Producer Services and Productivity: A Global Value Chain Perspective

• Published date: 01 June 2021
• Author: Dazhong Cheng,Zhiguo Xiao
• Date: 01 June 2021
• DOI: http://doi.org/10.1111/roiw.12482

© 2020 International Association for Research in Income and Wealth

418

PRODUCER SERVICES AND PRODUCTIVITY: A GLOBAL VALUE

CHAIN PERSPECTIVE

by Dazhong Cheng*

Department of World Economy and Institute for World Economy,Fudan University, Shanghai, China

AND

zhiguo Xiao

Department of Statistics,Fudan University, Shanghai, China

Services have long been blamed for their stagnant productivity and cost disease. This study demonstrates

that producer services defy the cost disease. We explore, in the context of global value chains (GVCs),

how the growth of producer services helps improve the productivity of final goods and services and how

the effects differ for local and foreign sources of producer services. The GVC revolution, along with

technological progress, expands the market and deepens division of labor across the world, which, in

turn, magnifies the available varieties of producer services as intermediate inputs. The proliferation of

producer services, along with their productivity enhancement induced by the GVC competition, helps

boost the overall productivity and reduces the cost of supplying producer services. We develop a simple

model to justify this mechanism and employ the World Input-Output Database to quantify producer

services and the GVC division of labor. The empirical results are consistent with theoretical predictions.

JEL Codes: F15, F20, O19, O53

Keywords: final goods and services, global value chain, producer services, productivity

1. introDuCtion

Modern industrial production started with the invention of machines. With

the development of ever more powerful and smarter machines, manufacturing pro-

ductivity increased significantly, and complete automation of production has

become a cause of worry for economists today (Acemoglu and Restrepo, 2018). By

contrast, services have long been blamed for their “cost disease,”1 presumably due

1The cost disease, also known as Baumol’s disease, is the hypothesis that productivity improve-

ments are less likely in service industries than in goods-producing industries of the economy because of

the inherent nature of services (Baumol, 1967). See also Hartwig (2011), Atanda etal. (2018), Nishi

(2019), Atanda and Reed (2020), and the subsequent discussions.

Note: We thank the editor and an anonymous reviewer for their helpful comments and suggestions.

This work was supported by the National Social Sciences Foundation of China (SSFC) Key Project

(18VSJ056), Chinese Ministry of Education Key Project (17JJD790001), and National Natural Science

Foundation of China (NSFC) Projects (71272069, 71661137005, and 71473040).

*Correspondence to: Dazhong Cheng, Department of World Economy and Institute for World

Economy, Fudan University, Shanghai, China (chengdz@fudan.edu.cn).

Review of Income and Wealth

Series 67, Number 2, June 2021

DOI: 10.1111/roiw.12482

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Review of Income and Wealth, Series 67, Number 2, June 2021

419

© 2020 International Association for Research in Income and Wealth

to their stagnant productivity. This perception regarding the productivity of ser-

vices is understandable because several final services entail manual intervention

with negligible application of machines. This might lead to sluggish technological

progress, especially as the cost of cultivating an equally able human being has not

declined substantially, a stark contrast with the manufacturing sector, where the

costs of making equally functional machines have been declining continuously.

However, services, when used as intermediate inputs of production, dubbed as

“producer services,” might enjoy a productivity boost and improve the overall effi-

ciency. Therefore, they can circumvent the cost disease by engaging in and integrat-

ing into the modern machine-based global production systems.

Research on the service industry can be traced at least as far back as Adam

Smith. The service industry has undergone a profound transformation, especially

after the information and communication technology revolution, which has major

ramifications. Services are becoming increasingly important, with striking sectoral

heterogeneity, in the modern economy (Buera and Kaboski, 2012). Francois and

Hoekman (2010) point out that it is meaningful to categorize services into con-

sumer services and producer services. Consumer services are used for final con-

sumption, while producer services enter the production process of manufacturing

or other services as intermediate inputs. Overall, services for intermediate use (i.e.,

producer services) account for more than 30 percent of the total service industry

output across the world (see Figure 1).2 However, one has to be careful when draw-

ing inferences from the numbers because many service sectors listed in the national

account statistics perform dual functions—of both producer and consumer

services—even though they may emphasize the provision of services to one group

2The data source and processing in Figures 1 and 2 are presented in Section 3.

Figure 1. Share of Service Output Used as Intermediates (%) in the Sample Economies in 2009

Source: Authors’ calculation based on the WIOD database.