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Emerald Group Publishing Limited
Copyright © 2011, Emerald Group Publishing Limited
Business services in European economic growth
Article Type: Suggested reading From: Strategic Direction, Volume 28, Issue 1
Luis Rubalcaba and Henk Kox,Palgrave Macmillan, Basingstoke,2007,ISBN: 978-0-230-00202-9,302 pp.
Over the past two decades, services in general, and in particular the business-services sector (hereafter BSS), are playing an increasingly important role in the global economic structure. The former currently represent about 70 percent of value added and employment in the EU15. BSS now represents over 11 percent of total employment and value added of the EU15. Furthermore, in the period 1979-2001, over half (54 percent) of total employment growth in the EU and 18 percent of income growth is attributable to these services.
BSS span a wide range of services that are generally traded between firms. They encompass services as diverse as software development, temporary employment agencies, equipment rental, financial consulting, translation, or accounting, etc. BSS are related to the production processes of all economic sectors and, as suppliers of intermediate inputs, are often knowledge-intensive (Chen, 2009; Martinez-Fernandez, 2010; Pechlaner and Bachinger, 2010). In this context, the central idea of this book is that BSS are contributing substantially to economic growth, not only in employment, but also in terms of productivity and innovation.
Three features can be highlighted in this book: its timeliness, originality and depth. First, it is appropriate because in the context of the current economic crisis, it provides interesting policy recommendations on the contribution that BSS can make to European economic growth. The novelty of this study lies in the analysis of various issues related to the topic that have previously not received adequate attention. These include the study of BSS sector relations with the rest of the economy, market operations, and especially its role in the dynamics of the whole European economy. In the words of William Baumol, “this book is not confined to theory and goes on to explore the associated reality, casting needed light in an important subject that has previously too much been kept in the dark” (foreword).
With regard to the quality of this book, a glance at the 15 chapters that examine the various dimensions of BSS is enough to confirm its depth and range of analysis. These chapters are the result of research by 21 well-known authors (Luis Rubalcaba, Henk Kox, Ian Miles, Dirk Pilat, Paul Baker, Franceso Crespi, Jose Camacho, Mercedes Rodriguez, Jeremy Howells, Bruce Tether, Elvira Uyarra, Aija Leiponen, Werner Hölzl, Andreas Reinstaller, Paul Windrum, George van Leeuwen, Henry van der Wiel, Desirée van Welsum, Arjan Lejour, John Bryson, and Peter Daniels) and are grouped into three sections. First, the causes and effects of rapid growth in the sector (chapters 1-4). This section analyzes the main causes of the high growth of BSS and its effect on the European economy. The vital elements are the expansion of the BSS sector, productivity (Hechavarria and Reynolds, 2009; Koschatzky and Stahlecker, 2010; Lee et al., 2009; Lin, 2010), and the effects of externalities on other sectors of the European economy. Second, its contribution to competitiveness and the growth of other sectors (chapters 5-10). This section emphasizes the effects of dynamic externalities arising in BSS and how they affect productivity and innovation in other sectors. This point is especially relevant because, although BSS present low labor productivity, their use can increase the productivity of client firms. Third, the characteristics and dynamics of their markets at local, European and international levels (chapters 11-15). This section seeks to answer whether firms really compete with each other or are operating in segmented markets. The study of the role of government regulations also becomes important in this sense.
In this final section, the editors draw practical implications from their analysis and in doing so present several policy suggestions for action in the final chapter. From a summary of the main existing market failures they recommend a variety of courses of action. In short, the research contained in the book attempts to answer questions that currently are on the minds, not only of experts in the field of business services, but anyone who has doubts about the economic transformations that characterize contemporary society. Some of the issues could be summarized as follows.
Is the slow evolution of the productivity of BSS an obstacle to economic growth in Europe? This phenomenon, known as “Baumol disease”, gives some cause for concern. However, as shown in several chapters of this book, it does not represent a major economic challenge, as there are positive externalities of productivity and innovation from the BSS sector towards other industries (Amara et al., 2009). Baumol himself says: “the surprising part of the story is the evidence that the growth of this relatively stagnant sector tends to accelerate the productivity growth of the economy as a whole, and does so to a significant degree”. However, it is necessary to take action to improve market transparency in BSS, and in particular to ensure that productivity gains are transferred to client firms.
Is the BSS sector growth process only due to the outsourcing of existing services in the manufacturing industry? The answer is also negative. First, BSS are not only used for manufacturing, but are also used by other service industries and public administrations. Second, because certain BSS are new services and new skills that cannot be compared with the services previously provided in-house (Baggio and Cooper, 2010; Cegarra-Navarro et al., 2009; Jensen et al., 2010; Peris-Ortiz, 2009; Rodríguez and Santos, 2009; Tolstoy, 2010; Valle and Castillo, 2009). In other words, we can say that growth in BSS is not only due to growth by substitution, but also a creation of trade growth (chapter 1). In the words of the editors, “ the current tertiarization of production inputs is a process that can be compared to the way that manufacturing industry has developed out of the agricultural and craft sector” (introduction).
What role do the different types of contracts in knowledge intensive business services play in entrepreneurial innovation? The research presented in chapter 9 of that book presents three main results. First, the incentives for teams and qualitative incentives may be more effective than those based on general economic performance. Second, it was found that the establishment of performance-based pricing harms innovation. This is because projects working to tight deadlines are unlikely to generate innovative ideas. Third, there is an indication that BSS suppliers who sign exclusive contracts with customers or transfer the rights to their designs on a regular basis to their customers (Ekinci and Dawes, 2009; Fan and Ku, 2010; Sigala, 2009), tend to be significantly less innovative.
Does distance affect the performance of BSS? This aspect should be differentiated according to types of BSS. In the case of standardized services, spatial proximity is becoming less important, as evidenced by the proliferation of off-shoring (Rondan-Cataluña et al., 2010). However, for other services (BSS customized for the client) proximity seems essential.
Can the European market be considered a single market for BSS? The answer that emerges is negative. As seen in the third part of the book, there is strong evidence that competition is weak: the market is segmented and there is a lack of transparency (different national regulations, regional differences, firm size, etc.). This affects the contribution of BSS to the growth of the entire economy. Government policies have also adversely affected competition, mainly due to the high costs of start-ups because of the existence of different national regulations (Arando et al., 2009; Hospers et al., 2009; Mas-Verdú et al., 2009). In short, the European single market in services is far from functioning adequately.
Are BSS firms efficient in terms of size? Again the answer is negative. In chapter 11, we find that economies of scale are also relevant in this sector. The minimum efficient scale is about 20 employees, and most firms are operating below that level. These firms with fewer than 20 employees have clear disadvantages with regard to productivity.
How do services innovate? In chapter 8 we find that the innovation process is complex and involves interdependent and complementary dimensions. It is not simply a matter of adopting certain technologies provided by a supplier (Warren et al., 2009). Rather, the development of new services often requires the development of new organizational schemes. And it is these interactions that improve the performance and productivity of the company, since the value of an item increases with the presence of other elements. Finally, the changes are particularly important in organizational structure (Lee et al., 2010; Palacio and Soriano, 2010; Yang, 2009), and professional skills.
In the long-term, what impact can outsourcing have? Chapter 10 analyzes the impact of outsourcing on the overheads costs of administration and on the growth of productivity in the long term. The analysis suggests that if company directors continue to turn to outsourcing (reducing overhead costs), this may undermine the productivity gains generated by long-term organizational innovation. This occurs when the modular components are outsourced, reducing the firm’s potential for organizational innovation.
Is there sufficient statistical information on BSS? Not yet. Several chapters of the book (Introduction, chapter 3) stress the fact that, although substantial progress has been made, the statistics available are inadequate. These deficiencies are identified in terms of both quality and quantity, especially because data is too widespread. This constitutes a major barrier to further progress in research on the sector.
Is European policy needed aimed specifically at BSS and what policies should be put in place? In this case the answer is clearly yes because important market failures exist that require the application of EU policies. In any case, these actions have to take into account the national policies of member states. Regarding market failures, authors identify three main areas: social externalities not taken into account; the existence and abuse of market power; and the existence of asymmetric information and lack of market transparency. As for the future course of action, the European Union emphasizes the need to promote competitive, transparent markets. Among other actions, they highlight the need for flexibility in markets and standardization of quality regulation and firm taxation. Regarding policy recommendations at a European level, the following aspects can be identified: market integration and the elimination of barriers in the internal market for services. Openness to international competition could bring greater pressure to improve productivity and greater innovation in products and processes. Innovation policies and technology transfer could also rely on BSS. These services produce innovative effects on business clients and also act as disseminators of innovation. It is important to protect intellectual property rights and create incentives for innovation in BSS enterprises. EU member countries could benefit from the standardization of national quality norms that apply to BSS firms. At a national level, two aspects need attention: the promotion of employment. As the industrial structure and market conditions differ considerably between member states, national policies would be recommended. Achieving more flexible markets may also encourage the growth of certain areas of business services. In short, this book edited by Professor Luis Rubalcaba and Henk Kox represents a significant contribution to the economic literature on BSS. Two reasons underpin the strength of this new publication. First, individual contributions by renowned specialists in industrial economics, innovation and international trade are to be found in the book from start to finish. Its second strength stems from for the mosaic created by all these contributions from interesting and varied points of view. These factors mean that this book could become a reference point for all those wanting to understand current trends in BSS.
Reviewed by: Francisco Mas-Verdú, Universidad Politécnica de Valencia (Spain).
This review was originally published in Management Decision, Vol. 49 No. 4, 2011.
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