Intra-industry trade is driven by product differentiation and economies of scale. Business services are important for developing and marketing new varieties. Yet, their role for product differentiation has attracted little attention in the literature. This paper contributes to filling this gap by estimating trade costs in business services and exploring the relationships between such costs and the Grubel-Lloyd index of intra-industry trade. High trade costs in business services are associated with a low level of product differentiation in downstream industries, particularly in the motor vehicle industry. Open markets in business services could help industrial upgrading in developing countries.

JEL Classification: F12