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Intensity Have Both Roughly Tripled
FIGURE 4.16 In India, the Share of Servitized Manufacturing Firms and Their Service Intensity Have Both Roughly Tripled
Share of manufacturers that sell services and the share of services in their total revenue, India, 1994–2013
70 25
Share of servitized manufacturing firms (%) 60
50
40
30
20
10 20
15
10
5 Share of services in total revenue (%)
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 0
Share of servitized firms (left scale) Service intensity (right scale)
Source: Grover and Mattoo 2021. Note: “Servitized” firms are those manufacturers that also sell services. “Service intensity” is the share of total revenue attributable to the sale of services.
What Explains the Bundling of Manufactured Goods and Services The growing complementarity between manufactured goods and services described above is attributable to both supply- and demand-related factors (Grover and Mattoo 2021). The supply side relates to economies of scope in production. For example, a cell phone is a good, but it is tied to the use of telecommunications services, which allow the user to install apps with purchased content that can give rise to additional transactions such as audiovisual services (streaming movies or music), publishing (e-books), or computer services (video games). Apple’s combination of iTunes with the iPod provides a relevant example whereby the company profited from pairing a music device with a service that allowed consumers to buy music instantly and remotely (Amit and Zott 2012).
Amazon’s Echo—a music player that comes with an artificial intelligence (AI)enabled digital assistant, “Alexa”—provides a more recent example. The embedded voice recognition technology, which enables the digital assistant to accomplish tasks such as creating a reminder for a certain activity or estimating the length of a commute, has improved the Echo speaker’s profitability (Son and Oh 2018). ICT services and professional, scientific, and technical services are therefore increasingly complementary to the manufacture of computing machinery.
The demand-side explanation for this bundling of goods and services relates to consumer preferences that can enable a firm to differentiate its product from those of
its competitors. Financial services such as credit and insurance offered by manufacturers of consumer durables are a case in point. In some instances, these production- and consumption-driven motivations come together. Traditional consumer durables, for instance, increasingly come with an assortment of after-sales services, such as advertising, warranties, and repair. By supplying these services with their goods, manufacturers can increase their market share since a product-service bundle is harder to compete against (Gebauer, Fleisch, and Friedli 2005).
A study of Indian manufacturers finds that the bundling of goods and services is positively associated with exposure to import competition (Grover and Mattoo 2021). Firm-level data from the United Kingdom also support the link between servicification and import competition: the increase in servicification of UK manufacturing between 1997 and 2007 was associated with a decline in import tariffs (Breinlich, Soderbery, and Wright 2014). Further evidence from Belgium suggests that such bundling has enabled manufacturers to differentiate their products and increase their sales in export markets by selling larger quantities at higher prices (Ariu, Mayneris, and Parenti 2020).
Although economies of scope in production and consumer preferences for bundling are more likely to push certain industries toward servicification, not all firms within an industry servitize. Servicification is likely to require organizational changes that impose additional fixed costs of bundling services with goods (Gebauer, Fleisch, and Friedli 2005). Given the large productivity differences across firms within narrowly defined industries (Syverson 2011), it is therefore likely that only the more productive firms servitize. In fact, the bundling of goods and services by manufacturing firms in India is positively associated with firm productivity and does not shield low-productivity firms from import competition (Grover and Mattoo 2021).
The Role of Linkages in Expanding Inclusion
Chapter 2 illustrated the dichotomy between productivity growth and unskilled-jobs creation in the services sector, in that they are less likely to occur together in the same subsector. Chapter 3 then showed that this productivity-jobs dichotomy within a given services subsector may be narrowing, especially among low-skill tradable services, owing to (a) the reduced importance of physical proximity in matching demand and supply, (b) innovation, and (c) combining labor with intangible capital. Access to larger markets, including through linkages, can further narrow this dichotomy.
Trade in low-skill tradable services directly creates more and better jobs for low-skilled labor. For example, tourism brings significant benefits for employment and wages in Mexico (Faber and Gaubert 2019). Similarly, retail imports through FDI in Mexico (particularly through the entry of Walmart) increased real wages, while employment
gains in new foreign-owned retail stores were canceled out by employment contraction in local stores (Atkin, Faber, and Gonzalez-Navarro 2018). Furthermore, evidence across 83 low- and middle-income economies from 2013 to 2018 shows that tourism and travel-related services such as travel agencies, tour operators, hotels and restaurants, and transportation are characterized by the highest contribution in exports by smaller firms and by women-owned firms (WTO 2019).
The impact of low-skill tradable services on economic inclusion is magnified through their intersectoral linkages. Increasing the productivity of wholesale trade and transportation services reduces transaction costs for all marketed products and is particularly beneficial for sectors, such as agriculture and manufacturing, that employ low-skilled labor. For example, in Tanzania, after accounting for linkages between sectors, the reduction of transportation costs is associated with a substantial increase in the incomes of unskilled and rural workers (Adam, Bevan, and Gollin 2018).
Low-skill services can also be indirectly exported through forward linkages with other traded sectors. For instance, although direct value added in the export of distribution (wholesale and retail trade) services is negligible across most countries, the sector’s value added embodied in the exports of other sectors is considerably larger (figure 4.17). These forward linkages could either be with goods-producing sectors or other directly exported services.
Global Innovator Services: Indirect Job Creation
Linkages with other sectors can also help narrow the dichotomy between productivity growth and the absorption of low-skilled labor among global innovator services through indirect job creation. For example, for every US$1,000 of ready-made garment exports from Bangladesh, about US$160 can be attributed to unskilled-labor value added in gross exports (figure 4.18, panel a). For the same value of business services exports from the Philippines, less than US$90 can be ascribed to unskilled-labor value added.
However, when a sector’s inputs to economywide production are included, the contribution of unskilled-labor value added for every US$1,000 of exports remains unchanged for apparel in Bangladesh but increases to US$130 for business services in the Philippines (figure 4.18, panel b). Even in a larger cross-section of countries, exports of business services are distinctly more intensive in unskilled labor when linkages with other sectors are also included (figure 4.19).
A recent study in India finds that employment growth in traded services at the district level contributes to employment growth in low-skill domestic services, with this effect being stronger in women-led firms and smaller firms (Avdiu, Bagavathinathan, et al. 2021). This evidence suggests that global innovator services can be inclusive and
