1. 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

2. 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
Also management literature on supply-chain-management

3. 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

4. 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)

5. 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

6. 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)

7. 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

8. 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

9. Business Services Firms Multinational Parents
Top five regions
Region
Business Services Firms
Multinational Parents
New Multinationals
Nord
1058
Val de Marne 13
Rhone 2
Bouches du Rhone
1174 3
1325 15
Hauts de Seine
2886 63 7
Paris
6569
118 11
Shows co-agglomeration of BS and multinational firms

10. 96 departements
Paris, Marseille (bouches du rhone), Lyon (Rhone), Lille (Nord)

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)

12. Baseline results (1) (2) (3) (4) All Countries No Colony
(1)
(2)
(3)
(4)
All Countries
No Colony
No Common Language
Closed to BS
Effective Business Services
0.8***
0.88***
0.95***
1.34***
(0.2)
(0.3)
Nb Local Affiliates
1.3***
1.24***
1.25***
1.5***
(0.08)
(0.09)
(0.1)
Multinationals_Regions
-0.35***
-0.2
-0.31**
-0.6**
(0.13)
(0.14)
Multinationals_Industry
-0.55***
-0.5***
-0.53***
-0.86***
Labour Productivity
0.28***
0.3***
0.32***
0.57***
(0.16)
Scale
0.35***
0.36***
0.55***
(0.05)
(0.06)
Agglomeration
-0.002
-0.008
-0.01
-0.006
(0.01)
Nb of observations
5184
5115
5011
3707
Predicted Probability
0. 13***
0. 09***
0. 1***
0.03***
(0.009)
(0.008)
(0.005)
Business Services (Marginal effect)
0.09***
0.08***
0.05***
(0.02)
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.

13. 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?

14. Business Services and New Multinationals – Including Interactions7:
Business Services and New Multinationals – Including Interactions
(1)
(2)
(3)
(4)
All Countries
No Colony
No Common Language
Closed to BS
Effective Business Services
1.05***
1.14***
1.2***
1.58***
(0.2)
Nb Local Affiliates
2.2***
2.3***
2.7***
(0.17)
(0.23)
EBS*Nb Local Affiliates
-0.2***
-0.24***
-0.25***
-0.27***
(0.03)
(0.04)

15. Robustness Additional estimations provide similar results
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

16. Extension Endogeneity? Also turn to IV strategy
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

17. IV regressions cannot reject H0 of exogeneity of regressors (1) (2)
(1)
(2)
(3)
(4)
All Countries
No Colony
No Common Language
Closed to BS
Effective Business Services
0.05**
0.04
0.021
(0.02)
Nb Local Affiliates
0.25***
0.24***
0.27***
0.16***
(0.03)
EBS*Nb Local Affiliates
-0.01*
-0.01**
-0.02***
-0.01
(0.007)
(0.008)
cannot reject H0 of exogeneity of regressors

18. 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