A new study is putting a powerful question at the center of China’s industrial transformation: can opening the service economy to international competition help factories move into more sophisticated, higher-value activities? In research published in Humanities and Social Sciences Communications, economists M. Zhang and Y. Zhou examine how service trade liberalization may influence manufacturing value chain upgrading, using China as a large-scale quasi-natural experiment. The topic reaches far beyond trade statistics. It concerns the hidden infrastructure of modern production—finance, logistics, software, engineering, consulting, telecommunications and business services—that increasingly determines which countries design products, control technologies and capture profits, rather than merely assembling goods.
For decades, manufacturing competitiveness was often associated with physical factories, abundant labor and access to raw materials. That model is changing rapidly. A smartphone, electric vehicle or advanced machine may cross several borders before reaching a customer, while its most valuable components—industrial software, patents, product design, data analysis, branding and supply-chain coordination—are frequently delivered as services. Manufacturing and services are therefore no longer separate sectors in the traditional sense. A factory depends on transport platforms, cloud computing, insurance, research laboratories, technical maintenance and professional advice. When these services become cheaper, more efficient or more internationally connected, the structure of manufacturing itself can change.
The study’s central concept, manufacturing value chain upgrading, describes a movement toward activities that generate greater productivity, technological sophistication or economic value. Upgrading can occur when firms produce more complex goods, improve quality, develop proprietary technologies, strengthen research and development, or take control of higher-value stages such as design, marketing and after-sales services. It can also involve moving from a narrow role in global production—such as assembling imported components—to a broader position involving innovation, management and integrated supply-chain coordination. Economists often assess these changes through indicators such as productivity, export sophistication, research intensity, product complexity and the domestic value added embedded in exports.
Service trade liberalization refers to policies that reduce restrictions on cross-border service activity. These restrictions can include limits on foreign ownership, licensing barriers, regulatory discrimination, market-access rules and constraints on international data or professional operations. Liberalization does not simply mean importing more services. It can expose domestic providers to new competitors, attract foreign firms, expand access to specialized expertise and connect local companies to international production networks. The resulting pressure can be disruptive, especially for less productive firms, but it may also encourage businesses to adopt better technologies, improve management and invest in capabilities that were previously unavailable or too costly.
Zhang and Zhou use a quasi-natural experiment to investigate whether such policy changes have a causal effect rather than merely appearing alongside industrial progress. In a conventional correlation study, researchers might observe that regions with more open service markets also have more advanced manufacturers. But that pattern could be explained by many other factors: richer cities may both liberalize services and invest more in technology; better-educated workers may attract foreign companies; or governments may open markets precisely because local industries are already improving. A quasi-natural experiment attempts to separate the effect of liberalization from these confounding influences by comparing units exposed to policy variation with comparable units that were less affected.
The analytical logic resembles a controlled experiment, even though researchers cannot randomly assign trade policies to cities or industries. If a reform is introduced at a particular time or applies more strongly to selected locations and sectors, researchers can compare changes before and after the intervention. They can also compare affected firms or regions with carefully selected control groups. Difference-in-differences models are commonly used for this purpose: the estimated effect is the additional change observed among treated units after liberalization, beyond the change occurring in the control group. More advanced specifications may incorporate firm characteristics, industry trends, regional conditions and time effects to reduce the risk that unrelated developments are mistaken for policy impacts.
This method matters because the relationship between open services and manufacturing is theoretically complex. Greater competition may reduce costs and improve access to finance, logistics or technology, enabling manufacturers to upgrade. Foreign service providers may bring knowledge, international standards and connections to global buyers. At the same time, liberalization could intensify competitive pressure on domestic service firms, and its benefits may not be distributed evenly. Large manufacturers with skilled workers and strong balance sheets may absorb new technologies rapidly, while smaller firms may struggle to pay for advanced services or meet international standards. The impact could also differ between coastal and inland regions, technology-intensive and labor-intensive industries, or firms already integrated into global supply chains and those focused mainly on domestic markets.
China provides an especially important setting for examining these dynamics because its manufacturing sector is vast, diverse and deeply connected to global production. The country has moved from an export model heavily associated with low-cost assembly toward industries involving advanced equipment, renewable energy, electric vehicles, digital platforms and sophisticated consumer products. That transition has required more than new factories. It has depended on improvements in transportation, telecommunications, financial systems, research services, industrial design and digital infrastructure. Studying service trade liberalization in this environment can reveal whether the opening of “upstream” service markets helps manufacturers climb the value chain, and whether such effects emerge through productivity, innovation, technology adoption or changes in the organization of production.
The research also speaks to a major policy dilemma. Governments often seek to protect domestic service industries while supporting manufacturing, assuming that restrictions preserve jobs or nurture national champions. Yet excessive protection can leave firms isolated from international expertise and reduce incentives to improve. Liberalization, by contrast, may generate long-term gains while creating short-term adjustment costs. The relevant question is not simply whether markets should open, but how they should open: which services require stronger regulation, how competition should be managed, whether domestic firms need training and financing, and how policymakers can prevent the gains from concentrating in only a few advanced regions or companies. The study’s quasi-experimental framework offers a way to evaluate these trade-offs with evidence rather than slogans.
Its broader significance extends beyond China. Across the world, manufacturing competitiveness is increasingly shaped by intangible inputs that do not appear on a factory floor. A product’s final price may reflect algorithms, patents, certification, data systems, financial engineering and global logistics as much as steel, plastic or electronic components. Countries seeking industrial development therefore face a strategic choice: focus narrowly on expanding physical production, or build the service ecosystems that allow domestic firms to innovate and capture more value. By investigating the link between service-market openness and manufacturing upgrading, Zhang and Zhou place that choice within a measurable economic framework. Their work highlights a potentially decisive lesson for the next era of globalization: the future of manufacturing may depend less on producing more goods than on mastering the services that make advanced goods possible.
Subject of Research: Service trade liberalization and manufacturing value chain upgrading in China
Article Title: Service trade liberalization and manufacturing value chain upgrading: a quasi-natural experiment from China
Article References: Zhang, M., Zhou, Y. “Service trade liberalization and manufacturing value chain upgrading: a quasi-natural experiment from China.” Humanities and Social Sciences Communications (2026). https://doi.org/10.1057/s41599-026-08691-x
Image Credits: AI Generated
DOI: 10.1057/s41599-026-08691-x
Keywords: service trade liberalization, manufacturing, value chain upgrading, China, quasi-natural experiment, international trade, industrial policy, globalization, productivity, innovation
