Services tradeability, trade liberalization and foreign direct investment

The article analyzes a two-country general equilibrium model to examine the role played by services in the world economy. Services play an increasingly important role in the world economy, as observed, for instance, by the growing share in employment, production, exports and foreign direct investment. Firms increasingly delegate costly, knowledge intensive intermediate-stage processing activities in their production processes to specialized outside producers in order to gain cost advantages. Countries generally differ in the extent to which producers in final goods sectors have the opportunity to gain cost advantages by using knowledge intensive producer services. In the article, the authors concentrate on trade patterns between countries that are similar in all respects, except that one country lacks a producer services sector. The authors also develop a general equilibrium model in which a home country and a foreign country both produce a manufactured good and a basic commodity called food.