Sources of Comparative Advantage in Services: Institution vs. Social Capital

Abstract

Previous studies that have identified the impacts of institutions or cultural traits on comparative advantage focused on goods trade, but not services trade. In contrast to the rapid increase in trade in services, empirical examination on sources of comparative advantage in services trade remains limited. This paper attempts to fill this gap by investigating empirically the impacts of institution as well as social capital on comparative advantage in services trade. Services are exposed to relatively more pre-choice risks than goods, because it is difficult to obtain information on the quality of services before the consumer decides to purchase. In addition, trade in services involved in global value chains possibly takes on the risks of contract breach by other firms along the same value chains. As a result, the transaction risks for trade in services are higher than for trade in goods. Using the World Input Output Database, we estimate the importance of social capital for comparative advantage in services. We find that countries with more social capital tend to specialize in the production of contract-intensive services. We also find that social capital rather than institution matters for comparative advantage in services.