Abstract This article examines the effect of Aid for Trade (AfT) flows on services export diversification in recipient countries. The empirical analysis has relied on a sample of 100 recipient countries (of which 31 least developed countries [LDCs]) over the period 2002–2014, and used the two‐step system generalised methods of moments (GMM) approach. It shows that total AfT as well as its components—AfT for services sectors and AfT for non‐services sectors—exert a positive effect on services export diversification over the full sample. Additionally, over the full sample, there is a positive effect of the cumulative AfT flows over time (for both total AfT flows and its components) on services export diversification. However, findings are different for LDCs and NonLDCs. Specifically, AfT for services sectors exerts a positive effect on services export diversification in both LDCs and NonLDCs, although the magnitude of this positive effect is higher for NonLDCs than for LDCs. Furthermore, the effect of the cumulative AfT flows for services sectors and that of the cumulative AfT flows for services sectors are positively associated with services export diversification in both LDCs, and NonLDCs, with the magnitude of the positive effects being higher in LDCs than in NonLDCs.
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