Exports and Foreign Direct Investment: Theory and Evidence for Services Firms *

Abstract

This paper analyses firms’ choice of how to serve foreign markets in services. Using administrative firm-destination data from Sweden, we document some key facts that contradict workhorse models in international trade. First, the productivity pecking order of exporters and multinationals may not apply to services. Second, firms simultaneously export and sell services via foreign affiliates to the same market. Third, most services exporters are also goods exporters and almost half of all services exporters have their main activity in manufacturing. To explain these stylised facts, we develop a model where services are credence products. Consumers learn about the products from using them and producers build firm-specific reputation which generates economies of scope. We bring the model to Swedish micro data. Our gravity-based estimations support the credence product explanation and also suggest that the proximity concentration trade-off may not apply to services. JEL Codes: D21, D22, F12, F23.