1 The relative weight of manufacturing and services in Europe: an innovation perspective on structural change Carolina Castaldi Groningen Growth and Development Centre (GGDC), University of Groningen EUKLEMS Consortium Meeting Brussel, March 2007 This project is funded by the European Commission, Research Directorate General as part of the 6th Framework Programme, Priority 8, "Policy Support and Anticipating Scientific and Technological Needs".

2 Motivation Differences in industrial structures have been used to explain the productivity gap between EU and the US. Sectors contribute to aggregate productivity growth in heterogenous ways. What is the the role of knowledge and innovation in explaining these differences? Aim Assess the contribution of both manufacturing and service industries to labor productivity growth using an innovation- based sectoral taxonomy

3 Theoretical background Structural change necessary for growth Schumpeterian processes of creative destruction are at the heart of sectoral productivity differences (supply side) Structural bonus when labor shifts to higher productivity sectors Shift to services as a structural burden? National specialization patterns and growth differentials

4 Empirical literature on structural change and growth Shift-share exercises looking for evidence of shift effects (Fagerberg 2000, Timmer and Szirmai 2000, Peneder 2003) Regression analysis including structural variables: higher shares of high-tech industries has positive impact on growth Growth accounting (Jorgenson and Stiroh 2003, van Ark et al 2003)

5 Sectoral differences in innovation Technological regimes Pavitt (1984) taxonomy based on several dimensions of innovation Recent efforts at new innovation-based classification in services Miozzo and Soete (2001) extends the Pavitt taxonomy to services

6 Innovation-based taxonomies 1.Pavitt taxonomy (manufacturing) Supplier dominated Scale intensive Specialized suppliers Science based 2.Miozzo and Soete (services) Focus on the linkages between manufacturing and service and on the increased importance of knowledge and information technologies Supplier dominated services Physical networks Information networks Science-based/specialized services (also KIBS)

7 Specialized suppliers manufacturing Science based manufacturing Scale intensive manufacturing Supplier dominated Manufacturing and services Scale intensive infrastructural services: Physical and information networks Knowledge intensive Business services (KIBS) Source: Castellacci (2006)

8 Data EUKLEMS database, 12 EU countries, US, Japan, Methodology Shift-share analysis to decompose labor productivity growth (LP= value added / hours worked) IntraShift Decomposition calculated annually, dynamic shift negligible

9 A modified shift-share decomposition van Ark and Timmer (2003) After re-allocating shift effects to expanding sectors, the contribution of sector i to LP growth will be: Define K and J as the set of expanding and shrinking sectors. The average productivity of the shrinking sectors

10 Average annual productivity growth

11 Contributions to labor productivity growth

12 Annual growthShare in 2003 WithinStaticDynamicSumLPVAEmplVA EU-15SI SD SB SS Total Japan*SI SD SB SS Total USSI SD SB SS Total Decomposition of manufacturing labor prod growth, Pavitt taxonomy,

13 Findings Major weight of within growth contribution, but shift effects are significant and they indicate a shift from manufacturing to services Productivity growth higher in manufacturing than in services Some services escape the Baumol disease and show already high productivity growth (PN and IN services) Large cross-country variation in group contributions

14 Discussion of the findings Prominent role of networks services in the innovation-based taxonomy Key knowledge/technology generating role of SB (ICT production) and SI sectors Marginal role of SD and SDS Disappointing contribution of KIBS can be explained with: measurement errors (Wőlfl, 2003) reliance on outsourcing as a constraint to productivity gains (Fixler and Siegel, 1999)

15 Conclusions Use of innovation taxonomies as lenses to interpret structural change and growth Modified shift-share decomposition to account for direction and quality of shift effects More on the cross-country variation in the contribution of different groups of sectors Further step: Relate to links between the properties of national systems of innovation and the differences in sectoral performance