Services-Manufacturing Linkage and the Role of Policy

Abstract

The database of the Organisation for Economic Co-operation and Development-World Trade Organization (OECD-WTO) on Trade in Value Added shows that services constitute a significant share of global goods exports. These services are either embedded in the product (such as engineering services) or bundled with its sale (such as recycling services). “Servicification”--the term coined to describe the increasing value contribution of services in manufacturing value chains--is also true in the Asia-Pacific Economic Cooperation (APEC) member-economies. This paper shows the growth in the share of services value added in APEC’s manufacturing exports between 1995 and 2009. The role of services in improving productivity is a top consideration in the decision of manufacturing firms to “servicify”. Indeed, this paper shows positive correlations between services inputs and productivity but negative correlations between OECD index of services restrictiveness and manufacturing exports per capita. Particularly for business services, restrictions on the movement of people as well as on foreign ownership and other market entry conditions contribute the most to high index of trade restrictiveness.