Manufacturing Firms As Services Providers: What the Belgian Data Show

Abstract

The aim of this paper is to describe the servitisation phenomenon, a feature that has stood out for a couple of decades now in developed economies. Servitisation not only refers to the rising share of services in macroeconomic aggregates such as value added or employment. It also stems from the fact that manufacturing firms provide services to their customers. Thanks to a unique microeconomic dataset for Belgian manufacturing firms over 1997-2013, we reveal that macroeconomic figures hide an important part of the servitisation phenomenon. Indeed, most of the servitisation among manufacturing firms does not lead to any change of economic activity but is essentially at play for firms that remain active in the manufacturing sectors. The paper therefore focuses on the provision of services by firms that operate in the manufacturing sectors. This tendency is rising over time, due to the fact that, on average, all firms raise their servitisation rate, but also to the fact that more servitised firms are the ones that increase their market share. The servitisation phenomenon is in fact highly heterogeneous, both between and within sectors. On average, servitised firms are older, larger, more skill-intensive and pay higher wages than other firms from the same sector of economic activity. But they also have a higher probability of exit. Servitisation is actually a risky activity, that involves substantial costs, whether in terms of organisation, workforce adjustment or managerial challenges, and does not always produce the expected benefits. Our analysis suggests that engaging in servitisation results in a drop in employment, a recomposition of the labour force in favour of better-paid white-collar workers but has no clear impact on firm exit and profitability. What seems to be a paradox may actually result from complex situations, various strategies, the economic environment and firm market position. Growing demand for goods-services bundles may be an incentive for all companies to provide services to their customers. This may develop customer relations and enhance brand image. Broadening the scope of products to services as well as goods may also be an opportunity to diversify a firm’s product portfolio and thereby diversify its revenues. In addition, when efficiency or intangible assets may act as a public good and provide an advantage for all business activities, firms may develop service provision without affecting goods production. Some technologies such as ICT may enable business activities to be developed across products or markets at low additional cost. Another motive for servitisation is that it may be a way of differentiating from competitors. This may be especially relevant for leading companies when there is fierce, neck-and-neck competition. This will also be a relevant strategy on mature markets where efficiency gains and cost reductions have been exhausted and where servitisation is a way of differentiating from competitors. It may also be a strategy for young and small firms to penetrate a market by offering an innovative and attractive goods-services package. It may even be a last chance for laggard companies to remain active on a market, as it may arise in low-competition environments where firms have survived in spite of low efficiency.