The paper studies the correlations between FDI in services and manufacturing efficiencies in host countries. First a theoretical analysis is presented on the direct and indirect channels through which FDI in services enhances manufacturing efficiencies in host countries. Then the forward linkages and backward linkages between FDI in services and manufacturing sector in host countries are tested empirically using China’s industrial panel data. We find that FDI in services has positive forward and backward linkage effects on China’s manufacturing sector, with forward linkages stronger than backward linkages, and the wholesale, retail, trade and restaurant sector has the strongest linkage effects.