This paper contributes to the debate on the development potential of South-South trade in services. It represents the first attempt to identify key features governing the South-South dimension of services. Services trade between developing countries is predominantly regional and may reflect an increasing tendency to incorporate disciplines to liberalise services trade in regional agreements. It is estimated that cross-border South-South exports currently represent around 10 percent of world services exports. The bulk of developing countries exports is destined to developed countries markets save in the case of developing Asian countries whose services export markets are predominantly within the region. The results suggest that here is further scope for increasing developing countries services exports in general and services trade between developing countries in particular.
The paper also shows that the gravity model can successfully be applied to trade in services using FDI stocks in services sectors as a proxy for trade in services through mode 3. The analysis points to the importance of policy barriers in hindering trade, and implies that countries could increase mode 3-related trade in services across all sectors by relaxing restrictions on foreign establishment. Finally, one important finding is that the impact of lifting restrictions on performance may increase more than proportionally with the scale of the liberalisation measure. Our results suggest that if services sectors are closed to foreign competition, the improvement of their performance requires a major rather than a minor or moderate liberalisation effort. More research is needed to further assess whether a courageous liberalisation effort is required for notable improvements in outcomes, which may particularly benefit goods exports of less developed countries.