Manufacturing Input Servitization, Firm Innovation, and Export: Evidence From China

Abstract

To address current challenges such as low positioning in the global value chain (GVC), diminishing demographic dividends, and rising labor costs, Chinese firms are pivoting their comparative advantage from production expansion to service provision. This study investigates the impact of input servitization on Chinese firms' innovation and exports. First, we theoretically integrate the heterogeneous firm model with the technology selection model to explain how input servitization fosters firms' innovation capacity and export performance. Next, we empirically examine the effects of firms' input servitization with extensive and unique firm-level data. The results provide robust evidence that increased input servitization amongst manufacturing firms significantly enhances their innovation capacity. Sub-sample regressions further reveal that, while the positive effects on innovation differ by ownership and industry, even firms with lower productivity and smaller size benefit from input servitization. Additionally, our analyses reveal that input servitization reduces search and matching costs, thereby fostering innovation and amplifying firms' exports, strengthening their global competitiveness.