoption of the ‘best practice’ regulatory framework, that is, the average of the three lowest levels of regulation by service category observed across the OECD in 2007. According to our results, the adoption of the ‘best practice’ regulation would have increased exports by an average of 18%, with a range of variation that spans from 14.8% (electrical and optical equipment) to 23.7% (other non-metallic mineral products). The recent outstanding performance of Spanish exports might be partly explained by further improvements in service sector regulations taking place after 2007.2

Concluding remarks

Growing evidence suggests that regulatory barriers to competition in the markets for inputs matter for the performance of downstream firms. In a panel study of firm-level data from Spanish manufacturers, we find that reducing anti-competitive regulation in the provision of upstream services has a positive and sizeable effect on the volume of exports of downstream firms. Our estimates indicate that deregulation is beneficial to the export performance of large firms, especially if they are foreign-owned multinationals, while the evidence for SMEs is weaker. Hence, firm characteristics are relevant for the impact of regulation on export volumes. Intuitively, large exporters may be able to negotiate better input prices or, more generally, better terms and conditions with suppliers in the face of a more competitive input market environment, which may raise large firms' ability to compete internationally. An economic policy lesson is that SMEs may be at a relative disadvantage to fully exploit the benefits of service deregulation, highlighting the importance of firm growth.

References

Arnold, J M, B S Javorcik, and A Mattoo (2011), “Does service liberalization benefit manufacturing firms? Evidence from the Czech Republic”, Journal of International Economics 85, 136-146. See also VoxEU.org, 1 October.

Barone, G and F Cingano (2011a), “Service regulation and growth: Evidence from OECD countries”, Economic Journal 121, 931-957.

Barone, G and F Cingano (2011b), “Boosting growth in high-debt times: The role of service deregulation”, VoxEU.org, 6 December.

Berman, N and J Héricourt (2010), “Financial factors and the margins of trade: Evidence from cross-country firm-level data”, Journal of Development Economics 93, 206-217.

Bourlès, R, G Cette, J Lopez, J Mairesse, and G Nicoletti (2013). “Do product market regulations in upstream sectors curb productivity growth? Panel data evidence for OECD Countries”, Review of Economics and Statistics 95, 1750-1768.

Buti, M and G Padoan (2013), “How to make Europe's incipient recovery durable – A rejoinder”, VoxEU.org, 8 October.

Correa-López, M and R Doménech (2014), “Does anti-competitive service sector regulation harm exporters? Evidence from manufacturing firms in Spain”, BBVA Research Working Paper No. 14/13.

Minetti, R and S C Zhu (2011), “Credit constraints and firm export: microeconomic evidence from Italy”, Journal of International Economics 83, 109-125.

OECD (2014), Going for Growth, Paris: OECD.

Footnotes

Using a measure of real exports is important since the combined effect of lower regulation on prices and quantities will tend to understate its impact on nominal values (Barone and Cingano 2011).

2 Although we do not have detailed information to check this hypothesis, recent evidence published by the OECD suggests that the product market regulation environment in Spain has also improved to some extent from 2008 till 2013.