How does upstream service liberalization benefit downstream manufacturing firms’ emissions reduction performance?

Unlike the fragmented global division of labor in manufacturing, the globalization of services has continued to proceed apace. While the literature has extensively investigated the economic effects of service liberalization, it has not paid enough attention to its environmental performance. Based on input-output tables that distinguish different types of firm ownership, this paper analyzes the link between upstream service liberalization and the carbon emissions of downstream domestic-owned manufacturing firms (DMFs) relying on service inputs. Our results show that upstream service liberalization can significantly reduce the carbon emissions of DMFs. When distinguishing among different types of services, sources of demand for final products, OECD and non-OECD economies, and pollution intensities, the carbon emission reduction effect of upstream service liberalization exhibits a slight heterogeneity. The mechanism test indicates that upstream service liberalization mainly inhibits the expansion of carbon emissions by DMFs through the energy substitution effect and technology spillover effect. Moreover, the extended analysis emphasizes that the industrial chain linkages between DMFs and foreign-owned firms, as well as DMFs and overseas firms, can further enhance the carbon emission reduction effect of upstream service liberalization. Our findings reveal the environmental benefits of service liberalization and highlight the significance of strengthening industrial chain linkages among countries to jointly cope with global climate change.