Location factors of FDI and the growing services economy1

Foreign direct investment (FDI) has increasingly shifted toward the service sector. This change in the industrial composition of FDI and the non‐tradable nature of services may have altered the importance of location factors for investment decisions. To capture potential changes in FDI determinants, a contrasting sectoral analysis is performed. Based on FDI stock data from eight new EU member states for the period 1998–2004, we implement a dynamic panel approach allowing the speed of adjustment to the equilibrium investment level to vary across sectors. Results support our assumption that investment into the service sector, which is characterized by low installation costs, adjusts much faster to its desired level than manufacturing FDI. Thus, government interventions to attract FDI are likely to boost the service sector immediately while having a slower impact on manufacturing FDI. Furthermore, as services are mostly non‐tradable, FDI into this sector is largely based on market‐seeking motives while FDI in the manufacturing sector is also driven by international price competitiveness measured by real unit labour costs.     

Outsourcing and productivity growth in services

Outsourcing from manufacturing firms has fueled some of the service sector's rapid growth. We model the firm's decision to outsource and show that increases in outsourcing may explain part of the increase in the divergence in productivity growth between manufacturing and services. We also analyze the implications of outsourcing for output and productivity growth of service industries. Our findings indicate that it has reduced service sector productivity in the short run. In contrast to earlier work on services (Baumol, W.J., 1967. American Economic Review 57, 415–426. Baumol, W.J., Blackman, A.B., Wolff, E.N., 1985. American Economic Review 75, 806–817), we project that productivity growth in services is likely to increase, once demand growth from manufacturing due to outsourcing subsides.     

STRUCTURAL CHANGE IN A SMALL OPEN ECONOMY: AN APPLICATION TO SOUTH KOREA

This paper develops a dynamic general equilibrium model and studies structural change in a small open economy with two tradable sectors, agriculture and manufacturing, and a non‐tradable sector, services. In addition to obtaining results for a falling employment share of agriculture and a rising share of services, we demonstrate analytically the hump‐shaped share of manufacturing by identifying two countervailing effects: the productivity effect and the Balassa–Samuelson effect. The first effect, arising from differential rates of productivity growth among sectors, increases the share of manufacturing; the second effect, together with low rates of substitution between products, enhances the service sector and eventually draws labour from the manufacturing sector. At the aggregate level, however, the economy maintains a constant rate of growth. We calibrate the model with data from South Korea and find that the calibration fits the country's historical path of structural change.     

Does FDI in manufacturing cause FDI in business services? Evidence from French firm‐level data

Abstract .  This paper uses a large French firm-level data set to evaluate the determinants of location choices in services. In a first step, estimates for four broad services sectors are compared with the estimates for the manufacturing sector. Using a discrete choice model, we find that this framework does fairly well in explaining location choices in services and that the parameter estimates for services are close to the ones for manufacturing. We then investigate whether the similarity in estimated parameters is due to a complementarity between location choices in manufacturing and in services, in the sense that manufacturing location choices may cause the location of services. A particularly appropriate services sector, for this purpose is the business services sector, for which input-output linkages with the manufacturing sector are particularly strong. It is found that the downstream demand of French manufacturing firms has a positive effect on the location choice probabilities of French business services firms. This effect is robust.     

Would a North-South Free Trade Agreement Hurt Unskilled Labor in the North?

I present a simple model to examine the impact of international outsourcing on the welfare of skilled and unskilled labor. In this model, specialized business services are to facilitate manufacturing production, creating additional welfare gains in the presence of positive production externalities. Policies that favor the business service sector contribute to the development of a larger bundle of specialized business services, generating more welfare gains to not only skilled but also unskilled labor. Thus, a country’s unskilled labor is not necessarily worse off with open trade if the country is prosperous in business service provisions.     

Deindustrialization and Trade

This paper extends the Dornbusch–Fisher–Samuelson (1977) model to explain deindustrialization and trade; this extension follows Baumol's (1967) observation on the negative correlation between the size of the service sector and growth. It is shown that trade improves welfare through the exploitation of comparative advantages but accelerates the shift toward services, slowing down the rate of growth. Trade can decrease welfare if manufacturing activities with learning-by-doing move abroad. In this case, some experience is lost and all countries lose.     

The rise of service employment and its impact on aggregate productivity growth

This paper investigates how the employment shift from manufacturing toward service sectors affects the rate of economic growth when services play their role both in intermediate and in final demand. Our model includes as a special case both Baumol’s [Baumol, W.J., 1967. Macroeconomics of unbalanced growth: the anatomy of urban crisis. American Economic Review 57 (3), 415–426] model, in which services are produced only for final consumption, and Oulton’s [Oulton, N., 2001. Must the growth rate decline? Baumol’s unbalanced growth revisited. Oxford Economic Papers 53 (4), 605–627] model, in which services are entirely devoted to intermediate demand. We show that, given that the growth rate of productivity in the service sector is lower than that in the manufacturing sector, both the employment share in manufacturing and the rate of economic growth will decline in the long run irrespective of the size of the elasticity of substitution between labor and service input.     

Manufacturing In Decline? A Matter Of Definition

This paper offers a new approach to the definition of manufacturing activities, placing them in a broader framework to capture the dynamics of manufacturing in the economy. After discussing why in many cases it may bc appropriate to consider producer services and tnanttfacturing industries together, the paper analyzes the development of manufacturing and producer service industries in the United States. We examine the factors leading to the growth of producer services, concluding that unbundling, the shift of some activities (such as legal, accounting, and data processing services) from manufacturing to producer services industries, is an important explanation for this growth. Finally, we discuss the relationship between manufacturing and producer services. Our analysis, based on a broader definition of manufacturing, shows that over the last two decades the U.S. manufacturing base has declined only slightly rather than radically as suggested in many studies.     

Can producer services boost manufacturing growth? Evidence from China's de‐regulation

The impact of producer services on manufacturing growth has long been disputed. Using a unique dataset from the Catalogue for the Guidance of Foreign Investment Industries (CGFII), we construct a set of regulation indicators for each industry in the service sector. Then we explore the effect of upstream producer services, instrumented by regulation indicators, on manufacturing growth. The findings are as follows. First, the development of producer services can effectively promote the growth of manufacturing, and such an effect is stronger in more developed regions. Second, regulations are negatively related to the development of producer services, and among various kinds of regulations, prohibition is the one with the largest marginal effect. Third, consumer services fail to promote manufacturing growth, indicating the irreplaceability of producer services, which also suggests that we should pay more attention to the structure of the service sector.     

Does offshoring of materials and business services affect employment? Evidence from a small open economy

The fear of massive job losses has prompted a fast-growing literature on offshoring and its impact on employment in advanced economies. This article examines the situation for Belgium. It improves the offshoring intensity measure by computing a volume measure of the share of imported intermediates in output, and it is among the first to address both materials and business services offshoring to high wage and low wage countries. Estimations of static and dynamic industry-level labour demand equations augmented by offshoring intensities do not reveal a significant impact of either materials or business services offshoring on total employment for Belgium between 1995 and 2003. This result holds for both the manufacturing sector and the service sector and it proves robust to splitting the manufacturing sector into high technology and low technology industries.     

SENIORITY WAGES AND ECONOMIC GROWTH*

Economies that lack well‐developed markets for mobilizing household savings may, in some instances, grow faster than those that are financially more developed, provided that their labour markets are also characterized by seniority rather than spot wages. This occurs because of a Kaldorian redistribution effect in a model where households have finite‐horizons and where older workers, as an endogenous feature, have higher saving rates.     

A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing?

Recent empirical studies document that the level of resource misallocation in the service sector is significantly higher than in the manufacturing sector. We quantify the importance of this difference and study its sources. Conservative estimates for Portugal in 2008 show that closing this gap, by reducing misallocation in the service sector to manufacturing levels, would boost aggregate gross output by around 12 percent and aggregate value added by around 31 percent. Differences in the effect and size of productivity shocks explain most of the gap in misallocation between manufacturing and services, while the remainder is explained by differences in firm productivity and age distributions. We interpret these results as stemming mainly from higher output-price rigidity, higher labor adjustment costs and higher informality in the service sector.     

Endogenous growth and environmental policy: are the processes of growth and tertiarization in developed economies reversible?

The starting point for this article is the idea put forward by Gadrey (2008, 2010) that environmental problems and a policy of addressing them by introducing an environmental tax could trigger economic contraction and downscaling and a shrinking of the service sector in developed economies. The purpose of this article is to test these hypotheses using an evolutionary simulation model. To this end, we use a model of endogenous growth and structural change into which an environmental dimension is incorporated. The results of our simulations certainly reveal structural change within service industries but no change in the distribution of employment between services and manufacturing. Furthermore, we show that the environmentally desirable stagnation of labor productivity in the capital goods sector is compatible with a largely positive growth trend in the economy as a whole, with the development of knowledge-intensive business services apparently able partially to offset the stagnation of productivity in the capital goods sector. We conclude by emphasizing the need for environmental innovation in service activities and cast doubt on the long-term effectiveness of an environmental tax in the fight against pollution.     

Endogenous phase switch in Baumol's service paradox model

This paper develops a two-sector model that considers Baumol's service paradox. The paper simultaneously incorporates two ideas about technological progress in the model: (1) the consumption of services contributes to human capital accumulation and (2) the production of manufacturing leads to technological progress due to learning-by-doing. Accordingly, productivity growth in both services and manufacturing is endogenously determined. We show that initially, a shift in the employment share toward the services sector decreases the per capita real GDP growth rate, but at some point in time, the shift begins to increase the growth rate. Therefore, we observe an endogenous phase switch from a phase where the employment shift toward services depresses the economy to another where the employment shift promotes the economy.     

Services,innovation and the new economy

Several distinctive stylized facts form the new economy, an information technology service sector organized in network forms of organization, an inflation rate below its fundamentals, an increase in stock market volatility, high rates of economic growth, but apart from a small information technology manufacturing sector low productivity rates. This paper presents a model where the innovation of new service varieties can explain all of these facts. First, productivity gains are no longer realized within but between firms, as the increase in variety increases value-added per employee. Whilst service innovators, such as the information technology manufacturers, get ever more productive, individual service firms will exhibit low productivity. It is this unmeasured sectoral productivity gain, which is the key element in understanding the intrinsic inertia in the price index. Finally, the paper shows that variety in the service sector enables service providers to realize rents, where fluctuations of these rents are the basis of more than proportional changes in the firms' stock market value.     

资源配置与中国非农部门全要素生产率* ——基于制造业和服务业之间资源错配的分析

近年来,经济学家与政策制定者之间逐渐达成共识：有限的资源未能得到优化配置是阻碍发展中经济体生产率水平提升的重要原因。本文以1993-2011年中国制造业和服务业分行业数据为研究样本,从经验层面上系统分析了制造业和服务业之间的资源错配对中国非农部门TFP的影响。本文研究发现：（1）相对于中国制造业TFP的持续改善,服务业的TFP则长期徘徊在低位,二者之间的资源错配程度在进入21世纪后明显加重,造成非农部门TFP近40%的损失;（2）21世纪以来,制造业和服务业间的资源错配绝大部分来源于装备制造业与生产性服务业之间的错配;（3）装备制造业和生产性服务业之间的资本错配普遍高于劳动力错配。本文的引申含义是,现阶段的产业政策目标主要应定位于促进制造业和服务业二者之间的协调发展。     

Did the rising importance of services decelerate overall productivity improvement of Turkey during 2002–2007?

This paper answers the question of what would have been the growth rate of aggregate productivity in Turkey between 2002 and 2007, had it realized China’s rates of productivity growth in agriculture, industry, and services. It does this in a three-sector general equilibrium model calibrated to the Turkish economy over the 2002–2007 period. The main findings are: (i) Turkey would have had much higher aggregate productivity growth over this period if it had experienced China’s service sector productivity growth; (ii) very low productivity growth rates in finance and in the non-market service sector are the main culprits behind Turkey’s weak service-sector performance.     

Growth decomposition bias when accounting for heterogeneous regimes: Evidence from China

When exploring the logic why some economies grow faster than others, previous studies commonly assume that all economies follow a universal growth path. This paper explores the heterogeneity of growth regimes across economies and then investigates the decomposition bias of growth sources in traditional methods. Using a panel data of China's provinces, the empirical results show that a finite mixture model with three classes is best to describe the data, revealing that there are multiple growth regimes across provinces. Also, some provinces switch regimes over time while the others remain stable. Further, neglecting heterogeneous regimes overestimates the importance of factor endowment and underestimates the importance of sector productivity, while it does not greatly influence the importance of of factor market efficiency. In particular, the decomposition bias embodies in physical capital and energy input rather than labor. Our findings indicate that the existing literature may underestimate the contribution of sector productivity. Thus, it is critical to account for heterogeneous regimes when exploring the sources of economic growth.     

商业服务进口、自主研发与制造业企业技术进步

制造业企业技术进步可以通过自主研发与国际技术转移实现。商业服务贸易是包括专利、研发在内的知识密集型服务贸易,是国内企业获得国际技术溢出的主要渠道。利用WIOD数据库计算出我国制造业对商业服务进口的依赖程度,并基于我国工业企业数据库2001-2007年企业面板数据,对商业服务进口和企业自主研发是否促进制造业企业技术进步进行实证研究。结果发现：自主研发和商业服务进口对全要素生产率有显著促进作用;商业服务进口可以促进国内企业自主研发,二者共同促进制造业企业全要素生产率提高。     

Wage bargaining,trade and growth

We construct a North-South product-cycle model of trade with fully-endogenous growth and union wage bargaining. Economic growth is driven by Northern entrepreneurs who conduct R&D to innovate higher quality products. Northern production technologies can leak to the South upon successful imitation. The North has two sectors: a tradable industrial goods sector (manufacturing) where wages are determined via a bargaining process and a non-tradable sector (services) where wages are flexible. The South has only a tradable industrial goods sector where wages are flexible.We find that unilateral Northern trade liberalization, in the form of lower Northern tariffs on industrial goods, increases the rate of innovation but decreases both the bargained wage in the industrial sector and the flexible wage in the service sector. The wage effects are relative to the Southern wage rate. We also consider a variant of the model with Northern unemployment, driven by a binding minimum wage in the non-tradable service sector. In this case, Northern tariff cuts decrease the innovation rate and the bargained wage rate. In addition, the Northern unemployment rate increases. The model thus highlights the role of labor market institutions in determining the growth and labor market effects of tariff reductions. We also study the effects of unilateral Southern trade liberalization.