Producer Services and Productivity: A Global Value Chain Perspective

Abstract

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.