Analysing the contribution of business services to European economic growth

Kox, Henk L.M. and Rubalcaba, Luis (2007): Analysing the contribution of business services to European economic growth.

Abstract

The sector business services contributes directly and indirectly to aggregate economic growth in Europe. The direct contribution comes from the sector’s own dynamism. Though the business-services industry appears to be characterised by strong cyclical volatility, there was also a strong structural growth. Business services actually generated more than half of total net employment growth in the European Union since the second half of the 1990s. Apart from this direct growth contribution, the sector also contributed in an indirect way to economic growth by generating knowledge and productivity spill-overs for other industries. The knowledge role of business services is reflected in its employment characteristics. The business-services industry created spill-overs in three ways: original innovations, knowledge diffusion, and the reduction of human capital indivisibilities at firm level. The share of knowledge-intensive business services in the intermediate inputs of the total economy has risen sharply in the last decade. Firm-level scale diseconomies with regard to knowledge and skill inputs are reduced by external deliveries of such inputs, thereby exploiting positive external scale economies. The process goes along with an increasingly complex social division of labour between economic sectors. The European business-services industry itself is characterised by a relatively weak productivity growth. Does this contribute to growth stagnation tendencies à la the so-called “Baumol disease”? The paper argues that there is no reason to expect this as long as the productivity and growth spill-overs from business services to other sectors are large enough. Finally, the paper concludes by suggesting several policy elements that could boost the role of business services in European economic growth. This might to achieve some of the ambitious Lisbon goals with respect to employment, productivity and innovation.

• Item Type: MPRA Paper
• Institution: College of Europe
• Language: English
• Keywords: business services; structural change; economic growth; Europe; services; productivity
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O52 - Europe; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior; L - Industrial Organization > L8 - Industry Studies: Services > L84 - Personal, Professional, and Business Services; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights; L - Industrial Organization > L8 - Industry Studies: Services

References

Aiginger, K. (2001), “Speed of change and growth of manufacturing”, in: M. Peneder et al., Structural Change and Economic Growth, WIFO, Vienna. Antonelli, C., 1999. The Micro Dynamics of Technological Change. Routledge, London. Arnold, J., B.S. Javorcik and A. Mattoo, 2006, Does services liberalisation benefit manufacturing firms? CEPR Discussion Paper 5902, Centre for Economic Policy Research, London. Autor, D., F. Levy and R. Murnane, 2003, The skill content of recent technological change: an empirical exploration, Quarterly Journal of Economics, 118 (4), pp. 1279-1333 Baker (2007), The impact of business-services use on client industries: evidence from input-output data, in: L.Rubalcaba and H.Kox, eds., Business services in European economic growth, Palgrave MacMillan, forthcoming. Baldwin, R. (2006), Globalisation: the great unbundling(s), contributed paper to project Globalisation Challenges for Europe and Finland, Prime Minister’s Office, Helsinki, 20 September 2006. Baumol, W. et al. (1989), Productivity and American leadership. The long view. MIT Press, London. Baumol, W. (1967). ”Macroeconomics of unbalanced growth: The anatomy of urban crisis”. American Economic Review , June 1967 (57), 415-426. Beyers, W.B. and D.P. Lindahl, 1996, Explaining the demand for producer services: is costdriven externalisation the major factor?, Papers in Regional Science, 75 (3), 351-74. Blind, K., et al. (2003), Patents in the Service Industries – Final Report. Fraunhofer Institut für Systemtechnik und Innovationsforschung, Karlsruhe. Boden, M., and I. Miles, eds., (2000), Services and the Knowledge-Based Economy. Continuum, London. Browning, H. and J. Singelmann, 1978. The transformation of the US labor force - the interaction of industry and occupation, Politics a & Society, vol. 8, no. 3/4. Burda, M. and B. Dluhosch (2000), Cost competition, fragmentation and globalization, CESifo Paper Nr. 393, Center for Economic Studies & IFO Institute for Economic Research, München. Camacho, J.A. and M. Rodriguez (2007), Integration and Diffusion of KIS for Industry Performance, in: L.Rubalcaba and H.Kox, eds., Business services in European economic growth, Palgrave MacMillan, forthcoming. José A. Camacho and Mercedes Rodríguez Coe, N.M., 2000, The externalisation of producer services debate: the UK computer services sector, The Services Journal, 20 (2), 64-81. Clark, C. (1938), Australian economic progress against a world background, J. Fisher Lecture. Collechia, A. (2001), The impact of Information Communications Technology on output growth. STI Working Paper. OECD, Paris Crespi, F. (2007) IT services and productivity in European industries, in: L.Rubalcaba and H.Kox, eds., Business services in European economic growth, Palgrave MacMillan, forthcoming. CSES (2001), Barriers to trade in business services - Final report, Report commissioned by the European Commission, Centre for Strategy & Evaluation Services / European Commission, Brussels. De Bandt, J., 1999, The concept of labour and competence requirements in service economy, The Services Journal, 19 (1). De Bandt, J., 1995, Indirect productivity of business services, through non-material investments, E. Felli et al. (eds), The service sector: productivity and growth, Physica Verlag, Heidelberg, 157-173. Drejer, I. (1999), Technological change and interindustrial linkages: introducing knowledge flows in input-output studies, PhD dissertation, Aalborg University, Aalborg. Eaton, B.C. and R.G. Lipsey, 1989, Product differentiation, in: R. Schmalensee and R. Willig (eds), Handbook of industrial organization, vol. I, North Holland, Amsterdam. EC (2004), Innovation in Europe - results for the EU, Iceland and Norway, data 1998-2001, 2004 edition, European Commission / Eurostat. EC (2003), ‘The competitiveness of business-related services and their contribution to the performance of European enterprises’. Communication from the Commission, COM(2003) 747. European Commission, Brussels. EC (2003a), Third European Report on Science and Technology Indicators - Towards a Knowledge-Based Economy. European Commission, Luxembourg. EC (2002a), Europe's response to World Ageing: a contribution of the European Commission to the 2nd World Assembly on Ageing, COM(2002) 143 FIN, Brussels. EC (1998), The contribution of business services to industrial performance: a common policy framework, Communication from the Commission, COM(1998)534final, EU, Brussels. European Commission Services (1997), Industrial competitiveness and business services: report to the Industry Council. Working Document IIIA.0/OGD(97)pw//bs/workpap.EU, Brussels. ECB Task Force of the Monetary Policy Committee of the European System of Central Banks (2006), Competition, productivity and prices in the euro area services sector, Occasional Paper No. 46, ECB, Frankfurt. ECORYS-NEI (2004), Business Services: Contribution to Growth and Productivity in the European Union, technical report prepared for the European Commission, Enterprise Directorate-General, Brussels Edwards, B. and R. Starr (1987), A note on indivisibilities, specialisation and economies of scale, American Economic Review, 77 (1), pp. 192-194. Eustace, C. (2000), The intangible economy - impact and policy issues, Report European High Level Expert Group on the Intangible Economy, European Commission, Brussels. Feenstra, R.C. and G.H. Hanson, 1999, The impact of outsourcing and high-technology capital on wages: estimates for the United States, 1979-1990, Quarterly Journal of Economics, 114 (3), 907-940. Fisher, A.G.B. (1939), Production, primary secondary, tertiary, in: Economic Record, vol.15 , June, 24-38. Fixler, D. and Siegel, D. (1999), Outsourcing and productivity growth in services, Structural Change and Economic Dynamics, 10, 177-94 Francois, J. (1990), Producer services, scale and the division of labour, Oxford Economic Papers, 42, pp. 715-729. Francois, J. and K. Reinert (1995), The role of services in the structure of production and trade: stylised facts from a cross-country analysis, CEPR Discussion Paper No. 1228, CEPR, London. Gadrey, J. and Gallouj, F. (1998) The provider-customer interface in Business and Professional Services. The Services Industries Journal. Vol. 18 (2), pp. 2-15. Greenhalgh, C. and M. Gregory (2000), Labour productivity and product quality: their growth and inter-industry transmission in the UK 1979-90, in: Barrell, R., Mason, G., O’Mahoney, M., (Eds.), Productivity, Innovation and Economic Performance. Cambridge University Press, Cambridge. Griliches, Z. (1979), Issues in assessing the contribution of research and development to productivity growth. Bell Journal of Economics, 10, 92-116. Grossman, G. and E. Rossi-Hansberg (2006), The rise of offshoring: it's not wine and cloth anymore, mimeo Princeton University, Lecture at Jackson Hole, August 25, 2006. Grubel, H.G and M.A.Walker, 1991, The dominance of producers services in the US economy, Banca Nazionale del Lavoro Quarterly Review, vol. 1976, pp. 57-68. Grubel, H.G., 1995, Producer services: their important role on growing economies, in: E. Felli et al. (eds), The service sector: productivity and growth, Physica Verlag, Heidelberg, pp. 11-41. Guerrieri, P., B Maggi, V. Meliciani, and P.C. Padoan, 2005, Technology diffusion, Services, and Endogenous Growth in Europe: Is the Lisbon Strategy Useful?, IMF Working Paper WP/05/103, IMF Washington. Hempell, T. (2002), What’s spurious, what’s real? Measuring the productivity impacts of ICT at firm-level. ZEW Discussion Paper 02-42. Center for European Economic Research, Mannheim. Hicks, J. (1973), Capital and time, a neo-Austrian theory, Clarendon Press, Oxford. Hill, T.D. (1977) “On goods and services”. The Review of Income and Wealth, vol. 4. Hughes, A. and Wood, E. (1999), Rethinking innovation comparisons between manufacturing and services: the experience of the CBR SME surveys in the UK. Working paper, no. 140. ESRC Center for Business Research, Cambridge University, Cambridge. Katsoulacos, Y., Tsounis, N., 2000. Knowledge-intensive business services and productivity growth: the Greek evidence, in: Boden, M., Miles, I. (Eds.), Services and the Knowledge-Based Economy. Continuum, London. Klodt, H., R. Maurer and A. Schimmelpfennig, 1997, Tertiarisierung in der deutsche Wirtschaft: Schwerpunkstudie zur Strukturberichterstattung fur den Bundesminister fur Wirtschaft, Institut fur Weltwirtschaft, Kiel. Kok, W. (2004) Facing the challenge: The Lisbon strategy for growth and Employment. Report from the High Level Group chaired by Wim Kok. November 2004. European Commission Kox, H. (2004), The contribution of business services to aggregate productivity growth, in G. Gelauff et al. (eds), Fostering productivity growth – patterns, determinants and policy implications, Contributions to Economic Analysis Series No. 263, Elsevier Science, Boston. Kox, H., 2002, Growth challenges for the Dutch business services industry: international comparison and policy issues, De Swart / CPB (ISBN 90-5833-095-8), The Hague. Kox, H., 2001, Sources of structural growth in business services. CPB Research memorandum No. 12, The Hague. (http://www.cpb.nl/eng/pub/cpbreeksen/memorandum/12/memo12.pdf) Kutscher, R.E. (1988) Growth of services employment in the United States, in: Guile, B.R. and Quinn, J.B. (Eds.), Technology in services: policies for growth, trade and employment. National Academy Press, Washington DC. Leiponen, A., (2001), Knowledge Services in the Innovation System. ETLA / SITRA, Helsinki. Lesher, M. and H. Nordås (2006), Business services, trade and costs, TD/TC/WP(2006)32, OECD, Paris. Leeuwen, G., van, and H. Van der Wiel (2003), Do ICT spillovers matter? – Empirical evidence for the Netherlands, CPB Discussion Paper 26, CPB, The Hague. Lewis, J. (1988) Services post industrial transformation or flexible production, in: Marshall, J.N. (Ed.), Services and uneven development. Oxford University Press, Oxford. Maddison, A., 2004, Macromeasurement Before and After Colin Clark, Australian Economic History Review, vol. 44(1), pp. 1-34. Marsh, P. (2007), A new twist to India IT outsourcing, Financial Times, January 31st, p. 7. Martini, M. (1990) Implicazioni statistiche dell'analisi dei servizi resi alle imprese. Criteri di identificazione e classificazioni. Internal Document of Eurostat, Luxembourg. McCarthy, J.C., 2002, 3.3 million US service jobs go offshore, Techstrategy Brief, Forrester Research Inc, Nov.2002. Meade, J.E., 1955, The theory of customs unions, North Holland, Amsterdam. Miles, I. (2007), Business Services and their Users: a literature review, in: L.Rubalcaba and H.Kox, eds., Business services in European economic growth, Palgrave MacMillan, forthcoming. Müller, E. and R. Zenker (2000), The contribution of knowledge-intensive business services to regional innovation capacities. Fraunhofer Institute, Karlsruhe. Nordhaus, W. (2002), Productivity growth and the new economy. Brookings Papers on Economic Activity, 2002(2). Brookings Institution, Washington. O’Mahony, M and B. van Ark (2003), EU productivity and competitiveness: an industry perspective. Can Europa resume the catching-up process? European Commission, Brussels. OECD (2003), Science, Technology and Industry Scoreboard, 2003, OECD Paris. OECD (1999a), OECD (1999a) Strategic business services, OECD, Paris. Oosterhaven, J. and A.R. Hoen, 1998, Preferences, technology, trade and real income changes in the European Union - an intercountry decomposition analysis for 1975-1985, The Annals of Regional Science, 32, 505-524. Oulton, N. (2001), Must the growth rate decline? Baumol’s unbalanced growth revisited. Oxford Economic Papers, 53, 605-627 Pain, N. and F. Jaumotte (2005), Innovation policies: innovation in the business sector - evidence on innovation determinants from the Community Innovation Survey, ECO/CPE/WP1(2005)2/ANN4, OECD, Paris Peneder, M., S. Kaniovski and B. Dachs, 2000, External services, structural change and industrial performance, Enterprise DG Working Paper, European Commission, Brussels. Perry, M., 1992, Externalisation and the interpretation of business sector growth, The Service Industries Journal, 12 (1), pp. 1-17. Perry, M. (1990) Business services specialization and regional economic change, Regional Studies, 24, 195-209. Pilat (2007), Productivity in business services, in: L.Rubalcaba and H.Kox, eds., Business services in European economic growth, Palgrave MacMillan, forthcoming. Pilat, D. and A. Wölfl (2005), Measuring the interaction between manufacturing and services, STI Working Paper 2005/5, OECD, Paris. Pilat, D. and F. Lee (2001), Productivity growth in ICT-producing and ICT-using industries: a source of growth differentials in the OECD?, STI Working Papers, 2001/14. OECD, Paris Rajan, A. (1987) Services: the second industrial revolution? Butterworths, London. Rubalcaba, L. and H. Kox, eds. (2007), Business services in European economic growth, Palgrave MacMillan, forthcoming. Rubalcaba, L. (2006), The European service economy: new challenges and policy implication, Elgar Publishing. Rubalcaba, L. (1999), Business services in European industry. Growth, employment and competitiveness, European Commission, Brussels. Sapir, A., P. Buigues and P.Jacquemin, eds. (1995). The coherence of European Policies on Trade Industry and Competition, introduction Edward Elgar. Savona, M. and A. Lorentz, 2006, Demand and technology determinants of structural change and tertiarisation – an input-output structural decomposition analysis for four OECD countries, BEPA Document de Travail 2006-01, Université Louis Pasteur, Strasbourg. Stigler, G.J, 1951, The division of labor is limited by the extent of the market, Journal of Political Economy, 59. Triplett, J. and B.Bosworth (2004), Productivity in the U.S. Services Sector, Brookings Institution, Washington. Tschetter, J., 1987, Producer services: why are they growing so rapidly?, Monthly Labor Review, 110 (Dec.), 31-40. Windrum, P. and M. Tomlinson (1999), Knowledge-intensive services and international competitiveness: a four country comparison, Technology Analysis and Strategic Management, 11 (3), pp.391-408. Vernon, R. (1966), International investment and international trade in the product cycle, Quarterly Journal of Economics, vol. 80, 190-207. Van Welsum, D. and G. Vickery (2006), “The share of employment potentially affected by offshoring – an empirical investigation,” OECD Working Paper DSTI/ICCP/IE(2005)8, Paris. Viner, J., 1950, The custom unions issue, Stevens and Son, London. Van Welsum, D. and G. Vickery (2006), “The share of employment potentially affected by offshoring – an empirical investigation,” OECD Working Party on the Information Economy Report DSTI/ICCP/IE(2005)8, Paris. Van Welsum, D. and X. Reif (2005), “Potential Offshoring: Evidence from Selected OECD Countries,” Brookings Trade Forum 2005, 165-194. Wölfl, A., 2004. The interaction between manufacturing and services: some preliminary findings. DSTI Working Paper DSTI/EAS/IND/SWP/AH(2004)7. OECD, Paris. Wölfl, A. (2003), Productivity growth in service industries: an assessment of recent patterns and the role of measurement, STI Working Paper 2003/7, OECD, Paris. Zambon, S. et al., 2003, Study on the measurement of intangible assets and associated reporting practices, prepared for the European Commission (DG Enterprise), Ferrara/Melbourne/New York.