Producer Services and Manufacturing Productivity: Evidence from Japan Industrial Productivity Database

As service sectors account for a growing share of economic activity in advanced economies, economists claim that the quality and cost of producer services supplied by the service sectors are crucial in supporting the competitiveness of manufacturing firms. This paper provides an empirical assessment on this argument by exploring a link between service-sector performance and manufacturing productivity in Japan for the period 1980-2005. Assuming that an improvement in producer services is measured with errors by a price deflator growth of service outputs, I propose an estimation framework in which an observed productivity depends partly on the performance of service sectors weighted by service-input intensities. Robust to a wide range of specifications and alternative indicators of services upgrading, I find little evidence that the service sectors contributed to productivity growth of the manufacturing sector. Thus, my findings do not support the claim that the upgrading of producer services improves manufacturing competitiveness.