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 Also management literature on supply-chain-management

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

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

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

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 (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.

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?

Business Services and New Multinationals – Including Interactions 7: 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)

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

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

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

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