Services Liberalization and Product Variety of Manufacturing Firms

This paper investigates the impact of services sector liberalization on product innovation of downstream manufacturing firms. Leveraging firm-product panel data from India and employing a shift-share research design, I find that services liberalization significantly increases firms’ product portfolio. Allowing foreign investments in the banking sector decreases firm’s credit-constraint and increases the amount of interest payments on short-term loans. This shows that services liberalization reduces firms’ fixed costs of product innovation. Firms diversify into input-similar industries which changes the distribution of sales across products with the core product experiencing the most pronounced decline in the sales share.

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