Competition in Manufacturing and the Service Content of Manufactured Products

Carolina Lennon (with Robert Stehrer) , wiiw, University of Paris 1 and PSE

In this paper we assert that manufacturing sectors tend to employ more services per output in more competitive environments. The idea behind this is that services can help manufacturing firms to counteract competition by means of increasing their monopolistic power. First, services can allow manufacturing firms to vertically differentiate their products. Second, the services' content and quality of the supporting services is argued to foster consumer's loyalty, making consumers' demand less elastic. We thus explore empirically whether manufacturing sectors facing more competition use relatively more services in their production process. For this, we employ data on the intermediate use of services in manufacturing for 42 countries in 1995, 2000 and 2005, as well as data on employment in services occupations in manufacturing for 29 European countries between 1995 and 2007. In order to describe the level of competition in manufacturing we use variables such as import penetration, import tariffs as well as the concentration of production by large enterprises within manufacturing sectors. We find that manufacturing sectors facing higher levels of competition use consistently more services inputs and employ relatively more people in services occupations such as 'customer services', 'R&D' and 'transport and logistics'. This finding not only suggests a new explanation for the increasing role played by services in national economies, but also might indicate that measures to increase competition such as tariff reductions do not necessarily lead to more competitive markets, as producers might react to new competitive pressures by increasing the services content of their products.


Keywords: service content, competition, input-output tables, import competition, service employment

JEL classification: F1, D57, L8, L6

Countries covered: Central, East and Southeast Europe, European Union

Research Areas: International Trade, Competitiveness and FDI