Introduction Baseline model Conclusions Annex

Competition in manufacturing and service content of manufactured products Carolina Lennon1

Robert Stehrer2

2 The Vienna Institute for International Economic Studies (wiiw) 1

Paris School of Economics (PSE) and wiiw

ETSG, September 2010

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Context

The main question An empirical work Does the service content of manufactured products increase with competition in manufacturing? Post-sales services (repairing, product’s guarantee, call centers) Distribution (home delivery, distribution points, virtual shops, phone sales etc) Marketing (advertisement, brand differentiation and loyalty programs), Finance (credit schemes)

Positive relationship between the service content and competition in manufacturing

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Context

The beginnings of the idea inspired by Horn and Shy (1996) “Bundling and International Market Segmentation”

Analytical framework Oligopoly game In which manufacturers can choose whether to bundle their products with services or not Trade liberalization ( ⇑ competition) ⇒ ⇑ service content. Since bundling products with services allows them to segment the market and to reduce competition. ⇒ Losses for the firm offering only the base product ⇒ Profit gains for the firm bundling its products with services

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Context

The beginnings of the idea in marketing

Marketers say: Product features can be easily duplicated by competitors Monopolistic power eroded quickly

The service content fosters consumers’ loyalty Monopolistic power lasts over time

As competition increases, the speed with which physical features can be copied also increases, implying that the only remaining source of firms’ sustainable differentiation might be the service content of their products.

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Previous literature Competition in services

⇒

Context

performance in manufacturing productivity exports

Francois and Woerz (2008), Amiti and Wei (2009) and Debaere et al. (2010).

Our work Competition in manufacturing

⇒

Use of services in manufacturing

import competition

input share

trade liberalization

employment share

concentration

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Databases Service input share Service employment share

Baseline model Does the service content increase with competition? s Smit = β0 + β1 Cmit + FEmit B + µmit s Smit

⇒ service content of manufactured products Service input share ⇒ outsourced Service employment share ⇒ in-house

Cmit ⇒ competition in the manufacturing sector FEmit ⇒ diff. sets of fixed effects to account for unobserved Three dimensions: - m: manufacturing sector - i: country - t: time

C. Lennon, R. Stehrer

Service content

(1)

Introduction Baseline model Conclusions Annex

Databases Service input share Service employment share

Data - dependent variable (1) Service input share

Input-output data IO data, STAN Input Output database years: 1995, 2000, 2005 countries: 42 sectors: based on ISIC Rev.3, 2-digit sectors, Total (37), Manufacturing (18), and services (10).

Service input share 1 2 3

over material inputs over manufactured inputs over total input

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Databases Service input share Service employment share

Data - dependent variable (2) Service employment share

Employment by occupation European Labour Force Survey (EU LFS) countries: EU-27 + Switzerland and Norway years: 1995-2007 (though better quality since 1999) occupations: ISCO 3-digit categories sectors: NACE rev. 1.1, 2-digit sectors.

Service employment share 1 2 3 4

Customer services R&D Transport and logistics Production (for comparison)

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Databases Service input share Service employment share

Regressions and results

1

Service input share Results and robustness checks Different measures of competition Different sets of FE Different samples

Further analysis Manufacturing sectors Service sectors 2 3

Service employment share Conclusions

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Databases Service input share Service employment share

Different measures of competition Independent variables

1

Import competition ⇒ importsmit /productionmit Imports Imports Imports excluding imported inputs Imports destined to household consumption

2

Other variables, of the type Cmit Tariff t-1 (simple average and weighted average - WB ) Concentration, Large firms share in sectoral production t-1 (SDBS Structural Business Statistics -OECD) Number of enterprises t-1 Number of enterprises over manufacturing n. of enterprises t-1

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Databases Service input share Service employment share

Different sets of FE year ⇒

trend, global shocks

country ⇒

level of development

sector ⇒ year*country ⇒ year*sector ⇒ country*sector ⇒

technology country specific business cycle shocks, relative services’ prices sectors that are doing particularly well, diff. impact of third sector’s (i.e. primary) country-sector specific characteristics

Errors clustered by within estimation groups

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Databases Service input share Service employment share

Different sets of FE

Service input over material inputs Import compet. (households) Beta coeff Obs. R2 Sector FE Country FE Year FE Country*year FE N. of groups Sector*Year FE N. of groups Country*Sector FE N. of groups

1 0.257*** [0.049] 0.15 1910 0.15 YES YES

2 0.235*** [0.047] 0.14 1910 0.26 YES YES YES

3 0.253*** [0.051] 0.15 1910 0.02

4 0.231*** [0.048] 0.14 1910 0.15 YES

YES 110

YES 110

5 0.238*** [0.047] 0.14 1910 0.02

6 0.238*** [0.048] 0.14 1910 0.16

7 0.093*** [0.032] 0.05 1910 0

8 0.087*** [0.033] 0.05 1910 0.02

9 0.235*** [0.051] 0.14 1910 0.17

YES YES

YES 54

YES 110 YES

YES 54 YES 734

YES 734

Robust errors clustered. Constant estimated but not reported * significant at 10%; ** significant at 5%; *** significant at 1%

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Databases Service input share Service employment share

Different samples

1 2 3

All observations - 1,900 ⇒ beta coeff. 0.14 Excluding outliers by leverage ⇒ beta coeff. 0.22 22 countries with the best data ⇒ beta coeff. 0.29

C. Lennon, R. Stehrer

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Introduction Baseline model Conclusions Annex

Databases Service input share Service employment share

Which Sectors

1

Manufacturing Pulp, paper, paper products, printing and publishing Wood and products of wood and cork Textiles, textile products, leather and footwear

2

Services Other Business Activities (professional services, marketing ..)

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Databases Service input share Service employment share

Service employment share

Service employment share Competition in manufacturing ⇑

Service share in employment ⇒

Import competition

⇑ Customer services ⇑ R&D ⇑ Transport and logistics Production

C. Lennon, R. Stehrer

Service content

Introduction Baseline model Conclusions Annex

Databases Service input share Service employment share

Table: Share in total employment

Dep. Var : Indep. Var :

Service share in total employment Import comp (imports by Households) all obs. Beta coeff.

Customer services R&D Transport and logistics Production

0.25 0.22 0.09 0.03

1.056*** 0.972*** 1.027** 0.463

Obs.

R-2

2005 Beta coeff.

786 1001 974 1034

0.44 0.68 0.42 0.68

0.34 0.3 0.15 0.04

Model: country, sector and year FE

C. Lennon, R. Stehrer

Service content

1.920*** 0.926*** 1.463*** 0.896

Obs.

R-2

325 400 389 404

0.56 0.71 0.49 0.72

Model: country and sector FE

Introduction Baseline model Conclusions Annex

Conclusions

Positive relationship between the service content of manufactured goods and competition in manufacturing Robust to... Different Different Different Different

measures of service content measures of competition sets of FE samples

C. Lennon, R. Stehrer

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Introduction Baseline model Conclusions Annex

Conclusions

Need for further investigation Analytical framework Industrial Organization: bundling, quality, advertisement.

Causality (explore other databases) More work on the occupation database.

C. Lennon, R. Stehrer

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Introduction Baseline model Conclusions Annex

Annex

C. Lennon, R. Stehrer

Service content

References

Average annual percentage change (1995-2005)

Primary Manufacturing Total Services Other Total economy

Value added

Gross output

3.1% 1.1% 4.4% 4.2% 3.7%

2.9% 2.4% 4.9% 4.2% 4.0%

Intermediate use 4.9% 2.6% 5.9% 2.4% 4.3%

Household consumption 1.2% 3.3% 4.3% 8.5% 4.2%

* at basic prices Countries: Austria, Belgium, Brazil, Canada, Chile, Germany, Denmark, Spain, Estonia, Finland, France, United Kingdom, Greece, Hungary, Indonesia, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, Portugal, Slovak Republic, Sweden, Turkey, United States and South Africa

C. Lennon, R. Stehrer

Service content

References

Share in total economy

Primary Manufacturing Total Services Other Total economy

Value added 1995 2005 3% 3% 16% 20% 60% 64% 16% 16% 100% 100%

Gross output 1995 2005 3% 3% 31% 27% 50% 54% 16% 16% 100% 100%

Intermediate use 1995 2005 7% 7% 41% 36% 43% 50% 9% 7% 100% 100%

Household consumption 1995 2005 2% 2% 24% 22% 70% 71% 4% 5% 100% 100%

* at basic prices Countries: Austria, Belgium, Brazil, Canada, Chile, Germany, Denmark, Spain, Estonia, Finland, France, United Kingdom, Greece, Hungary, Indonesia, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, Portugal, Slovak Republic, Sweden, Turkey, United States and South Africa

C. Lennon, R. Stehrer

Service content

References

Sectoral use of intermediate inputs by manufacturers

Type of input Material inputs Services inputs Other inputs Total inputs used by manufacturers

Value (US dollar, million ) 1995 2005 5,991,546 7,651,286 2,208,488 3,179,376 364,614 383,699 8,564,648 11,214,361

Growth Annual(%) 1995-2005 2.7 4.0 0.6 3.0

Share (%) 1995 70.0 25.8 4.3 100.0

2005 68.2 28.4 3.4 100.0

Countries: Austria, Belgium, Brazil, Canada, Chile, Germany, Denmark, Spain, Estonia, Finland, France, United Kingdom, Greece, Hungary, Indonesia, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, Portugal, Slovak Republic, Sweden, Turkey, United States and South Africa

C. Lennon, R. Stehrer

Service content

References

Models, FEs year ⇒ country ⇒ sector ⇒ year*country ⇒ year*sector ⇒ country*sector ⇒

trend level of development technology country specific business cycle shocks, relative services’ prices sectors that are doing particularly well, diff. impact of third sector’s (i.e. primary) country-sector specific characteristics

Errors clustered by within estimation groups

C. Lennon, R. Stehrer

Service content

Table: Diff. variables

Service input over material inputs Import comp., Households Import compet., excluding input imports Import compet. Beta coeff Constant Obs. Sector FE Country * year FE N. Of groups Beta coeff R-sq: overall R-sq: within R-sq: between Rho

1 0.231*** [0.048]

2

Service input over total input 3

4 0.051*** [0.013]

0.025*** [0.004]

0.14 42.253*** [2.456] 1910 YES YES 110 0.14 0.13 0.15 0.04 0.16

0.13 42.379*** [2.482] 1910 YES YES 110 0.13 0.13 0.15 0.04 0.16

5

Service input over manuf inputs 6

7 0.225*** [0.043]

0.005*** [0.001] 0.022*** [0.004] 0.13 42.367*** [2.481] 1910 YES YES 110 0.13 0.13 0.15 0.04 0.16

0.11 26.596*** [0.909] 1910 YES YES 110 0.11 0.25 0.34 0.04 0.35

0.1 26.625*** [0.914] 1910 YES YES 110 0.1 0.25 0.33 0.04 0.35

8

9

0.025*** [0.004] 0.005*** [0.001] 0.1 26.622*** [0.914] 1910 YES YES 110 0.1 0.25 0.33 0.04 0.35

0.1 42.773*** [2.476] 1910 YES YES 110 0.1 0.18 0.21 0.03 0.15

0.1 42.890*** [2.502] 1910 YES YES 110 0.1 0.18 0.21 0.03 0.15

Robust errors clustered by Country*year group, * significant at 10%; ** significant at 5%; *** significant at 1%

0.022*** [0.004] 0.1 42.879*** [2.502] 1910 YES YES 110 0.1 0.18 0.21 0.03 0.15

References

Table: Diff. samples Service input over material inputs Import compet, Imports by households Beta coeff Constant Observations R-squared Sector FE Country * year FE Number of groups R-sq: overall R-sq: within R-sq: between Rho

1 0.231*** [0.048] 0.14 42.253*** [2.456] 1910 0.15 YES YES 110 0.13 0.15 0.04 0.16

2 0.689*** [0.032] 0.22 39.154*** [1.678] 1880 0.4 YES YES 110 0.29 0.4 0.03 0.4

3 0.232*** [0.045] 0.29 16.311*** [2.005] 1112 0.37 YES YES 62 0.3 0.37 0.05 0.27

Robust errors clustered by Country*year group, * significant at 10%; ** significant at 5%; *** significant at 1%

C. Lennon, R. Stehrer

Service content

References

Table: Other variables of competition Service input over material inputs

Beta coeff Constant Sector FE Country * year FE Observations R-squared Number of groups R-sq: overall R-sq: within R-sq: between Rho Independent Independent Independent Independent Independent Independent

var. var. var. var. var. var.

(1) (2) (3) (4) (5) (6)

: : : : : :

1 0.253*** [0.051] 0.15 38.252*** [0.041] NO YES 1910 0.02 110 0.02 0.02 0.01 0.14

2 -0.846** [0.320] -0.19 43.840*** [2.008] NO YES 996 0.01 57 0.03 0.01 0.18 0.1

3 -0.882** [0.335] -0.18 43.670*** [1.952] NO YES 996 0.01 57 0.03 0.01 0.17 0.1

4 -0.248* [0.134] -0.06 64.389*** [11.688] NO YES 620 0 39 0 0 0.07 0.18

5 0.127*** [0.043] 0.04 41.461*** [0.295] NO YES 707 0 42 0 0 0 0.14

Import compet., imports by Households Tariff t-1, simple average Tariff t-1, weighted average Large firms share in sectoral production t-1 Number of enterprises (000) t-1 Number of enterprises over manufacturing n. of enterprises t-1

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Service content

6 0.694** [0.304] 0.09 38.676*** [1.695] NO YES 694 0.01 40 0.01 0.01 0.01 0.14

References

Table: Other variables of competition, cont...ops! Service input over material inputs

Observations Sector FE Country * year FE Number of groups R-sq: overall R-sq: within R-sq: between

1 0.231*** [0.048] 0.14 42.253*** [2.456] 1910 YES YES 110 0.13 0.15 0.04

Independent Independent Independent Independent Independent Independent

Import compet., imports by Households Tariff t-1, simple average Tariff t-1, weighted average Large firms share in sectoral production t-1 Number of enterprises (000) t-1 Number of enterprises over manufacturing n. of enterprises t-1

Beta coeff Constant

var. var. var. var. var. var.

: : : : : :

2 -0.501 [0.422] -0.11 37.622*** [6.213] 996 YES YES 57 0.15 0.15 0.21

C. Lennon, R. Stehrer

3 -0.365 [0.320] -0.07 34.532*** [3.911] 996 YES YES 57 0.15 0.15 0.2

4 0.227 [0.412] 0.05 27.614 [30.109] 620 YES YES 39 0.13 0.16 0.01

Service content

5 -0.075 [0.081] -0.02 13.847*** [1.964] 707 YES YES 42 0.13 0.15 0.09

6 0.582 [0.485] 0.08 13.604*** [1.956] 694 YES YES 40 0.13 0.15 0.12

References

Table: By manufacturing sector Dep. Var : Indep. Var :

Service input over material inputs Import comp., imports by Households Country FE Beta coeff

Food products, beverages and tobacco Pulp, paper, paper products, printing and publishing Wood and products of wood and cork Textiles, textile products, leather and footwear Other transport equipment Motor vehicles, trailers and semi-trailers Chemicals and chemical products Radio, television and communication equipment Coke, refined petroleum products and nuclear fuel Medical, precision and optical instruments Other non-metallic mineral products Office, accounting and computing machinery Rubber and plastics products Basic metals Fabricated metal products except machinery and equipment Machinery and equipment n.e.c Electrical machinery and apparatus n.e.c Manufacturing n.e.c; recycling

C. Lennon, R. Stehrer

61.884*** 275.345** 252.464** 21.947*** 9.110*** 1.505*** 41.689** 1.037*** 0.323*** 11.369 189.036*** 0.067*** 5.322 -0.807 -4.749 -1.437 -6.646 -19.222

Service content

1.28 0.87 0.75 0.49 0.46 0.45 0.44 0.34 0.26 0.2 0.19 0.15 0.05 0 -0.01 -0.02 -0.04 -0.49

Country and year FE Beta coeff 19.453 146.717* 206.912*** 19.667*** 11.856*** 1.548*** 33.219 1.208*** 0.276*** 12.227 201.340*** 0.058*** 7.985 36.646 -8.337 2.766 -1.784 -32.628

0.4 0.46 0.61 0.44 0.6 0.46 0.35 0.4 0.22 0.22 0.2 0.13 0.07 0.01 -0.02 0.04 -0.01 -0.84

References

Table: By services sector Import Comp ( House.) Beta coeff Observations Sector FE Country * year FE N. of groups R-sq: overall R-sq: within R-sq: between

Column Column Column Column Column Column Column Column Column Column

1

2

3

4

5

6

7

8

9

10

0.030** 0.1 [0.013] 1112 YES YES 62 0.16 0.25 0

-0.001** -0.02 [0.000] 1112 YES YES 62 0.1 0.16 0

0.003* 0.01 [0.001] 1112 YES YES 62 0.31 0.45 0.15

0.013* 0.18 [0.007] 1112 YES YES 62 0.22 0.26 0.01

0.030** 0.17 [0.013] 1112 YES YES 62 0.08 0.1 0.01

0.060*** 0.59 [0.017] 1112 YES YES 62 0.42 0.46 0.3

-0.002* -0.02 [0.001] 1112 YES YES 62 0.03 0.06 0

-0.007*** -0.07 [0.002] 1112 YES YES 62 0.14 0.16 0.01

-0.003** -0.02 [0.001] 1112 YES YES 62 0.1 0.14 0

0.110*** 0.38 [0.005] 1112 YES YES 62 0.29 0.39 0.17

1: Wholesale and retail trade; repairs 2: Hotels and restaurants 3: Transport and storage 4: Post and telecommunications 5: Finance and insurance 6: Real estate activities 7: Renting of machinery and equipment 8: Computer and related activities 9: Research and development 10:Other Business Activities C. Lennon, R. Stehrer

Service content

References

Table: By occupation

Dep. Var : Indep. Var :

Share in total employment, by occupation. Import comp., imports by Households. all obs. Beta coeff.

Customer services R&D Transport and logistics Production

0.25 0.22 0.09 0.03

1.056*** 0.972*** 1.027** 0.463

Obs.

R-2

2005 Beta coeff.

786 1001 974 1034

0.44 0.68 0.42 0.68

0.34 0.3 0.15 0.04

Model: country, sector and year FE

C. Lennon, R. Stehrer

Service content

1.920*** 0.926*** 1.463*** 0.896

Obs.

R-2

325 400 389 404

0.56 0.71 0.49 0.72

Model: country and sector FE

References

Table: Countries IO (42) High income: OECD

High income: nonOECD

Lower middle income

Upper middle income

3

3

10

EST ISR SVN

CHN IDN IND

ARG BRA CHL MEX POL ROU RUS TUR ZAF TWN

26 AUS AUT BEL CAN CHE CZE DEU DNK ESP FIN FRA GBR GRC

HUN IRL ITA JPN KOR LUX NLD NOR NZL PRT SVK SWE USA

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References

Table: Countries IO (22) 22 AUT BEL CZE DEU DNK ESP EST FIN FRA GBR GRC

C. Lennon, R. Stehrer

HUN ITA JPN LUX NLD PRT ROU SVK SVN TUR TWN

Service content

References

Table: Countries (occupation ) Countries (occupation ) 29 AUT BEL BGR CHE CYP CZE DEU DNK ESP EST FIN FRA GBR GRC HUN

C. Lennon, R. Stehrer

IRL ITA LTU LUX LVA MLT NLD NOR POL PRT ROU SVK SVN SWE

Service content

References

Table: Sectors’ classification (NACE) Manufacturing (18)

Services (10)

Food products, beverages and tobacco Textiles, textile products, leather and footwear Wood and products of wood and cork Pulp, paper, paper products, printing and publishing Coke, refined petroleum products and nuclear fuel Chemicals and chemical products Rubber and plastics products Other non-metallic mineral products Basic metals Fabricated metal products except machinery and equipment Machinery and equipment n.e.c Office, accounting and computing machinery Electrical machinery and apparatus n.e.c Radio, television and communication equipment Medical, precision and optical instruments Motor vehicles, trailers and semi-trailers Other transport equipment Manufacturing n.e.c; recycling

Wholesale and retail trade; repairs Hotels and restaurants Transport and storage Post and telecommunications Finance and insurance Real estate activities Renting of machinery and equipment Computer and related activities Research and development Other Business Activities

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References

Table: Service occupations Customer services Business services agents and trade brokers Cashiers, tellers and related clerks Client information clerks Fashion and other models Shop, stall and market salespersons and demonstrators R&D Physicists, chemists and related professionals Mathematicians, statisticians and related professionals Computing professionals Architects, engineers and related professionals Life science professionals Health professionals (except nursing) Physical and engineering science technicians Life science technicians and related associate professional

C. Lennon, R. Stehrer

Transport. Logistics Ship and aircraft controllers and technicians Material-recording and transport clerks Library, mail and related clerks Locomotive engine drivers and related workers Motor vehicle drivers Ships’ deck crews and related workers Transport labourers and freight handlers

Service content

References

Amiti, M. and S.-J. Wei (2009, 02). Service offshoring and productivity: Evidence from the us. The World Economy 32 (2), 203–220. Debaere, P., H. Grg, and H. Raff (2010, January). Greasing the wheels of international commerce: How services facilitate firms’ international sourcing. Kiel Working Papers 1591, Kiel Institute for the World Economy. Francois, J. and J. Woerz (2008, December). Producer services, manufacturing linkages, and trade. Journal of Industry, Competition and Trade 8 (3), 199–229. Horn, H. and O. Shy (1996, February). “Bundling and International Market Segmentation”. International Economic Review 37 (1), 51–69.

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