Study On Industrial Policy and Services (Eng) / Estudio de Política Industrial y Servicios (Ing) / Industri Politikaren Eta Zerbitzuen Analisia (Ing)

Study on Industrial Policy and
Services
Within the Framework Contract of Sectoral
Competitiveness Studies – ENTR/06/054
Final Report – Part I
Client: European Commission Directorate-General Enterprise & Industry
Paul Baker – Project Team Leader

Ian Miles
Luis Rubalcaba
Nora Plaisier
Saara Tamminen
Isabelle de Voldere
Rotterdam, 5 November 2008

Disclaimer: The views and propositions expressed herein are those of the experts and do not
necessarily represent any official view of the European Commission or any other organisations
mentioned in the Report
ECORYS Nederland BV
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ECORYS Macro & Sector Policies

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Study on Industrial Policy and Services

Preface
This Final Report has been produced as part of the “Study on Industrial Policy and
Services” commissioned by the European Commission Directorate General for Enterprise
and Industry, within the context of the framework contract on Sector Competitiveness
Studies (ENTR/06/054).
The Final Report is published in two parts. The first part, which is covered in this
document, provides the main background analysis of industry-service interactions and
cross-cutting policy themes and issues, together with the Executive Summary. The second
part, covered in a separate document, provides a review of six selected service sectors
that are heavily used by industry, together with a synthesis of the main findings from the
sectoral analysis.
The analysis contained in the Report has been undertaken by a team of consultants from
ECORYS Netherlands and IDEA Consult under the direction of the Team Leader, Paul
Baker. The project team has been supported by three external experts: Prof. Ian Miles
(Manchester Institute of Innovation Research), who has been the main contributor to
Section 1 of the Report, and Prof. Luis Rubalcaba (University of Alcalá, and President of
the European Association for Service Research, RESER) and Henk Kox (CPB –
Netherlands) who have provided guidance and advice.

Executive summary
Background
One of the main structural changes in recent decades has been the shift in employment
towards services in highly developed economies. This should not, however, be equated
with de-industrialisation. It reflects the deepening international division of labour and a
disaggregation of previously integrated vertical value chains. As a result, the cost, quality
and productivity of certain service sectors, have an impact on the competitiveness of
industry. In addition, the competitive advantage of manufacturing firms is increasingly
derived from the value contributed by service processes associated with their core
activity, with competition shifting away from how companies build their products
towards how well they serve customers before and after they produce and sell products.
As a consequence, industry and services are inextricably linked. However, from an
economic, statistical, and policy perspective, industry and services have largely been
treated as independent of each other.
In the 2007 Mid-term review of industrial policy, the Commission introduced an initiative
on “industry and services” to conduct a detailed screening and competitiveness analysis
of the service sectors and their impact on industrial competitiveness and, if necessary,
further sectoral monitoring. The outcome would be the identification of all obstacles to
improved competitiveness, and possible market failures, which might justify actions to
address specific problems in individual industrial and/or service sectors.
Scope of the study
The study has thoroughly analysed the process of interaction between service providers
and their clients, the issue of services productivity, and examined six sectors that are
heavily used by industry, namely: engineering and technical consulting, computer related
services, logistics, private employment agencies, industrial cleaning, and private security
services.
The six sectors examined employ around 14.7 million persons in the EU and have total
revenues of about € 1,150 billion. At a rough estimate, approximately € 230 billion
represents procurement by manufacturing industry in Europe.
Key findings and recommendations
Service inputs into manufacturing – as a proportion of total production costs – appear to

be positively related to the size and level of development of an economy, with greater use
of external service inputs in ‘old’ Member States compared to ‘new’ ones. In terms of the
Study on Industrial Policy and Services I

composition of service inputs across sectors, there are some – albeit relatively predictable
– patterns that emerge: for example, the importance of transport services for basic and
intermediate goods industries; renting of machinery and equipment for the construction
sector and mining; computer services for office machinery and equipment,
communication equipment and publishing and printing; R&D services for the chemicals
industry; and, on the basis of limited individual country estimates, the importance of
advertising and market research for consumer goods sectors such as processed food,
beverages, tobacco, and toiletries.
Outsourcing Much attention has been paid to this phenomenon, but it would appear that
two opposing trends are in operation. Services without a direct relation to the industrial
product are increasingly being outsourced to specialised service firms, allowing
companies to concentrate on their core competences. Services which are more directly
related to the manufactured product (‘product accompanying services’) are growing in
importance within manufacturing companies and are less likely to be outsourced.
Furthermore, the fact that many knowledge and information services are amenable to
codification and hence ICT-enabled forms of digital delivery can radically affect the
tradability of service outputs and also the interaction between service providers and their
clients and suppliers.
For many firms, it is unrealistic to speak of an outsourcing choice for service activities
(i.e. between in-house and external services provision). Particularly for SMEs, it may not
be possible for firms to develop internal capabilities to match those offered by external
services providers, or it may be that their level of demand is insufficient to attain the
minimum level necessary for effective services provision or to achieve economies of
scale (or scope) that would make internal provision a feasible option. In such
circumstances, the actual choice is between not undertaking the service activity and
utilising an external service provider. Access to specialised service markets - and the cost
and quality of the services available within the market – can thus become critical
elements in determining overall performance and competitiveness.
Productivity Business services generally perform badly in terms of their own productivity
growth rates, but can contribute to raising the productivity of their clients. However, it is
important to distinguish between manufacturing-based and service-based approaches to
productivity and competitiveness analysis. Service delivery requires, to a greater or lesser
extent, a certain amount of “co-production” on the part of the client. Some service
activities (e.g. standardised cleaning services) are mainly judged by their “efficiency”,
whilst others (e.g. professional services) are largely judged by their “effectiveness”,
namely the achievement of a desired outcome, with less regard to the amount of resources
needed to reach the result. The study proposes a typology for services along these lines,
and advocates that a new approach to measuring services productivity is needed.
Market failures The study examines the extent to which market failures exist in the
sectors analysed, with particular attention to the role of information asymmetries, such as:
problems for clients to assess the competence and experience of service providers, to
assess the skills or resources needed to address a problem, to clearly specify the service to
be provided, etc. These problems are liable to be more important when the services to be
provided are more specialised and/or more knowledge-based. Such asymmetries raise the

transaction costs to potential business service clients of utilising external service
providers, thus influencing the choice over whether to internalise or externalise service
functions.
Regulatory fragmentation Differences in national regulatory measures play a very

important role in shaping the development of all the service sectors covered by the study.
The nature and stringency of national regulations act as barriers to entry and determine
the possibilities for firms to achieve economies of scale.
The effects of stringent regulations that place limitations on the types of activities that
services providers are allowed to offer, or that entail high compliance costs, are clearly
reflected in the levels of concentration and consolidation observed in national markets.
For example, in both the private security sector and the temporary employment services
market, countries with high levels of national regulation are characterised by much higher
degrees of market concentration. By contrast, stringent national regulations on who can
perform technical consulting services in some Member States appear to have the opposite
effect, by creating an entry barrier to these national markets for international competitors
and restraining the development of larger companies.
Labour market regulations, taxes, and social security are also of particular importance for
labour intensive sectors, especially in terms of low-skilled workers, whilst other tax
issues and fiscal regulations (e.g. environmental taxes) influence location decisions (e.g.
concerning transport and distribution centres).
The positions of industry associations concerning current regulatory environments differ,

however. For example, whereas private employment agencies are generally in favour of
greater market liberalisation, the priority issue for the private securities service sector is
to ensure that requirements are raised in those Member States where security service
providers are subject to very low levels of regulation. For both these sectors, neither of
which is currently included within the Services Directive, greater European
harmonisation of sector regulations – and ultimately completion of Internal Market rules
– are seen as important.
Voluntary and professional standards Industry and professional standards – including

codes of practice – is an area where many of the sectors are active. To a large extent, the
development of industry norms and standards for business services is at a relatively
rudimentary stage and it is only recently that national and international standards
organisations have turned their attention to this area (many national standards do exist,
but mainly for consumer-related services). However, a number of sectors have been, or
are currently, active in developing professional standards, codes of conduct and ‘best
practice’ guides for the procurement of their services. In some sectors, where services are
fairly ‘standardised’ and markets are relatively transparent, standards act as a guarantee to
clients that the service provider delivers a service that meets some (minimally) specified
requirements. Often standards are used as a means of promoting more ‘professionalism’
in the industry, but since it is very difficult to develop standards for customized services,
clients have to rely more on the reputation of the service provider rather than objective
criteria to assess their quality.
Study on Industrial Policy and Services III

Skills shortages Labour force and skills and the inter-linkage with underlying
demographic change are an area where all sectors report important challenges. On the one
hand, for ‘low-skilled’, labour-intensive service sectors, a shrinking active labour force
can be seen to present a problem of securing a sufficient volume of labour, particularly
where the work itself may be associated with relatively unsocial or poor working
conditions and is seen as relatively unattractive. To some extent, this can be seen
reflected in, for example, the prevalence of minority and (im)migrant labour in sectors
such as industrial cleaning. Here, raising standards, training and skills does not only
involve efforts to increase the professionalism and quality of services provision, but is
also seen as an element in increasing the attractiveness of the sector to potential workers.
Shortages of workers with specific skills are a major concern for knowledge-intensive
sectors such as computer related services, and engineering and technical services. These
sectors face external challenges from countries with a growing stock of technically-
skilled workers (e.g. engineers, ICT professionals, etc.) and hence the increasing potential
for off-shoring of activities. At the same time, tight conditions in local labour markets
mean increased competition from other sectors that may be able to offer more attractive
employment conditions.
For the private employment agencies sector, which can be seen as an intermediary in the
process of labour supply and demand matching, the increasing difficulty that their clients
face in recruiting skilled and specialised workers is reflected in the fact that this is the
fastest growing segment of the employment agency business in Europe. In this respect,
demographic change and changing skills needs and availability represent important
opportunities for the sector. At the same time, existing national regulation and restrictions
on the use of temporary agency work are important for the sector – and their clients – in
shaping national skills profiles of temporary agency workers.
Research and innovation Skills shortages place limits on the potential to drive
innovation and productivity developments. Among the sectors covered in the study, this
is most obvious in the case of sectors such as engineering and technical services,
computer-related services and the more skilled (typically ICT-related) segments of
logistics services, which are heavily reliant upon knowledge skills to drive innovation
and, in turn, productivity developments. A key aspect is the growing complexity of the
services being requested by clients, which results in an expanding scope of knowledge
and skills requirements combined with management and organisational capacity to handle
complex projects. At the same time, increased client pressure to reduce costs, low
margins, and the prevalence of small companies – particularly in engineering and
technical services – all mean that firms within these sectors face considerable constraints
in investing in R&D and innovation.
There is concern that the intellectual property mechanisms offer business services
providers little help in safeguarding returns on investment in R&D and innovation. This
results in under-investment, and lower than optimal take-up of innovation, by business
services. In a broader context, there is a perception that innovations in business services
are under-recognised and under-valued when compared to tangible product innovations
and innovations in (manufacturing) processes.

R&D and innovation aspects arise also in the technical development of equipment and
systems associated with less knowledge-intensive sectors such as security services and,
even, industrial cleaning. Here, an important element of the knowledge and innovation
equation rests on the relationships between the providers of equipment, materials and
systems and the service providers themselves. There appears to be scope for
strengthening linkages between equipment manufacturers, service providers and,
ultimately, service clients so that both technological and organisational innovations can
make a greater contribution to enhancing the efficiency and effectiveness of service
provision.
Market access issues for the sectors covered by the study are by and large related to
issues of diversity of national regulatory systems and restrictions (see above). For
example, high compliance costs can be major impediments to the internationalisation of
service activities, particularly where proximity to clients and, hence, establishing a local
presence (e.g. through FDI) is necessary for successful international development. The
study has not assessed in any depth market access issues related to markets outside
Europe. These issues are perhaps of most importance for the logistics sector, where they
are very closely linked to liberalisation of transport markets and trade facilitation
measures (e.g. customs procedures, inspections etc.) and restrictions on FDI in the
transport sector. Slow progress in multilateral negotiations on trade facilitation is seen as
an important impediment to further development of the logistics sector.
Structural change is considered to be an important issue for all of the sectors covered by
the study. To a large extent, this reflects the role played by these sectors in the
externalisation process (e.g. outsourcing and off-shoring etc.), which, in turn, provides an
important driver of growth for the sectors. The private employment agency sector has a
very specific role in assisting business in adapting to structural change and changing
labour requirements. There is also an increased need for private security services to
ensure greater supply chain security due to fragmentation of value chains. At the same
time, structural change is also taking place within service sectors themselves. One aspect
of this is the greater segmentation of services markets and providers, reflected in
consolidation among major players and ‘niche’ strategies pursued by smaller firms and
new entrants. In addition, expanding the scope of services provided and the development
of multi-service and ‘one-stop shop’ approaches, such as facilities management services,
is a further feature of structural change taking place within the business services sector.
Competition issues The report has examined some limited aspects of possible
competition policy issues within the sectors covered. One aspect is the role played by
regulations in shaping the structure of national service markets. For example, very high
levels of concentration are observed in some national markets for some business services.
Whether these may give rise to competition concerns has not been assessed and,
moreover, to do so would necessitate more in-depth examination of the correspondence
between market segmentation on the supply-side and that on the demand-side. From the
perspective of international and global competition, there are important differences in
potential competition pressures. For some of the sectors covered, provision of services
requires close geographical proximity to clients and, therefore, international (global)
competition per se is of limited relevance, except where foreign firms establish
themselves in local markets. For engineering and technical consulting and logistics,
Study on Industrial Policy and Services V

global competition is an important factor in the development of the market. For example,
the engineering consultancy sector is already seeing some activities being outsourced to
lower cost regions such as India, where there is a plentiful supply of engineers. At the
same time, global competitors are starting to become more present even in European
markets. Within the logistics sector, Chinese companies are becoming increasingly
important competitors and, closer to home, an additional challenge comes from the
increasing attractiveness of Eastern Europe as a location for logistics activities, due to
both lower costs and the growth of markets in the region.
From the analysis contained in the report, and following the points raised above, the
following areas of EU policy initiatives stand out in terms of their general relevance for
the sectors covered by the study (see Table A):
• Better regulation and simplification. Among the current EU industrial policy
initiative areas that stand out in terms of across the board relevance for the sectors
covered by the study are the themes of ‘better regulation and simplification’ (with
particular reference to greater harmonisation of EU regulatory policies and
frameworks) and ‘other standards’ (with particular reference to the development of
European definitions and standards, professional standards and training, and ‘best
practice’ guidelines).
• Employment, qualifications, skills and flexicurity is another EU policy area that
stands out as being highly relevant for business services. Improving skills levels,
raising professional standards and addressing labour or specific skill shortages are
raised as important issues for all sectors covered by the study.
• Services and organisational innovation. There is also a link to ‘organisational
innovation’ and the possibilities to enhance sector performance through
improvements in the organisation of labour-based processes in the business services
sector. A second aspect of ‘services innovation’ relates to enhancing the interface
between service providers and clients, particularly – but not only – in relation to more
knowledge-intensive service activities. For these sectors, more traditional services
innovation (i.e. through new service-product innovations) is important for improving
performance and competitiveness.
Recommendations The report contains a wide range of recommendations that could serve
to improve the competitiveness of the service sector, its impact on the competitiveness of
industry and the ability of manufacturing companies to provide added-value services to
their customers more easily. In order to prioritise these possible actions, and to implement
those that are considered necessary, an extensive consultation with all relevant
stakeholders is required. In particular, the report echoes two of the key recommendations
of the European Economic and Social Committee, namely:
• Setting up a High Level Group on Business Services to undertake deeper analysis
of the sector, to screen existing policies in order to identify and assess the more
effective and successful of these in regard to business services, and to design
concrete policy actions to address major gaps and needs.
• Establishment of an Observatory on Business Services to monitor results of
actions implemented by EU and to publicise best practices, both within the
industry, and in the Member States.

Table A Sector screening of policy initiatives: actual or potential relevance for the sector
Heading Initiative Relevance
Industrial Security Employment Engineering & Logistics Computer

Cleaning Services Services technical services related services
Services Services
Trade policy - - -
Trade
Proper functioning
-
of the IM
Public procurement -
Competition policy - - -
Better
Better regulation
regulation
and simplification
Technical standards - - -
Other standards
Health and safety - - - - -
Research and
- -
development
Intellectual property
- - - -
rights
Innovation policy - - -
Knowledge
and skills
Employment,
qualifications, skills /
Flexicurity
Access to finance /
- - -
risk capital
Waste, water, air - - -

Energy and
environment Intensive energy
- - - - - -
use
Organisational and
services innovation
Support for
knowledge intensive - - -
business services
Services Measurement and
recognition of - - - -
intangible assets
Regional actions
(demand and supply - - -
matching)
- No or limited relevance
Relevant
Important
Very important
Study on Industrial Policy and Services VII

Table of contents
1 Introduction and extended overview 1

1.1 Rationale 1
1.2 Background 1
1.3 Study objectives and scope 3
1.4 General EU policy context 4
1.5 Overview of industry-services interactions 4
1.5.1 Outsourcing of service activities 5
1.5.2 Digital delivery in the business services sector 6
1.5.3 Supplier-client relationships 6
1.5.4 Industry use of market services, evidence from input-output data 7
1.6 Service characteristics and implications for productivity 7
1.6.1 The productivity and employment challenge for business services 7
1.6.2 The need for new approaches to characterising and measuring
productivity in services 8
1.7 Services-related policy issues 9
1.7.1 Information asymmetries and transactions costs 9
1.7.2 Professional, quality and technical standards 10
1.7.3 Client-provider relationships 10
1.7.4 Intellectual property rights and innovation 11
1.7.5 Market structure and market access 11
1.8 Screening the competitive position, framework conditions and policy
environment of business services sectors 11
1.8.1 Screening of framework conditions in the business services sector 12
National and EU regulatory measures and standards 12
Industry and professional standards 12
Labour force and skills 13
Knowledge, R&D and innovation 14
Market access 14
Structural change 14
Competition issues 15
1.8.2 Screening against existing EU policy initiatives 15
1.9 Priorities and recommendations for policy analysis and development 16
2 Industry-service interactions: externalisation and internalisation 19

2.1 Overview of industry-services interactions 19
2.1.1 Introduction 19
2.1.2 Evidence and findings from the economic literature (overview) 23
2.2 Outsourcing of service activities 25
2.2.1 Economic and business factors influencing outsourcing decisions 25

2.2.2 Institutional factors influencing outsourcing decisions 27
2.2.3 Theoretical approaches and types of outsourcing relationships 28
2.2.4 Geographic aspects of outsourcing 29
2.2.5 Services outsourcing by activity and function 33
2.2.6 Outsourcing contracts 35
2.2.7 EU performance as a sourcing destination 36
2.3 Services provision by industry 36
2.3.1 Motivation for manufacturers to provide services 36
2.3.2 Types of services provided by manufacturers 37
2.4 Digital delivery and implications for business services 40
2.4.1 Overview of digital delivery of business services 40
2.4.2 Digital delivery in the context of a general framework of distributed
work 41
2.4.3 Service characteristics influencing digital delivery of business
services 42
2.4.4 Use of digital delivery in the business services sector 44
2.4.5 Impediments to digital delivery and policy implications 47
3 Industry-service interactions: supplier-client relationships and the role of

co-production 51
3.1 Introduction 51
3.2 Asymmetric information and transaction costs 51
3.3 Standardisation, Specialisation, and Interactive Relationships 53
3.4 Co-production 56
3.4.1 Co-production in services 56
3.4.2 Client roles and co-production 59
3.4.3 Service provider’s management of co-production 62
3.4.4 Service clients’ management of co-production 63
3.5 Knowledge and innovation 67
3.6 Managerial and policy implications 70
3.7 Future analysis – key services and sectors 72
4 Classification of service sectors 75

4.1 Official industrial (statistical) classification of services 75
4.2 Towards a policy relevant typology of services 79
4.2.1 A productivity-based typology of service sectors 86
5 Industry use of market service: evidence from input-output data 93

5.1 EU-wide estimates of services use by industry sectors 93
5.2 Patterns of services use by industry sectors across Member States 96
5.3 Individual country estimates of service use by industry 103
6 Industrial policy development and business services 113

6.1 Introduction 113
6.2 EU industry policy challenges and their interaction with business services 113
6.2.1 Main challenges for EU industrial policy 113
6.2.2 Business services in the context of the challenge of globalisation 115

6.2.3 Business services in the context of the challenge of technological
change and innovation 118
6.2.4 Business services in the context of the challenge of industrial
productivity gaps and employment 119
6.2.5 Business services in the context of the challenge of climate change
and the environment 120
6.3 EU industrial policy framework and the integration of service issues 121
6.3.1 The general framework of EU industrial policy 121
6.3.2 Business services within the EU industrial policy framework 122
6.4 The broad framework of EU services-related policy and the role of
complementary policies for business services 124
6.4.1 Quality and standards policy 126
6.4.2 Innovation and R&D policy 128
6.4.3 Regional policy 133
6.4.4 Employment and qualification policies 133
6.4.5 Entrepreneurship policies 134
6.4.6 Knowledge and statistics for services 134
6.5 EU business services policy background and recent development 135
6.5.1 “The contribution of business services to industrial performance”
COM(1998)534 135
6.5.2 “The competitiveness of business-related services and their
contribution to the performance of EU industry” COM(2003)747 136
6.5.3 EESC Opinion on services and European manufacturing industries
(2006) 137
6.5.4 EESC Opinion on developments in the business services sector in
Europe (2008) 138
7 Towards an EU business services policy 139

7.1 Introduction 139
7.2 Economic rationale for a business services policy 139
7.2.1 Market power and market imperfections (structure, access,
competition and trade) 139
7.2.2 Information asymmetries 142
7.2.3 Social externalities 143
7.2.4 Systemic failures 144
7.3 Heterogeneity of business services: a general framework for industrial
policy screening 145
7.4 Heterogeneity of business services: findings from sector reviews 148
7.4.1 Screening of framework conditions 148
7.4.2 Screening of market and systemic failures 153
7.4.3 Screening of policy initiatives 154
7.5 Recommendations and priorities for policy development 157
7.5.1 The case for EU policy towards business services 157
7.5.2 Main recommendations 157
8 References 161
Annex 1: Supplementary tables and figures 168

1 Introduction and extended overview
1.1 Rationale
The underlying rationale for examining services in the context of industrial policy is that
the competitiveness of many manufacturing sectors/companies is inextricably linked to
the performance of service activities, whether externally supplied or undertaken within
manufacturing companies themselves. To date, however, from a policy perspective,
industry and services have largely been treated as if they are independent from each other.
The linkages between industry and services mean that many industrial policy measures
aimed at improving competitiveness, or coping with structural change, are likely to have a
major impact on services sectors in terms, for example, of employment and value added.
At the same time, the main beneficiaries of some measures aimed at service sectors1 are
likely to be industry sectors that are either users of these services or for which these
service sectors represent important markets for their products. Further, where service-
related problems are encountered in manufacturing sectors – in terms of the availability of
services or access to markets for services, for example2 – then this may require
(industrial) policy measures aimed explicitly at the services upon which manufacturing
depends.
The above comments indicate the need to take a more ‘holistic’ approach to industrial
policy that considers industry value-chains in a broader context – an approach that looks
both up and down the chain. Such an approach should aim to provide a better
understanding of the interactions between manufacturing and services and the effects of
these interactions in terms of driving the development and competitiveness of
manufacturing (and service) sectors. This will, in turn, enable the implications for
industrial policy to be identified.
1.2 Background
For the more developed economies, the rise of the service economy represents the
predominant pattern of structural change observed since the beginning of the 20th century.
Although rising incomes have contributed to increased final consumer demand for
services, a major determinant of this process has been increasing demand from producers
1
For example, the Services Directive or efforts to promote the use of voluntary standards for services.
2
There are a broad range of ‘access to market’ issues that include, for example, access to service inputs per se;
international dimensions of market access and trade in services; manufacturing companies ability to supply complementary
services; etc.
Study on Industrial Policy and Services 1

for external service inputs provided by specialised suppliers (as opposed to in-house
provision of service activities).
Services activities are an integral part of any economic process. This is reflected in the
pervasive nature of service activities in all production processes both within
manufacturing and in other service activities. Some level of service inputs, whether
drawn from within a company or from an external service supplier, are necessary for the
manufacture and supply to market of any material good. Moreover, the traditional
dichotomy between industry and services is becoming ever increasingly artificial, as the
boundaries between manufacturing and services activities and sectors become more and
more blurred. Many ‘outputs’ consist of combined services and manufactured products,
which may be supplied by companies from either the “services” sector or
“manufacturing” sector. For many industries, the “additional” services elements
surrounding the core product are a major focus of competition in industrial and consumer
markets alike, and manufacturers increasingly derive competitive advantage from the
value contributed by services processes associated with their core activities.
In this context, the growth in the share of economic activity attributed to service activities
and sectors should not be seen simply as increasing deindustrialisation of the economy.
Rather, in part, it can also be attributed to a growing interdependence between services
and manufacturing industries that reflects the deepening division (specialisation) of
activities and the disaggregation of previously integrated value chains. This can be
observed through the increasing share of service activities that is necessary for, or
complementary to, manufacturing production and that has, as a consequence, the effect of
raising the interdependence between services and manufacturing industries (Pilat and
Wölfl (2005)3).
The distinction between services and (the manufacture of) material goods remains
nonetheless embedded in current approaches to both classifying economic activities and
industrial policy development. Historically, services have been treated as a residual
category of economic activity, defined indirectly through their lack of clear relationship
to material products. Thus, the ‘tertiary’ services sector encompasses an extremely
heterogeneous range of activities that, as a consequence, make it difficult to define the
scope and underlying characteristics of the services sector as a whole. Efforts to
breakdown the services sector and to focus on key driving activities in the process of
structural change have given rise to the categorisation of a further class of activities,
called the “quaternary sector”. This covers comparatively new and fast growing branches
of knowledge-based and informational services (de Brandt (1999), European Commission
(2000))4.
This focus on the rising importance of knowledge-based and informational services has
brought increasing attention on the role and contribution of business services -
particularly the class of services referred to as “Knowledge-intensive business services”
3
Pilat, D. and A. Wölfl, “Measuring the interactions between manufacturing and services” OECD STI Working Paper 2005/5
4
de Brandt, J., “The concept of labour and competence requirements in the service economy”, The Service Industries
Journal, 19 (1), 1999; European Commission, “External services and industrial performance” in European Competitiveness
Report - 2000
2 Study on Industrial Policy and Services

(KIBS) - to industrial performance. The European Commission’s own Communication on
business services highlighted that the key importance of business services “lies in their
dynamic links and contribution to the competitiveness of EU Industry. An important
element in EU competitiveness policy is to promote intangible investment (knowledge
creation, quality, innovation, management etc.). Services are often required to supply key
elements of such investments. Hence, to promote intangible investments also requires the
promotion of services”.
This message was again repeated in the Commission’s mid-term review of industrial
policy under the EU’s Growth and Jobs Strategy5 (Lisbon Strategy), which noted that
“the cost, quality and productivity of certain service sectors, in particular Knowledge
Intensive Business Services, have an impact on the competitiveness of industry. For
example, regulations which affect the performance of professional and other business
services, financial services or retail and distribution also have an impact on industry. In
addition, competitive network industries enhance the competitiveness of industry as a
whole. Furthermore, industry is both a user and provider of a growing range of services
related to innovative technologies and products”.
1.3 Study objectives and scope
The overall objective set for this study is: “to conduct a detailed screening of
competitiveness analysis of the service sectors which are most closely related to
industrial competitiveness, and if necessary make proposals for further sectoral
monitoring”. The expected outcome of the study is to identify “all obstacles to improved
competitiveness, and possible market failures, which might justify actions to address
specific problems in individual industrial and/or service sectors”.
From the outset, it was clear that the targets set for the study are highly ambitious and
these need to be tempered by the recognition that understanding of the competitiveness of
service sectors and the interplay between services and industry is, despite being a rapidly-
developing area of economic and business analysis, relatively underdeveloped. Moreover,
from the above examples of linkages between performance of service sectors and
industry, the wide scope and variety of service sectors, and their interaction with
manufacturing, is evident. The services sector encompasses network industries (e.g.
energy production and distribution, telecommunications, transport services etc.), through
financial services and operational services (e.g. facilities management, industrial
cleaning, etc.) to professional services. In this context, it is not only the magnitude of
possible service-industry interactions to be addressed that is an issue but, also, the many
limitations on analysis that stem from the inherent weaknesses of available data on
services.
At the outset, some boundaries were set on the scope of analysis to be undertaken. Firstly,
in terms of the scope of service sectors, the analysis focuses on those services generally
classified as ‘market services’ (i.e. NACE Rev 1.1. categories G, H, I, J, and K) and
excludes energy and water services (E) and, unless otherwise mentioned, service
5
“Mid-term review of industrial policy: a contribution to the EU’s growth and jobs strategy”, COM(2007)374.

activities typically associated with public sector provision (i.e. L, M, N) and other
community, social and personal service activities (O). In terms of the scope of ‘industry’,
this covers manufacturing (D), non-energy extractive industries (CB), and construction
(F).
1.4 General EU policy context
Despite the fact that the competitiveness of many manufacturing sectors, and the firms,
therein, is inextricably linked to the performance of service activities – whether externally
supplied or integrated within manufacturing – industry and services have largely been
treated as independent of each other from a policy perspective. Moreover, the depth of
policy development with regard to services is noticeably shallow when compared to that
for manufacturing. To date, at an EU level, the focus for services policy has been on
regulatory measures in the two main areas of competition policy and internal market
policy. In areas of complementary (non-regulatory) policy, which is precisely the area
where EU industrial policy is most active, services-related policies are still largely in an
embryonic stage. Nonetheless, the importance of business services, and in particular
knowledge-intensive business services (KIBS), to industrial performance has been
highlighted in the European Commission’s own Communications on industrial policy.
1.5 Overview of industry-services interactions
A lot of attention has been given to the challenges for European industry resulting from
two underlying trends that have important implications for the industry-services
interactions. Firstly, there is the impact of globalisation, which is no longer just about
trade in goods, but increasingly involves the fragmentation of value chains, the
outsourcing of intermediate inputs and tasks and the increasing provision of integrated
bundles of services and manufacturing activities. Secondly, there is the rapid pace of
technological change, notably in relation to information and communication technologies
(ICT), that not only has profound implications for manufacturers, but also for service
providers in terms of both e-commerce (digital delivery of service inputs and outputs) and
in the organisation, coordination and management of service activities.
Much of the current discussion of service sector developments and industry-service

interactions has focussed on the externalisation (outsourcing) of service activities,
particularly where these services have been outsourced to a foreign country. Such
developments need, however, to be set against evidence of the growing importance of
service functions within manufacturing sectors and companies. It appears that the
competitive advantage of manufacturing firms is increasingly derived from the value
contributed by service processes associated with their core activity, with competition
shifting away from how companies build their products towards how well they serve
customers before and after they produce and sell products. Thus, it would appear that two
opposing trends are in operation:
• Services without a direct relation to the industrial product are being increasingly
outsourced to specialised service firms, allowing companies to concentrate on their
core competences;

• Services which are more directly related to the manufactured product (‘product-
accompanying services’) are growing in importance within manufacturing companies,
and are less likely to be outsourced.
The rapid pace of technological change and its association with the so-called ‘knowledge
economy’ has also focussed attention on the role of, and relationships between, services
and industry. On the one hand, this has been reflected in the attention given to the rapid
growth of what are commonly referred to as "Knowledge-intensive business services"
(KIBS) and their role in the creation and diffusion of knowledge to manufacturing. On the
other hand, there is the fact that many knowledge and information services are amenable
to codification and, as a result, ICT-enabled forms of digital transmission can radically
affect the tradability (both geographically and in time) of service outputs and the
interaction between service providers and their clients and suppliers.
1.5.1 Outsourcing of service activities
A range of potential advantages and disadvantages of outsourcing service activities can

be identified. Among the advantages of externally-provided services are: lower cost,
access to services that cannot be provided in-house, superior quality, speed of delivery,
increased flexibility to respond to demand or technological changes and the possibility to
focus internal resources on core competences. Against these must be weighed
disadvantages such as: loss of internal knowledge, dependence on external suppliers, the
risk of selecting the "wrong" service suppliers, loss of management control and the
transaction costs (i.e. selection, managerial and organisational) of outsourcing. Overall,
though outsourcing is the predominantly observed business process, the existence of both
advantages and disadvantages of outsourcing explains the simultaneous coexistence of
outsourcing and (re-)internalisation processes.
In terms of service functions that are subject to outsourcing, evidence suggests that these
tend to be services such as transport, logistics and postal services, renting and operational
leasing, marketing and sales and IT services, with facilities management also being of
importance for larger companies. It also appears to be the case that manufacturing
companies with a predominance of high wage positions (high skill companies) tend to
outsource low-skill, labour-intensive services such as cleaning, while retaining “closer-to-
core” activities like financial or legal services and that the reverse pattern is true for low
wage (low skill) companies.
Although there has been a great deal of attention and speculation surrounding
international outsourcing, the evidence from business surveys suggests that outsourcing is
dominated by local provision of external services. International outsourcing is still the
exception and, where it does occur, tends to be associated with necessarily international
functions such as transport and logistics. Among other service functions where
international outsourcing is important are advertising, management consulting and IT
services; for which we can speculate that this reflects the need to access knowledge of
international markets and/or international networks. Overall, geographical proximity
appears to remain an important criterion in determining outsourcing patterns, though the
evidence as to the causes of this behaviour and possible impediments to international
sourcing of services remains, at best, sketchy.

1.5.2 Digital delivery in the business services sector
Business services are being reshaped by the application of ICT and the shift towards more
intensive online delivery. Further, even for service types that are not in themselves
amenable to digital provision (e.g. manual services), the use of ICT has important
implications for the management and organisation of service activities. The ‘advantages’
brought to companies through digital delivery can be characterised in terms of both the
potential market size (reach) and the quality of interactions between a service provider
and their clients (richness). However, in keeping with the point made above, evidence
suggests that cross-border digital delivery of business services remains quite limited.
There does not appear to be much information available on patterns of use of ICT-
enabled technologies and digital delivery by different service sectors. There is some
evidence to suggest, as may perhaps be expected, that KIBS appear to make greater use of
online technologies to share documents and perform collaborative work than is the case
for Operational Business Services (OBS), whereas OBS make greater use of such
technologies to manage technical processes and workflows.
1.5.3 Supplier-client relationships
The economic literature on supplier-client relationships for services pays particular

attention to the role of information asymmetries. These asymmetries include the difficulty
clients have in assessing the competence and experience of service providers, assessing
the skills or resources needed to address a problem, clearly specifying the service to be
provided, etc. These problems are liable to be more important when the services to be
provided are more specialised and/or more knowledge-based. Such asymmetries raise the
transaction costs of utilising external service providers for potential business service
clients, thus influencing the choice of whether to internalise or externalise service
functions. The presence of information asymmetries also points to the potential
importance of learning process between service providers and clients, through which
mutual understanding can be developed, both with regard to the nature of services to be
provided and, for providers, client organisations and their requirements.
The issue of information asymmetries and learning processes may also be linked to the
role of clients in the co-production of services. It has long been noted that services are
frequently co-produced, in the sense that the service client is engaged in the production
process (i.e. ‘open’ production processes). The level of participation of clients can vary
significantly, with more physical service processes seen as requiring low levels of
participation, while knowledge-intensive services can require high levels of client
participation. The need for participation means that effective (and efficient) provision of
business services may lie not only with the service provider but may depend also on the
capabilities and absorption capacity of the client. Management of co-production, both
from the side of the service provider and the service client, becomes an issue in itself and
the effectiveness of these relationships may have additional effects in terms of knowledge
transfer and innovation.

1.5.4 Industry use of market services, evidence from input-output data
The review of economic and business literature provides some pointers to the relative
importance of external provision of business services in terms of the types of service
activities that are outsourced and, to a lesser extent, differences in patterns of external
service use across industry sectors. Our own analysis, based on use of EU and individual
Member States’ Input-Output (I-O) data tends to support the broad lines of previous
findings. At the same time, our analysis points to a very high degree of heterogeneity in
patterns of services inputs across sectors and countries and for the same sector across
different countries, though, in part, this may reflect differences in statistical approaches at
the country level. This suggests that considerable caution is needed when translating
empirical findings into policy recommendations, particularly if this involves generalising
country-specific findings into EU-wide assessments (or using multi-country analysis as
the basis for individual country policy initiatives). It also provides a strong indication that
service markets within the EU remain highly fragmented.
Notwithstanding the above comments, some reasonably consistent patterns emerge.

Looking across countries, service inputs into manufacturing – as a proportion of total
production costs – appear positively related to the size and level of development of the
economy, with greater use of external service inputs in ‘old’ Member States compared to
‘new’ ones. In terms of the composition of service inputs across sectors, there are some –
albeit relatively predictable – patterns that emerge. These include, for example, the
importance of transport services for basic and intermediate goods industries; renting of
machinery and equipment for the construction sector and mining; computer services for
office machinery and equipment, communication equipment and publishing and printing;
R&D services for the chemicals industry; and, on the basis of limited individual country
estimates, the importance of advertising and market research for consumer goods sectors
such as processed food, beverages, tobacco, and toiletries.
1.6 Service characteristics and implications for productivity
1.6.1 The productivity and employment challenge for business services
Business services are activities that perform relatively badly in terms of their own
productivity growth rates, but which can be important in terms of their contribution to the
improvement of the productivity performance of client sectors. In this respect, two issues
arise. Firstly, we need to obtain a better understanding of the factors that drive
productivity performance within services sectors and, in turn, to identify how productivity
performance can be enhanced. Secondly, we need to identify and promote better
conditions for industry-service interactions, such that productivity transmission channels
from (business) services to industry function in an effective way.
A further issue that relates to the role of services in industrial growth and, in turn,
aggregate (labour) productivity performance relates to the employment balance from the
use of business services. Here, we can see that, from an ‘employment perspective’, the
challenge is to maintain a positive balance between employment generated by the overall
business services economy and employment lost due to the transfer from ‘in-house’ to
external provision of services. At the same time, this may also lead us to take into

consideration not only whether the net change in employment is positive or negative
overall, but also changes in the quality of jobs being created.
1.6.2 The need for new approaches to characterising and measuring productivity in services
The characterisation of services in terms the factors that determine their performance and
the ways in which these may differ from traditional manufacturing-based approaches to
economic analysis has been a relatively neglected area of research. It is, however,
important to distinguish between “manufacturing-based” and “service-based” approaches
to productivity and competitiveness analysis. This is particularly the case in the context of
the shift in the economic paradigm towards the knowledge economy and flexible
production modes, which emphasises the importance of factors such as product/service
variety, innovation, customisation, and service-product packages. Furthermore, following
from the point made above, it is important to recognise that the standard productivity
model, which separates the producer from the customer, is insufficient in the context of
service processes incorporating co-production.
As a starting point, it is increasingly recognised that more sophisticated approaches to

classifying service activities are required, which differentiate services according to
underlying characteristics that may influence their development and performance and
which are, therefore, more relevant for informing policy analysis. In this context, and
leaving aside ‘consumer’ services, it has become normal to classify business-related
services into three main categories: “Network-type services”, “Knowledge-intensive
business services” (KIBS) and “Operational business services” (OBS). The distinguishing
feature of KIBS and OBS, when compared to network-type services, is that they serve as
intermediate inputs that complement or substitute for in-house service functions. In other
words, they are services for which there is a possible choice between external or internal
provision. When comparing OBS with KIBS, OBS tend to be more frequently based on
manual processes and to be relatively standardised, while KIBS involve knowledge-based
processes and tend to be more client-specific.
Building on the above typology of service activities, a number of characteristics can be

identified that seem to be important for understanding the underlying determinants of
performance and competitiveness:
• The possibility of choice between internal versus external provision;
• Labour intensive versus capital intensive services;
• Tangible versus intangible services;
• Standardised versus customised services;
• Open versus closed production systems and;
• Continuous versus discrete production.
To these, may be added the extent to which the service can be codified and, hence, be
amenable to digital delivery. In order to integrate these characteristics into the assessment
of services productivity, however, it is important to be aware that productivity
measurement in services is concerned not only with the quantity of resources utilised to
produce a unit of output (i.e. traditional efficiency measures of productivity), but is also
intrinsically linked to the effectiveness of the service provided (i.e. the degree to which
the required end result is achieved, or ‘quality’ of service). In this respect, the central

issue for services productivity can be seen to be the relative importance of the efficiency
of production and the effectiveness of production.
Typically, the more a service combines the characteristics of being standardised,

produced in a closed system on a continuous basis and being incapable of being produced
in-house (i.e. closer to the characteristics of traditional manufacturing production), then
the greater the role of efficiency in determining overall productivity. Conversely,
effectiveness will be more important for services that combine characteristics of being
customised, discrete, produced in open systems, and for which internal production is
potentially a closer substitute. Thus, we can see, on the one hand, a set of conditions
pushing towards efficiency and scale effects as being important determinants of
productivity and competitiveness and, on the other, another set of conditions pushing
towards effectiveness and specialist provision of services.
1.7 Services-related policy issues
The analysis included in this Report raises a number of ‘conceptual’ issues that have
potential implications for policy-making. Before describing these issues, it is reasonable
to mention some limitations of the literature and analysis on the role of business services,
the determinants of their performance, and their contribution to the performance of client
industries.
From a broad, service-wide perspective, there is a growing body of analysis on the

contribution of services to overall economic performance. One assessment of available
empirical studies, however, notes that while these illustrate the complexity of service-
manufacturing interactions and effects on productivity growth and employment, the lack
of comparability across studies limits their usefulness for drawing policy conclusions.
There also appears to be something of an underlying bias in the attention given to
different service activities. While there is – in relative terms – a reasonably extensive
body of literature looking at business services as a whole or focusing on knowledge-
intensive business services, there appears to be a veritable paucity of empirical evidence
on the specificities and productivity performance of operational business services.
As noted in this Report, business services are very heterogeneous and subject to a wide
range of business models and performance drivers. Thus, the lack of differentiation and
detail in available studies and analysis represents a major shortcoming for assessing the
relative importance of different policy challenges and issues for different service sectors -
a situation further complicated by the fact that many ‘new’ and ‘complex’ service
activities are poorly identified in existing statistical classifications.
1.7.1 Information asymmetries and transactions costs
The nature of many services - particularly those that are discrete, non-standardised, and
complex – means that they are difficult to evaluate ex ante and even during actual
performance or ex post. The absence of mechanisms for metering services (e.g. industry
technical and quality standards, codes of conduct, performance indicators, or customer
satisfaction measures) implies low levels of transparency in some services markets and
the need for clients to evaluate service prevision on the basis of other mechanisms, such

as reputation and personal experience. Where reputation effects act to restrict market
access for potential new entrants or limits them to low margin segments of the market,
this may result in clients paying too high a price for services. In addition, as overcoming
information asymmetries implies additional costs for potential service clients (i.e. in
terms of search and selection, and in monitoring service provision) this may negatively
influence choices over externalising services provision, and/or act to raise switching costs
from one supplier to another.
1.7.2 Professional, quality and technical standards
Although the existence of information asymmetries points to the positive role that may be
played by mechanisms for metering services such as certification (e.g. professional
qualifications and membership of professional associations), there is an offsetting concern
that such mechanisms can in themselves be utilised to restrict market access. There may
be strong reasons why policy makers are reluctant to move regulatory barriers associated
with the provision of certain services (particularly some professional services) and
administrative provisions related to multi-professional cooperation. However, the lack of
harmonisation of professional standards and certification is seen to be a major
impediment to opening up markets to international competition.
A further issue concerns the role of technical standards for business services that provide
(both service providers and users) with common terminologies, technical specifications
and procedures, conformance testing, certification and accreditation etc. Common
technical standards can contribute to raising transparency and reducing costs for both
service clients and providers, by ensuring that service technologies and processes are
transferable across business service providers and their clients. By and large, with respect
to quality and technical standards, the business services sector lags far behind
manufacturing, both in terms of the adoption of such standards and in their international
harmonisation. However, such standards – be they in the form of regulations, industry
standards, codes of conduct or, even, performance indicators such as customer
satisfaction measures - may play an important role in addressing information asymmetries
and facilitating integration of markets through greater harmonisation. In turn, such market
integration should permit scale economies and greater efficiency in the production of
some services (particularly for standardised and network-type services).
1.7.3 Client-provider relationships
The important role that clients can play in the co-production of services indicates the
potential importance for the effective provision of services of managing client-provider
relationships. This can be a two-way street, requiring capabilities on both sides to develop
mutual understanding, in order, for example, for clients to understand the nature of the
service to be provided and its effective utilisation and, in turn, for providers to understand
better clients' organisation and requirements. At the same time, although the positive
dimension of learning processes and development of long-term client-provider
relationships can be emphasised, it can also be set against their potential to raise the costs
of switching service provider or of (re-)internalising an outsourced service activity.

1.7.4 Intellectual property rights and innovation
Owing to their intangible nature, some business service products are difficult to integrate
within normal intellectual property protection systems (e.g. patents, copyright, etc.).
Although trademarks can be important in some service sectors, this may have as much to
do with securing reputation and branding as it does with protection of intellectual
property. There is concern that the lack of mechanisms to enable business services
providers to safeguard returns on investment in R&D and services innovation results in
underinvestment and lower than optimal take-up of innovation by the sector. In a broader
context, there is a perception that innovations in business services are under-recognised
and under-valued when compared to tangible product innovations and innovations in
(manufacturing) processes. This, in turn, has implications both for the valuation of
business services firms and for their access to finance.
1.7.5 Market structure and market access
There are concerns that markets for non-standardised products and services can be highly
non-transparent, particularly where price plays a relatively limited role in determining
competition (e.g. as a result of information asymmetries, reputation effects, high
switching costs). Even where such markets are characterised by low market
concentration, they can become highly segmented, such that they exhibit characteristics
of monopolistic competition, sometimes approaching localised monopolies. There
appears to be very little available information on market segmentation, be it geographical
or in terms of company size. There is, however, strong evidence to suggest that proximity
is a very important determinant of choice of external service provider, suggesting that
there is significant potential for geographical segmentation.
Although there are strong reasons why local service provision may be preferred for
certain types of services, there is little information on actual patterns for different services
and types of clients. Nor is there evidence on whether choices reflect client preferences
or constraints on their access to geographically more distant service providers. Similarly,
there seems to be relatively little analysis of the extent to which ‘local’ provision of
services is actually provided through subsidiaries or franchises of international service
providers. There is some evidence, for example, that accountancy and tax consultancy are
among the services that are most sheltered from foreign competition, but it seems highly
probable that the markets for these services are highly segmented by company size.
1.8 Screening the competitive position, framework conditions and

policy environment of business services sectors
In this report, we have tried to move beyond the ‘conceptual’ analysis of possible
industrial policy-related issues for the service sectors, towards a more concrete analysis
based on a limited number of sectoral reviews. These reviews have covered six sectors,
chosen on the basis of key attributes seen to be relevant from an economic and policy
perspective. The sectors chosen also illustrate the heterogeneity of business service
activities and their implications for policy. The sectors analysed are: industrial cleaning
services (ICS); private security services (PSS); private employment agencies (PrEA);

engineering and technical consulting (ETC); computer related services (CRS) and
logistics6.
Inter alia, the sector reviews aimed to assess key drivers of the development and
competitive position of enterprises within the sectors, to identify potential market and
systemic failures and to provide a screening of each sector against its ‘framework
conditions’ and existing (and potential) policy issues. Some of the key findings are
described in the following sections.
1.8.1 Screening of framework conditions in the business services sector
National and EU regulatory measures and standards

Differences in national regulatory measures play a very important role in shaping the
development of all the service sectors covered by the study. One observation is the way in
which the nature and stringency of national regulations act as barriers to market entry or
shape the possibilities for firms to achieve economies of scale. The effects of stringent
regulations that place limitations on the types of activities that services providers are
allowed to offer or that entail high compliance costs are clearly reflected in the levels of
concentration and consolidation observed in national markets. For example, in both the
PSS and the PrEA markets, countries with high levels of national regulation are
characterised by much higher degrees of market concentration. By contrast, stringent
national regulations on who can perform ETC in some Member States appear to have the
opposite effect, by creating an entry barrier to these national markets for international
competitors and restraining the development of larger "home-grown" companies.
Labour regulations (e.g. working conditions), labour taxes and social security are also of
particular importance for labour-intensive sectors, especially those employing
predominantly low-skilled workers (e.g. ICS, PSS, PrEA, logistics). Other tax issues and
fiscal regulations (e.g. environmental taxes) are important for the logistics sector, for
example, in terms of their influence on location decisions for transport and distribution
centres.
Industry and professional standards

Most of the covered sectors are active in the area of industry and professional standards –
including voluntary industry standards and codes of practice. To a large extent, the
development of industry standards for business services is at a relatively rudimentary
stage and it is only recently that national and international standards organisations have
turned their attention to standards in this area. However, a number of sectors have been,
or are currently, active in developing professional standards, codes of conduct and ‘best
practice’ guides for the procurement of their services (e.g. ICS, PSS, ETC). These are
seen as a way of ‘educating the client’ and encouraging clients – particularly where cost-
cutting pressures within client organisations is high – to pay greater attention not only to
the price of services, but also to the quality of service provision.
6
A short section on facility management services is included, but was not fully developed due to the difficulty of defining the
scope of these services and the absence of reliable comparative statistics. The development of this sector also depends
heavily on the extent to which Public Private Partnerships are used to deliver certain types of services, however this goes
far beyond the scope of the current study.

In more operational business services sectors (OBS), where services are fairly
standardised and markets are relatively transparent, standards act as a guarantee to clients
that the service provider delivers a service that meets some (minimally) specified
requirements. Often standards are used as a means of promoting more ‘professionalism’
in the industry. Especially in less regulated markets, OBS sectors use standards to self-
regulate the industry through the development of their own codes of conduct and
accreditation systems. These instruments help clients in comparing and evaluating
different service providers and in distinguishing reliable from less reliable companies.
In KIBS sectors, standards play a different role in the competitive positioning of firms.
KIBS companies deliver specialized, customized services and operate in a much less
transparent market. Technical standards exist, but as it is very difficult to develop
standards for customized services, the reputation of firms is used as a much stronger
“quality” signal towards clients.
Labour force and skills

Labour force and skills and the inter-linkage with underlying demographic change are an
area where all sectors report important challenges. On the one hand, for ‘low skilled’
labour-intensive service sectors, a shrinking active labour force can be seen to present a
problem for securing a sufficient volume of labour, particularly where the work itself may
be associated with relatively unsocial or poor working conditions and is seen as
unattractive. To some extent, this can be seen reflected, for example in the prevalence of
minority and (im)migrant labour in sectors such as ICS. Here, raising standards, training
and skills does not only involve efforts to increase the professionalism and quality of
services provision, but is also seen as an element towards increasing the attractiveness of
the sector to potential workers, for example by enhancing prospects for career
development.
On the other hand, shortages of workers with specific skills are a major concern for
knowledge-intensive sectors such as CRS, and ETC. These sectors face external
challenges from countries with a growing stock of technically-skilled workers (e.g.
engineers, ICT professionals, etc.) and hence an increased potential for off-shoring of
activities. In addition, tight conditions in local labour markets mean increased
competition from other sectors that may be able to offer more attractive terms and
conditions to workers.
For the PrEA sector, which can be seen as an intermediary in the process of labour supply
and demand matching, the increasing difficulty that their clients face in recruiting skilled
and specialised workers is reflected in the fact that this is the fastest growing segment of
the employment agency business in Europe. In this respect, demographic change and
changing skills needs and availability represent important opportunities for the sector. At
the same time, existing national regulation and restrictions on the use of temporary
agency work are important for the sector – and their clients – in shaping national skills
profiles of temporary agency workers.

Knowledge, R&D and innovation
Skills shortages are also reflected in the discussion of knowledge and innovation issues,
specifically in sectors that are heavily reliant upon knowledge skills to drive innovation
and, in turn, productivity developments. Among the sectors covered in the study, this is
most obvious in the case of sectors such as computer related services, engineering and
technical services and the more skilled (typically ICT-related) segments of logistics
services. A key aspect is the growing complexity of the services being requested by
clients, which results in an expanding scope of knowledge and skills requirements,
combined with management and organisational capacity to handle complex projects. At
the same time, increasing client pressure to reduce costs, low margins and the prevalence
of small companies – particularly in engineering and technical services – all mean that
firms within these sectors face considerable constraints in investing in R&D and
innovation.
R&D and innovation issues also affect the technical development of equipment and
systems associated with non-KIBS sectors, such as security services and even industrial
cleaning. Here, an important aspect to the knowledge and innovation equation rests on the
relationships between the providers of equipment, materials and systems and the service
providers themselves. There appears to be scope for strengthening linkages between
equipment manufacturers, service providers and, ultimately, service clients in order that
both technological and organisational innovations can make a greater contribution to
enhancing the efficiency and effectiveness of service provision.
Market access
Market access issues for the sectors covered by the study are related by and large to
issues of diversity of national regulatory systems and restrictions (see above). High
compliance costs, for example, can be major impediments to the internationalisation of
service activities, particularly where proximity to clients and, hence, establishing a local
presence (e.g. through FDI) are necessary for successful international development. The
study has not assessed market access issues related to markets outside of Europe in any
depth. These issues are, perhaps, of most importance for the logistics sector, where they
are linked very closely to liberalisation of transportation markets, trade facilitation
measures (e.g. customs procedures, inspections etc.) and restrictions on FDI in the
transport sector. Slow progress in multilateral negotiations on trade facilitation is seen as
an important impediment to further development of the logistics sector.
Structural change
Structural change is considered as an important issue for all of the sectors covered by the
study. To a large extent, this reflects the role played by these sectors in the externalisation
process (e.g. outsourcing and off-shoring etc.) and which provides an important driver of
growth for the sectors. We can also observe a specific role for the PrEA sector in assisting
business in adapting to structural change and changing labour requirements and an
increased need for PSS sector as a result of greater supply chain security requirements in
light of increased fragmentation of value chains.
At the same time, structural change is also taking place within service sectors themselves.
One aspect is related to the greater segmentation of services markets and providers,
reflected in consolidation among major players and ‘niche’ strategies pursued by smaller

firms and new entrants. In addition, expanding the scope of services provided and the
development of multi-service and ‘one-stop shop’ approaches, such as the development
of facilities management services, is a further feature of structural change taking place in
the business services sector.
Competition issues
The report has examined some limited aspects of possible competition policy issues
within the sectors covered. One aspect, mentioned above, is the role played by regulations
in shaping the structure of national service markets. For example, very high levels of
concentration are observed in some national markets for operational business services.
Whether these may give rise to competition concerns has not been assessed and,
moreover, to do so would necessitate a more in-depth examination of the correspondence
between market segmentation on the supply-side and on the demand-side. From the
perspective of international and global competition, there are important differences in
potential competition pressures.
For all three of the OBS sectors, provision of services requires close geographical
proximity to clients and, therefore, international (global) competition per se is of limited
relevance, except where foreign firms establish themselves in local markets. For
engineering and technical consulting and logistics, global competition is an important
factor in the development of the market. For example, the ETC sector is already seeing
some activities being outsourced to lower cost regions such as India, where there is a
plentiful supply of engineers. At the same time, global competitors are starting to become
more present, even in European markets. For logistics, Chinese companies are becoming
increasingly important competitors in the sector and, closer to home, an additional
challenge comes from the increasing attractiveness of Eastern Europe as a location for
logistics activities due to both lower costs and the growth of markets in the region
1.8.2 Screening against existing EU policy initiatives
The study has examined a range of existing and potential EU industrial policy initiatives
that are or may be of relevance to business services. Among these, three areas stand out in
terms of apparent importance across the board of sectors covered.
Better regulation and simplification

Among the policy initiative areas that stand out in terms of across the board relevance for
the sectors covered by the study are the themes of ‘better regulation and simplification’
(with particular reference to greater harmonisation of EU regulatory policies and
frameworks) and ‘other standards’ (with particular reference to the development of
European definitions and standards, professional standards and training, and ‘best
practice’ guidelines).
As mentioned above, standardisation within services activities is increasingly being used

to promote best practices, to spread knowledge throughout the market and to set
benchmarks against which businesses can measure the quality and performance of their
own services or the services they are purchasing, thus improving competitiveness and
increasing efficiency. By and large, both with respect to quality and technical standards,
the business services industry lags far behind manufacturing both in terms of the adoption

of such standards and in their international harmonisation. To date, efforts to define and
develop consensus on the potential role of standards in the business services sector have
received relatively limited visibility. As a consequence, international efforts towards the
development of service standards for business services are at an early stage and appear to
being developed on the basis of a rather piecemeal approach.
Employment, qualifications, skills and flexicurity

A second policy area that seems relevant across all sectors covered by the study relates to
‘employment, qualifications, skills and flexicurity’. Improving skills levels, raising
professional standards and addressing labour or specific skill shortages are highlighted as
issues for all of the sectors. Given the labour-intensive nature of many business services,
a well-functioning labour market is key to supporting the development of the business
services sectors. Nevertheless, as pointed out above, OBS and KIBS are confronted with
different challenges in terms of demographic change and labour force developments,
which points to the need for policy initiatives targeted towards the needs of specific
sectors.
Services and organisational innovation

There is a link between employment policy, policy related to ‘organisational innovation’
and the possibilities to enhance sector performance through improvements in the
organisation of labour-based processes in the business services sector. A second aspect of
‘services innovation’ relates to enhancing the interface between service providers and
clients, particularly – but not only – in relation to more knowledge-intensive service
activities. More ‘traditional’ forms of service innovation (i.e. new service product
innovations) are also of importance for improving performance and competitiveness in
these sectors. However, ‘support for knowledge-intensive business services’ is only
shown to be of major relevance for the engineering and technical consulting services
sector.
1.9 Priorities and recommendations for policy analysis and

development
The sector analysis undertaken in this study has been limited in both scope and depth and
can be seen as no more than a starting point for discussion of the possible role of
industrial policy initiatives in relation to the business services sector. Nonetheless, we can
now hopefully identify some of the key steps that are required and provide indications as
to where further more extensive assessments are needed.
Two key components of analysis are necessary in order to provide the foundation for
policy analysis, policy screening, and policy formulation:
• A first component is to conduct a further and more exhaustive and systematic
screening of market and systemic failures within business service sectors – and in
inter-linkages between these and client sectors – in order to identify the economic
grounds upon which policy intervention may be justified.
• A second component is to combine the identification of market and systemic failures
and with an assessment of their relative importance in relation to existing and
potential policy measures for each business-related service sector and a consideration

of the impact such measures would have on the competitiveness of European
industry.
Specific results would be, for example:
- Deepening analysis of business services needs, including the needs of the
different and very heterogeneous sub-sectors in business services;
- Screening existing policies affecting business services and designing concrete
policy actions at the appropriate level (regional, national or EU);
- Identification of strategic objectives to be achieved in WTO negotiations on
GATS, with an emphasis on measures needed to enable SMEs in services to
export;
- Identifying and grouping policy stakeholders in areas where representation is
very limited and fragmented;
- Monitoring results of measures implemented by EU policy actions and
publicising best practices.
Each of these tasks would need to be undertaken with wide consultation of relevant
stakeholders.
The actions suggested above correspond closely to the recommendations that have been
put forward by the European Economic and Social Committee (EESC). In its Opinion on
“Services and European manufacturing industries: Interactions and impacts on
employment, competitiveness and productivity”7 in 2006, the EESC advocated the urgent
recognition of business services as an integral part of any industrial policy. This was
followed up in the Mid-term review of Industrial Policy in 20078 with the introduction of
a new initiative on services and industry. This was in recognition of the fact that one of
the main structural changes in recent decades has been the shift in employment towards
services in highly-developed economies and that, as a consequence, industry and services
are inextricably linked. The cost, quality and productivity of certain service sectors, in
particular Knowledge-Intensive Business Services, have an impact on the
competitiveness of industry.
In its more recent Opinion on “Developments in the business service sector in Europe”9,
the EESC makes a number of detailed recommendations to the European Commission in
the context of the development of enterprise and industrial policy. The main
recommendations are:
• In order to ensure that policy actions take a broader view of services in their
interactions with industry and economic activity as a whole, and building on the
success of a number of High Level Groups and other Expert Groups which led to new
industrial policy initiatives, a High Level Group on Business Services should be set
up, composed of representatives from the business service industry as well as from
the Commission. The main objective of this group would be identify which of the
many EU policy initiatives that make up industrial policy need to be adapted and
applied to services. This involves matters such as: a fully effective internal market for
services, international trade, state aid rules, labour market, social measures, training
and regional policy, R&D, innovation, standardisation, entrepreneurship, and better
7 Opinion of the European Economic and Social Committee (2006/C 318/04).

8 “Mid-term review of industrial policy - A contribution to the EU’s Growth and Jobs Strategy” COM(2007)374
9 Opinion of the European Economic and Social Committee INT/412 (2008).

statistics and information, taking into consideration, where appropriate, the specific
needs of heterogeneous sub-sectors of the service industries.
• Within the context of the Lisbon Strategy for Growth and Jobs, the setting up a
European Observatory on business services to monitor the economic development
of the Business Services sector, including the key issue of productivity improvement
and the impact on industrial competitiveness.

2 Industry-service interactions: externalisation
and internalisation
2.1 Overview of industry-services interactions
2.1.1 Introduction
As a starting point, it is important to recall that many service activities are undertaken
within manufacturing and a large percentage of the workforce in manufacturing firms can
be engaged in service activities (see Figure 1)10. In fact, the pervasive nature of service
activities in all production processes - both within manufacturing and service sectors -
can be illustrated by sketching out the correspondence between a whole range of internal
company service functions and their external equivalents (see Table 2). It is the
externalisation (‘outsourcing’) of such service activities (or functions) to specialised
business-service providers that tends to provide the focus for much of the discussion on
industry-services interactions.
With the expansion and increased efficiency of externally-supplied services functions, the
balance of the trade-off between internal and external provision of services is continually
changing and provides one of the driving forces for outsourcing. At the same time, much
of the growth of external provision of (business) services goes beyond switching to more
efficient external supply. Rather, as pointed out by Miles (2007), it is a matter of
organisations responding to external challenges that require capabilities – to respond to a
major technical or environmental challenge, for example - that do not exist in-house and
that cannot be developed (at least in the short term). This points us to the fact that, as
challenges arise, they may require the creation of new services functions/capabilities. It
may be that these capabilities are initially developed within the services sector and never
develop in manufacturing or, alternatively, the starting point for initial development may
be in manufacturing, but, as the services become more generalised, a specialised market
for such functions/capabilities develops11.
When considering the trade-off between internal and external provision, it is important to
note that a considerable part of the demand for externally-supplied services comes from
Small and Medium-sized Enterprises (SMEs). Where attaining a minimum required scale
is necessary for supply of a service, or where supply is subject to economies of scale (or
scope), it may not be feasible for an individual firm to produce the service internally. We
10
Wölfl (2004) estimates that some 40 percent of all persons employed in manufacturing work in occupations that are more or
less (business) service related.
11
This can be seen in the way that many typically industrial activities/functions are now firmly established as part of the
tertiary (service) sector (e.g. maintenance workers and technicians, engineering, research and development, etc.)

can imagine, for example, that many SMEs do not require enough courier services, legal
and fiscal services, or software design services to provide the service for themselves12.
Similarly, smaller companies may simply not be able to develop the necessary
capabilities ‘in-house’. Accordingly, although much of the literature on ‘externalisation’
and ‘outsourcing’ presumes a trade-off between external and internal provision, for many
SMEs the choice may be between external provision or not using the services at all. In
such circumstances, specialised external providers can play a critical role in enabling
SMEs to access services that they would otherwise be unable to produce for themselves.
At the same time, the majority of service providers, particularly in the business services
sector, are themselves SMEs. This suggests that even though client companies may lack
the level of demand or necessary capabilities for ‘in-house’ provision, economies of scale
(and scope) are not so important – or are offset by factors such as proximity or a high
degree of specialisation – that they rule out external supply by (specialised) SME services
companies.
Figure 1 Share of employment in services-related occupations in the manufacturing sector (in percentage of total
employment of manufacturing, 1995 and 2002)
Source: Pilat and Wölfl (2005)
12
Certainly this can be inferred from differences in the pattern of use of external service provision across different categories
of firm size (see, for example, section 2.2.5)

Table 2 Internal service functions and externally delivered producer services
Major functions in Corresponding external producer services

enterprises
Information management Computer services ; Consultancy on information technology; Telecommunication
(IT services and infrastructure) services
Strategy and new markets Management consultancy; Market research; Fairs and exhibitions
Administration and accounting Accounting and auditing; Legal services
Marketing Advertising; Direct marketing; Public relations
Production and technology Engineering and technical services; Tests and quality control; Maintenance, service
functions and repair of equipment
Design functions Research and development; Industrial design
Personnel Selection and provision of personnel; Professional training

Facility management services Real estate; Security services; Building maintenance, Cleaning services; Catering;
Environmental service / waste disposal; Energy and water services
Purchase and sales Distributive trades (incl. after sales services)
Transport and logistics Logistics; Transport services (persons); Transport services (merchandise); Express
courier
Financial resources Banking; Insurance; Renting and leasing
Source: Rubalcaba and Kox (2007)
From an opposing perspective, manufacturing companies can also be important providers

of services in their own right. Typically these are ‘product-related services’ or
‘complementary’ services linked to their products, but they may even engage in the
supply of services that are almost un-related to their main manufactured products13. In
many cases, it appears that manufacturing companies can often derive significant
revenues – and sometimes their competitive edge – from services that are in some way
related to their products. This leads to a common argument that the “additional” service
elements surrounding the core product are a major focus of competition in industrial and
consumer markets, for manufacturers and service providers alike. The suggestion is that
in many manufacturing sectors, competition is shifting away from how companies build
their products, towards how well they serve customers before and after they produce and
sell products. Thus the competitive advantage of manufacturers is increasingly derived
from the value contributed by service processes associated with their core activity and it
may be that these associated services produce greater demonstrable value for the
customer14.
From the above, and on the basis of anecdotal evidence, it would appear that two opposite
trends are operating in the production of services that accompany manufactured products:
• Services without a direct relation to the industrial product are being increasingly
outsourced to specialised service firms, allowing companies to concentrate on their
core competences;
13
Companies may develop and supply non-product related services activities to meet their own service needs and then
subsequently supply the equivalent service to others, or services may be developed on the basis of internal capabilities
(e.g. provision of business management training).
14
At the same time, as these services are bundled together with the physical product, it can be hard to separately distinguish
the relative value/cost/price of the service and physical component supplied.

• Services which are more directly related to the manufactured product (‘product
accompanying services’) are growing in importance within manufacturing
companies, and are less likely to be outsourced.
These two opposing trends of externalisation ('outsourcing') and internalisation of service

activities by manufacturers is reflected in the increasing fragmentation of industrial
processes and supply chains. This fragmentation, which facilitates both companies'
engagement in vertical specialisation and outsourcing of non-core parts of the production
process, is seen as one driver for the rise of industry-service interactions. Gage and
Lesher (2005), for example, provide an overview of motives for fragmenting and the use
of services (see Table 3), which illustrates the dual role played by services in the
fragmentation process, by which services can act both as a link in the value chain and as a
stand-alone production component. In this context, the authors distinguish four types of
services provision that support the fragmentation process:
• Services that support the buyer, e.g. when a consumer purchases a service
complement to a manufactured good (e.g. automobile financing);
• Indirect services, that support the manufacturing process, e.g. custom brokerage,
transportation, accounting and financial services;
• Direct support services, e.g. procurement services that are needed to acquire inputs
in the manufacturing process;
• Sophisticated program management services to facilitate coordination among
many disparate production processes.
A specific factor that has radically transformed the landscape for industry-service
interaction is the adoption of digital delivery among business services and business
services suppliers. The OECD (2005) provides an overview of this development, which
highlights the way in which business services are being reshaped by the application of
information and communication technologies (ICTs) and the shift to more intensive
online delivery. Although there are a variety of drivers encouraging digital delivery, the
intangible nature of many business services makes them particularly suitable for digital
delivery. Although, at the same time, there are also barriers to digital delivery, including
codification (the extent to which business services can be stylised and "routinised"),
contact (the extent of face-to-face personal contact required), and complexity (whether
tasks can be divided into simpler sub-tasks).
Drawing on the work of Evans and Wurster (2000), the OECD report notes that the
potential of digital delivery can be seen in terms of the possibilities to combine greater
market reach with the ability to engage in richer interactions with clients. In other words,
use of digital delivery enables firms to broaden their supplier or customer base (better
reach) and make relationships more effective (greater richness). Again, digital delivery
can be seen to facilitate both the opposing trends of externalisation (outsourcing) and
internalisation of service activities by manufacturers mentioned above; either through
enhancing possible interaction between specialist business services providers and their
manufacturing clients, or through enabling manufacturers themselves to use digital
delivery for the supply of ‘additional’ services to their customers.

Table 3 Motives for fragmenting and the use of services
Source: Gage and Lesher (2005)
2.1.2 Evidence and findings from the economic literature (overview)
Pilat and Wölfl (2005) provide an overview of the economic literature on the interaction
of between manufacturing and service industries. As they note, much of the discussion on
industry-services interaction is concerned with the issue of off-shoring of service
activities. Thus, there are two key dimensions that can be distinguished. The first relates
to the organisational form of services production and whether the service activity is
integrated within the firm (i.e. vertically integrated) or bought-in from an outside supplier
(outsourced) and the second concerns whether the interaction takes place within the
country or abroad. Thus, following Antràs and Helpman (2003) and Grossman and
Helpman (2003), they distinguish four broad categories of interactions between industries
(see Figure 2).

Figure 2 Broad categories of interactions between industries
Organisational form
Integrated Bought-in
Buying-in from a domestic supplier

Home Standard vertical integration (e.g. via outsourcing)
use of domestic intermediate inputs
Country
Buying-in from a foreign supplier
Vertical integration
Abroad (e.g. via foreign outsourcing)
FDI and intra-firm trade
inter- or intra-industry trade
Source: based on Antràs and Helpman (2003)
As Pilat and Wölfl point out, however, the forms of both “vertical integration” and
“buying-in” of components and intermediate inputs may in reality comprise diverse
organisational forms and, thus, a broad variety of ways in which firms in different
industries may interact15. In their assessment of existing empirical analysis, the authors
conclude that “While existing empirical studies provide a broad picture of the complexity
of the services-manufacturing interaction and some of its effects on productivity growth
and employment, using these studies to draw policy conclusions is complicated. In
particular, these studies are not comparable, as they study a variety of issues for different
time periods and for different (typically a small number of) countries.”
From their own analysis, which covers empirical analysis of a variety of data sources at
different levels of aggregation, Pilat and Wölfl draw a number of conclusions that can
serve to set the scene for evaluating the extent and type of interaction between
manufacturing and services:
• Analysis of input-output tables indicates that the amount of services sector value
added embodied in manufactured goods has risen slowly over time and accounted for
up to 25-30% of total output in some countries in the mid-1990s16;
• A growing share of workers in the manufacturing sector is engaged in services-related
occupations (see Figure 1);
• Despite anecdotal evidence of a growing share of services turnover within the
manufacturing sector, firm-level evidence suggests that manufacturing enterprises in
most countries are not very diversified (i.e. they do not have many separate
establishments that are engaged in services production);
• At the same time, data on turnover by product suggest that manufacturing firms and
establishments do derive a greater share of turnover from service activities17.
Pilat and Wölfl conclude that this evidence demonstrates that the distinction between
manufacturing and services is becoming increasingly blurred. They also point out,
however, that “the two sectors still differ in their role in the economy. In this regard, they
15
See Section 3.1 for a discussion of the forms of interaction between service providers and their clients.
16
These estimates include both the direct service component (i.e. through intermediate consumption of services inputs by
industry) and the indirect services component (i.e. through (estimates of) the services components embodied in
intermediate consumption of goods inputs by manufacturing). Section 1 of this report provides more recent evidence of the
direct services component (i.e. intermediate consumption of services inputs) embodied in manufacturing.
17
For Finland the share of turnover of the manufacturing sector derived from services activities is over 15% in 2002, and
close to 10% for Sweden in 2002, also.

suggest that the services sector is more independent from other industries than the
manufacturing sector, in that the services sector interacts less strongly – both as a
provider and user of intermediate inputs – with other industries than do manufacturing
industries. Nonetheless, they conclude that services do have growing impacts on other
sectors of the economy and contribute as providers of intermediate inputs to the
performance of other industries.
2.2 Outsourcing of service activities
As noted in Section 2.1, outsourcing and off-shoring have provided a focus for attention
on service-manufacturing interactions. Outsourcing of services has significantly increased
over recent years, especially since the 1990s, and has provided a key argument to explain
the growth of business services in the economy, even though recent work has concluded
that outsourcing provides only a partial explanation of the expansion of business services.
A range of factors have been identified as facilitating the expansion of outsourcing,
including the development of ICT, changes in the relative costs of transport and increased
standardisation of services (e.g. mass customisation). Next to these facilitating factors, the
economic literature indicates a variety of economic/business arguments and institutional
factors that influence outsourcing decisions and behaviour.
2.2.1 Economic and business factors influencing outsourcing decisions
A wide range of potential advantages and disadvantages of outsourcing can be identified

(see Table 4), amongst which the main motives for outsourcing of service activities can
be summarised as follows:18
• Reduction of costs as external suppliers provide the service at lower cost;
• Access to services that are not provided "in-house";
• Superior quality of externally provided services;
• Speed of external service delivery;
• A need to focus internal resources on core competencies;
• Increased flexibility when faced with changes in demand or technological changes.
A survey among European top 500 companies by UNCTAD/Roland Berger (2004), found
that 70% of companies listed labour cost reduction as the main objective of global
outsourcing. However, the study also stresses the benefits of increased quality of the
services offered, such as the capability of offering services around the clock to customers.
This benefit was mentioned by more than 40 per cent of respondents. By contrast,
MacPherson (2008) – reporting the results of a 12-year tracking study of manufacturers of
scientific instruments in New York State (USA) - found that cost factors are never shown
to play a very important role for outsourcing of technical services.
Balanced against the possible advantages of outsourcing are a number of disadvantages or

risks associated with outsourcing. Some of the most important risks and other factors
limiting outsourcing that are identified in the literature are the following:
• Loss of internal knowledge;
18
For example, Bartel, Lach and Sicherman (2004), MacPherson (2008), Buse, Freiling and Weissenfels (2001), EC (2004),
McCarthy and Anagnostou (2004) and Gage and Lesher (2005).

• Dependence on the supplier of the service;
• Disadvantageous supplier selection (e.g. relating to their quality or financial
viability);
• Loss of management control/control of the production process;
• Managerial and organisational costs of outsourcing.
Each company needs to weigh carefully motives and risks before taking a decision to
outsource, although to what extent companies are able to make a good assessment of the
pros and cons is not clear. McCarthy and Anagnostou (2004) refer to a survey in 1996,
which showed that only 5% of companies gained high benefits from outsourcing and 39%
only mediocre benefits19. However, there appear to be important differences depending
on the industry and service outsourced and it appears that very general services can be
more easily outsourced than strategic services. In particular, if asset specificity is very
important (e.g. for strategic service activities), contractual uncertainty will increase and
companies will therefore be more hesitant to outsource. Furthermore, switching costs (i.e.
the costs of changing from supplier to another) can be a deterrent factor for outsourcing
(see Verwaal, Verbeke and Commandeur, 2002). Overall, although outsourcing is the
predominant business process, the existence of both advantages and disadvantages of
outsourcing explains the simultaneous coexistence of outsourcing processes and re-
internalisation processes (Rubalacaba 1999, 2007).
19
These findings may be contrasted with Kakabadse & Kakabadse (2002) – see Section 2.2.6 – who found that respondents
were mostly also satisfied with the suppliers (~58%), with around 40% with mixed feelings and only 4-5% were not very
satisfied.

Table 4 Outsourcing: advantages and disadvantages
Reason Advantages Disadvantages

Transactional • Decrease in transactional costs • Problems of moral hazard and adverse selection
costs - Production costs • High costs of specialised services
- Information and search costs • Opposing transaction costs
- Policy and performance costs • Waste of classical advantages of internalisation:
- Labour and other costs technical and management economies
• Use of scale economies
• Use of scope economies
• Use of network economies
Potential costs • Adaptation to uneven demand • Problems regarding follow-up, control and
• Elimination of possible labour conflicts assessment of services
• More adjusted cost estimation • Cost control difficulties
• Technological dependence
Quality and • Improvements in the quality of service • Possible lack of sufficient experience and
expertise • Acquisition of specialised knowledge by specialisation
transfer • Generalist and theoretical knowledge
• Difficult introduction of solutions
• Insufficient knowledge transfer
Production • Flexibility • Lack of independence and confidentiality
organisation - Substitution of fixed costs by • Possible increase of internal conflicts
variables
• Concentration on key tasks
• Independence
• Assistance in complex businesses
Market penetration • Passive, active and instrumental modes • Possible lower market control
• Access to new geographical, segmented
and socio-economic markets
Government • Specialised assistance for tax, • Conflicts with internal personnel
intervention accounting, legal etc. regulations
• Cost reduction of labour protectionism
Source: Rubalcaba (1999)
2.2.2 Institutional factors influencing outsourcing decisions
Institutional factors also play a role in the outsourcing decision, especially when it
concerns off-shoring. Kshetri (2007) analyses the drivers of the off-shore outsourcing of
business process and information technology services, focusing on institutional factors.
He distinguishes three kinds of institutional pillars: regulatory, normative and cognitive,
and makes a number of propositions in this framework20 on the impact of these
institutional pillars on off-shoring behaviour:
• Regulatory institutions, which consist of explicit regulative processes (i.e. rule
setting, monitoring and enforcement). The author argues that a lack of a strong rule of
law is negatively related to outsourcing inflow in a destination country. Countries
interested in attracting outsourcing activities are therefore likely to take measures to
strengthen the rule of law related to a specific industry. At the same time, if laws are
20
The author assumes that the extent to which an organisation’s structure and organisation is isomorphic (i.e. consistent with
regulatory, cognitive and normative institutions) depends on its perception of the gain or loss of control/resources
associated with its response.

very strict in the originating country (the example of privacy laws is given), this will
negatively affect outsourcing;
• Normative institutions, which refer to socially accepted norms and behaviours and
include elements such as trade unions, professional associations, labour certification,
etc. The author assumes that the higher the pressure from unions and the general
public, the more firms will reduce or slow down the rate of outsourcing in the
originating countries. This pressure is, furthermore, likely to increase if there is an
increase in outsourcing itself. In the destination country, the existence of professional
associations that enforce ethics and codes of conduct is, on the other hand, positively
related to the outsourcing inflows it will receive (e.g. the industry can implement
codes of conduct to make sure privacy of data is protected, in the absence of a good
judiciary framework);
• Cognitive institutions, which relates to culturally supported habits. Cultural
compatibility is an important concept in the discussion on outsourcing and relates to
language, understanding cultural contexts and business practices, management style,
etc. The authors states that the degree of cultural compatibility between origin and
destination countries is positively related to the amount of outsourcing flows between
the two countries. He furthermore notes that companies in destination countries are
willing to make changes which better suit the culture of the client firm in order to
attract outsourcing flows and that these changes are sometimes in conflict with their
local culture. There is, therefore, an upper limit to which a firm is likely to change its
practices to respond to the culture of the client firm.
2.2.3 Theoretical approaches and types of outsourcing relationships
The economic literature on outsourcing (see for example, Kedia and Lahiri, 2007, and
Buse, Freiling and Weissenfels, 2001) identifies three main theoretical perspectives:
• Transaction cost theory, which assumes that outsourcing will occur where the
transaction costs related to outsourcing of service functions (e.g. costs of making,
implementing, monitoring and enforcing a contract) are lower than the costs of
providing the service in house;
• Resource-based theory, which assumes that a firm is a collection of imperfectly
imitable resources and capabilities (physical, human or organisational). By utilising
these various resources, firms are able to catch opportunities and minimise the effects
of threats, and thereby obtain a competitive edge. Under a resource-based approach,
outsourcing is explained by the fact that in order to fill in resource voids within their
own business, ‘client’ companies need to benefit from the assets possessed by other
‘provider’ companies, who are deemed to be experts in their operations;
• Resource-dependence theory, which states that firms are actively involved in their
broader environments and are dependent on other organisations for the supply of
critical resources. Therefore, firms have to establish good relationships with the
owners of critical resources that are outside the firm.

Kedia and Lahiri (2007) distinguish three types of international outsourcing partnerships
related to the above three theories:
• Tactical partnerships, where operational costs reduction is the prime motive for
outsourcing. Lack of in-house resources or skills and a shortage of qualified
manpower in the workforce are other drivers. This partnership is based on the
transaction cost approach;
• Strategic partnership, where the primary driver is the need to focus on core business
in order to remain competitive. Value creation in strategic partnerships occurs
through building long-term relationships with a few best-in-class service providers.
This partnership is therefore based on the resource-based approach. Outsourcing will
be more attractive if the outsourcers can offer cumulative experience and learning
scope from the involvement;
• Transformational partnership, where the primary drivers are the need for increased
risk-sharing and flexibility and business transformation. The resource-dependence
theory can be used to explain this type of partnership.
The authors graphically shows the differences between the three partnership types in
terms of value proposition and in terms of involvement of the partners (see Figure 3).
Figure 3 Different types of International Outsourcing of Services (IOS) partnership
Source: Kedia and Lahiri (2007)
2.2.4 Geographic aspects of outsourcing
Although much of the attention around outsourcing has focussed on its international
aspects (i.e. off-shoring, for example for service functions to India), a considerable part of
outsourcing still takes place at a local and regional level. Recent studies point to the
importance of proximity and agglomeration effects in outsourcing behaviour.

One set of results is provided by Alajkääskö (2006) 21, who analyses data for eight EU
countries22 concerning where firms source external services from, Figure 4 displays the
key information.
Figure 4 Sourcing of External Services by EU firms, 2003 (% of total respondents)
Industrial cleaning services
Investigation and security services
Legal services
Transport, logistics and postal services

Same
region
Accounting and book-keeping
Another
region
Financial services
Another
country
Personnel related services
Do not
know
IT services
Architectural, engineering and related

technical consultancy
Renting and operational leasing
Advertising
Insurance services
Business management and consultancy
Market research
0% 20% 40% 60% 80% 100%
Source: Alajkääskö (2006)
Several points are immediately apparent. Services from other countries are rarely used,
and these mainly concern post and transport, IT services, advertising, consultancy and
market research. For most of the business services – 11 of 14 cases - the overwhelming
choice of supplier (more than 60% of cases) was a firm in the firm's own region. The
exceptions were market research, consultancy and insurance services, where we might
expect that firms in peripheral regions have to turn to suppliers in urban centres because
of local shortages of sophisticated services. With the exception of consultancy, these
three may be relatively low-interactivity business services. Otherwise, knowledge
21
The study discussed was conducted within a framework of exploring the effects of trade liberalisation for services. Other
studies in the series which continue with this theme are Alajkääskö (2007a) and Alajkääskö (2007b). These studies look at
national differences in BS and BS export structures, and examine barriers to internationalisation as experienced by BS
providers themselves.
22
The countries covered are: Denmark, Finland, Germany, Latvia, Lithuania, Poland, Slovenia and Sweden.

intensive business services (KIBS) tend to be sourced relatively locally, suggesting the
importance of social relationships, frequent contacts and, in some cases, local knowledge.
It is interesting to note that this is the case for IT services, where there is (a) a good deal
of internationalisation and (b) relatively high reliance on more codified knowledge.
Clearly, there is also a need to access knowledge about the client and the problems they
want to have solved. Finally, we note that it is not only KIBS that are locally sourced.
Where the physical presence of (low wage) workers is concerned, as in cleaning services
and transport, then local providers may also be chosen.
Such factors tend to suggest that new communications media are unlikely to promote
much growth of service “exports” as conventionally understood, though it is quite
possible that mergers, acquisitions, franchises and other ways of entering regional
markets may allow international firms to supply business services across more of the EU
and to a greater extent than they do today. This sort of international presence is facilitated
by modern communications for management and financial coordination. Likewise, we
can expect to see more off-shoring of routine elements of professional services, just as
call centre and similar work has been shifted overseas. However, tele-presence and virtual
reality tools will need to be cheaper, more user-friendly, and more socially acceptable for
these to dramatically change the picture in many KIBS. We return to this theme in
Section 2.4.
Alajkääskö (2006) goes on to present some data on sectoral variations in use of business
services. While manufacturing enterprises were more likely than service firms to have
their main external service providers from outside their own region; manufacturers did
tend to rely more on local providers for transport services. The author speculates,
reasonably enough, that this may reflect the size and weight of these firms’ products –
and, we might add, their raw materials. Manufacturers were, in addition, especially likely
to turn to non-local providers of market research or business management and
consultancy services. Alajkääskö suggests that this may reflect the global nature of
manufacturing operations or the larger average size of manufacturing enterprises, but it
might also be a matter of these service operations being more alien to them and harder to
integrate into their internal structures.
The above differences between manufacturing and service users of business services were
also apparent when one examines high-technology manufacturing and services firms. The
high-tech manufacturers were more likely to use overseas business services, although
there was little difference where the business service in question were IT services,
accounting and book-keeping or financial services (see Table 5). Larger enterprises (250
or more employees) were found to undertake more of their service relationships through
long-term contracts (except in Germany). Alajkääskö relates this to smaller enterprises
making smaller and/or less regular purchases of BS, while larger enterprises have easier
access to capital and/or to their centralised and powerful purchasing functions, which are
able to negotiate better terms for lengthier contracts. However, this may also tell us
something about "sparring" versus "jobbing" relationships, though there is not a one-to-
one correspondence between these and the two types of contracting.

The respondents to this survey were asked what the main barriers were to acquiring
business services from another country. Location emerged as the main barrier with
40.3% of those perceiving important barriers citing this. It was of particular importance
for transport, logistics and postal services; industrial cleaning services and investigation
and security services, as well as IT services. A lower proportion of large enterprises
(other than those from Finland) reported that location was a barrier to their demand for
services. There were country-specific trends in which other barriers were cited. For
example, language was relatively important in Finland and Sweden; culture, trust and
legal and regulatory barriers in Denmark; economic barriers in Lithuania. A lower
proportion of large enterprises reported language to be a barrier (exceptions were
Slovenia and Sweden), and a similar proportion reported cultural and trust barriers
(except in Denmark, Lithuania and Slovenia). Legal and regulatory barriers did emerge as
relatively more important for large than for small enterprises (except in Sweden), as did
economic barriers (except in Slovenia, Finland and Sweden). The variations across
country, as well as firm size, make these results something of a complicated patchwork.
Table 5 Sourcing of External Services by Firms in Different Sectors, 2003 (% of total respondents)
Low-Tech Manufacturing High-Tech Manufacturing High-Tech Services

Same Other Other Same Other Other Same Other Other
region region country region region country region region country
Transport, logistics
77.9 17.8 4.3 84.5 10.7 4.8 86.7 10.7 2.6
and postal services
IT services 75.4 23.1 1.5 80.6 15.6 3.8 72.8 17.3 9.9
Market research 50.5 37.9 11.7 51.5 15.2 33.3 77.2 17.8 5.0
Advertising 67.9 29.9 2.3 70.4 13.6 16.0 81.7 15.8 2.6
Legal services 79.5 19.4 1.0 82.4 16.0 1.6 88.3 10.5 1.2
Accounting and
84.5 15.2 0.3 94.2 5.8 0.0 79.9 8.7 11.4
book-keeping
Business
management and 60.5 34.2 5.4 62.7 27.8 9.5 70.1 22.2 7.7
consultancy
Personnel related
82.1 17.3 0.6 84.7 12.8 2.5 89.4 9.9 0.7
services
Financial services 79.3 19.3 1.3 85.3 13.8 0.9 87.0 11.8 1.2
Insurance services 74.8 24.8 0.4 77.4 17.6 5.0 82.7 16.3 0.9
Renting and
68.3 30.9 0.9 86.2 11.9 1.9 84.3 14.9 0.8
operational leasing
Architect, engineer.
& related technical 79.9 17.4 2.7 82.8 11.0 6.3 83.8 15.0 1.2
consultancy.
Industrial cleaning
92.8 7.2 0.0 93.0 4.4 2.7 94.7 5.2 0.1
services
Investigation and
91.4 8.5 0.1 98.2 1.8 0.0 93.5 6.5 0.0
security services
Simple average based on the seven countries for which data are available (Denmark not available); Lithuania,
no data available for the category 'another region'; data shown exclude the category do not know.
Source: Alajkääskö (2006) based on Eurostat, SBS

MacPherson (2008) also looks at the geographical proximity of services providers of
companies located in New York. The author finds that, for the three different regions in
New York State, firms in New York Centre are the heaviest users of external services,
because most service providers are located in this region. Ono (2006) – using US data for
1992 - also finds that the outsourcing of business services by manufacturers is more
common in bigger cities. Similarly, Cusmano, Mancusi and Morrison (2006), who look at
outsourcing of companies in the Italian province of Lombardy, find that 84 percent of all
outsourcing takes place at the regional level. Their findings show that off-shoring is still
limited, although the foreign business experience of companies, notably in exporting, is
positively associated with international outsourcing.
Further, although MacPherson identifies a growing trend towards international

outsourcing, Carmel and Abbott (2007) identify an increasing trend towards “near-
shoring”, defined as “the sourcing of service work to a foreign, lower-wage country that
is relatively close in distance or time zone". The customer expects to benefit from one or
more of the following constructs of proximity: geographic, temporal, cultural, linguistic,
economic, political or historical linkages. The authors note that some of the top Indian
firms have expanded their global presence, including to near-shore locations, such as
Eastern Europe.
In summary, the general conclusion from these articles is that distance (either in terms of
physical remoteness or in terms of ‘other’ differences) still is a constraining factor and
that proximity still matters.
2.2.5 Services outsourcing by activity and function
A survey of Ernst & Young (2005) among large European companies concludes that the
most outsourced functions are (% of respondents):
• facilities management (95%);
• logistics/transport (83%);
• information systems/telecom (73%);
• HR (72%);
• production (62%);
• administration and finance (62%);
• sales/marketing/communication (28%).
Similar results were obtained by Kakabadse & Kakabadse (2002)23 and Quélin &
Duhamel (2003). In the latter, the HEC Paris survey also showed that functions like
R&D, marketing, finance and industrial IT were the least frequently outsourced
completely and they also had the least potential among the survey respondents to be
outsourced in the future.
Alajkääskö (2006)24, based on a survey in eight EU countries, reports that the most
commonly purchased services (on the basis of the value of purchases) were transport,
logistics and postal services, accounting for a 25.3 % share of all purchases. Renting and
23
See Section 2.2.6
24
See, also, Section 2.2.4.; and footnote 22 (includes also data for Greece)

operational leasing, marketing and sales, and IT services also accounted for between 10%
and 20%. Both small and large enterprises favoured external service providers rather than
other parts of their own organisation, as sources of these services. Smaller enterprises
(between 50 and 249 employees) tended to require higher proportions of marketing and
sales-related services; renting and operational leasing services; and financial and
insurance services. Presumably, these are services where small firms have limited
capability.
Figure 5 Breakdown of the total purchases of services by main service category, 2003 (%)
Source: Alajkääskö (2006)
Merino & Rodriquez (2007) – who use a panel of about 1800 manufacturing firms from
the Spanish Survey of Business Strategies for 1998 - point out that service outsourcing in
manufacturing industries also depends on the size of the manufacturing company (see
Table 6). Here, we note the contrasting patterns of external services demand between
smaller and larger firms. In terms of services that are not used by SMEs, we cannot
distinguish whether this relates to the fact firms do not have a need for such services or
that they are unable to access such services (either internally or externally). However,
echoing the findings of Alajkääskö (2006), smaller companies tend to rely more heavily

on external suppliers for professional services (e.g. legal, economic, financial and tax
advise), software development and software installation services, but make less use of
external cleaning services.
In addition, from their empirical analysis, Merino & Rodriquez find that relative wages
matter for the types of activities outsourced. Companies paying large wage premiums
(most likely high skilled labour companies) are most likely to outsource low-skilled,
labour-intensive services like cleaning. These companies, on the other hand, less
frequently outsource the “closer-to-core” activities, like financial or legal services. The
authors also find an apparent learning process with external providers: the more contracts
firms arrange, the more likely they are to externalise more activities. In service sectors
where geographical closeness is important (courier, security etc.), the number of service
providers in the region also increases outsourcing. The preference for flexibility on the
part of manufacturing companies also positively affects outsourcing decisions.
Table 6 Services outsourcing by manufacturers (percentage of firms)
Source: Merino & Rodriquez (2007)
2.2.6 Outsourcing contracts
Goo et al (2006) studied outsourcing contracts in the IT sector, where they found that
knowledge acquisition, relationship-specific investment and the extent of substitution by
the vendor increased the duration of the contract (i.e. renewal of the contract was more
likely). In their sample of 93 contracts, in 62 cases there had been no previous
relationship between the contract parties, suggesting that in the IT sector around two
thirds of cases outsourcing contracts were not the result of contract extensions. The
authors specify that, in their opinion, these results are only valid for the IT sector, where
the outsourcing relations differ slightly from the other service sectors. They also point out
that often the IT outsourcing contracts last longer than contracts in other service sectors,
due to high investments.

Kakabadse & Kakabadse (2002) undertook an outsourcing study among the senior
management of EU and USA companies that have been involved in outsourcing and
received over 700 answers. They concluded that US companies pursue more "value-
adding" sourcing strategies, while EU companies are more focused on gaining economies
of scale through outsourcing. According to their survey, basic services where outsourced
the most, followed by IT services and HR. The most preferred contract type was a single
contract with a trusted supplier, based on an ongoing relationship. This suggests that most
companies prefer to maintain longer relationships and, hence, are likely to retain
outsourcing contracts with a trusted partner instead of changing supplier after each
contract. However, this does not appear to apply to services such as consulting services,
which have a very different nature compared to basic services or IT services.
2.2.7 EU performance as a sourcing destination
According to the global outsourcing study of Minevish & Richter (2005), the new EU
Member States (including the Czech Republic, Poland, Hungary and the Baltic countries)
have a good potential to attract a large number of outsourcing functions in the future,
thanks to their well educated and relatively cheap labour, when compared to ‘old’
Member States. Their survey compared costs, risks (geo-political risk, human capital risk,
IT competency risk, economic risk, legal risk, cultural risk and IT infrastructure risk)
together with market opportunity to rate 20 fast developing countries. From this, they
expect that high-core competence outsourcing and software innovations may be
particularly successful in the new Member States. Huws et al (2005) also confirm that the
new Member States have considerable potential for attracting more and more outsourcing
activities. Indeed, the Czech Republic has experienced very fast grow in the employment
in “other business services” sector.
2.3 Services provision by industry
As noted earlier, manufacturing companies can often derive significant revenues – and
sometimes their competitive edge – from the provision of product-related services.
Although the phenomenon of the rising importance of services in determining the
competitiveness and overall performance of manufacturers has received increased
attention over recent years, it remains relatively little analysed and understood. This is
perhaps even more the case when the attention shifts from manufacturing companies
providing services associated with their products to examining the motivations and
experiences of those firms that make a more wholesale transformation from manufacturer
to service provider.
2.3.1 Motivation for manufacturers to provide services
In a broad context, the motivation for manufacturers to move towards the provision of
services can be set against the major structural changes that have driven the rise of the
service economy. On the one hand, there are pull factors, such as the increasing share of
services in overall economic activity, the rapid expansion of international trade in
services and opportunities for new service activities created through the fragmentation of
production chains. On the other hand, there are push factors, such as increased

competition, and consequential impacts on prices and profitability in product markets.
Overall, as pointed out by Young (2008), companies in most developed economies are
confronted by the relative attractiveness of service business and the relative
unattractiveness of manufacturing or product distribution.
Against the background described above, there are more specific reasons that can be seen
to motivate product-based companies to provide services. Buse, Freiling and Weissenfels
(2001), for example, examine performance contracting25 by SMEs and find that the main
motivation for providing service packages26 along with their products is to differentiate
themselves from their competitors. Offering these additional services means that the
supplier can:
• Develop new markets;
• Increase its degree of customisation;
• Bond its customers;
• Find leeway for price increases, as pricing of different elements becomes less
transparent.
Similarly, in an article on the after-sales service supply chain, Saccani, Johanssen and
Perona (2007) note that for companies involved in the manufacturing and sales of durable
goods, after-sales service has a potential strategic relevance for company profitability,
customer retention and product development.
2.3.2 Types of services provided by manufacturers
There is a wide range of possible services that may be provided by manufacturing

companies, either in association with their products, or as more or less independent
service activities. If these are considered in terms of the different combination of product
and service outputs delivered to the customer, then we can distinguish between:
• Services integrated within manufactured outputs: i.e. service functions embedded
within physical products;
• Services supplied alongside manufactured outputs (product-related services27): i.e.
service functions that are complementary to the physical product. These may include,
for example, service functions – supplied by the manufacturer or sub-contracted to
specialist providers - that are not necessary for the product to function, but which add
to its utility. For such services (‘amenities’), Mathé and Shapiro (1993) distinguish
between services that encourage or facilitate sales (e.g. public relations,
demonstrations etc.) and services that increase the benefit or satisfaction from use of
the product (e.g. after-sales services, specialised training, etc.). However, this
category can also include services – supplied by the manufacturer, sub-contracted, or
provided by an independent service provider – that are essential for the product to
function (‘essential services’);
25
They use the definition that “performance contracting means that a supplier or a co-operation of suppliers renders a
customised bundle of technical infrastructure with several add-on services within a frame-giving and long-lasting contract
based upon the idea that the customer acts as a user of the infrastructure, only paying for the performance delivered.”
26
Service provided may include maintenance, training, finance, operation, etc.
27
The term “product related services” is increasingly used to denote services which are provided by manufacturing
companies in close association with the ‘product’ which is regarded as their ‘core business’.

• Services supplied independently of manufactured outputs (non-product related
services): i.e. service functions that are ancillary to (or independent of) the physical
product. Here, we are concerned with service functions that are provided by
manufacturing sectors/companies that are ancillary to their manufacturing activities.
Examples might include companies that are primarily identified as being within
manufacturing sectors, but provide services such as ‘recycling and waste disposal’,
other ‘environmental services’ or ‘facility management’ etc.
In addition, as the overall package of combined services and products can be extremely
complex, containing a multitude of different elements, many of which may be
individually customised, this has led to the categorisation of:
• Complex Products and Systems (CoPS): defined as high cost, engineering-intensive
products, systems, networks and constructs. The provision of CoPS requires multiple
combinations of goods and services (typically involving more than one industrial
sector). Examples stretch from complex software packages to entire rail transit
systems. For the latter, Public-Private Partnership (PPP) and/or operator models (e.g.
BOOT: Build Own Operate Transfer) require the supplier to span the full range of
activities from construction, manufacturing and provision of complex operational
services.
These different forms of service combination can be linked to different strategies for
product-based firms' provision of services. Marceau and Martinez (2002), for example,
distinguish three major firm strategies for offering product-service packages:
• Product-service integration, i.e. linking services to products as they are created.
This covers the provision of services that serve as inputs into the production process
such as engineering, R&D, design28. These inputs enable the producer to customise
products to meet the specific requirements of the client. Typically, provision of such
services is followed as a strategy by producers of intermediate goods, rather than
consumption goods29;
• Product-service packaging, i.e. linking products and services at or after the point of
sale. This covers, for example, financing, training, maintenance etc;
• Product-service bundling, i.e. where the service element dominates and the product
is provided to enable service delivery (e.g. supply of telephones and modems to
provide access to telephone and internet services). Typically, this sort of package is
proposed by service-based companies.
Similarly, Young (2008) identifies the following types of business focus, which product
companies adopt when moving into service markets:
• Tied maintenance and aftercare (i.e. services tied to the manufacturer’s own
products). These may be provided under product guarantees or warranties given at the
time of purchase for product repair (or frequently replacement), or through separate
maintenance contracts. Such services are seen the enhance customer satisfaction and
have an impact on repurchase intent;
28
i.e. services integrated within manufactured outputs
29
Although more ‘modular’ based forms of partial customisation strategies may be utilised by suppliers of manufactured
goods.

• Tied technical advice (i.e. provision of technical specialists to advise and assist
customers of the manufacturer’s product). Like tied maintenance, such specialist
advice is primarily aimed at supporting product sales and, in addition to ensuring that
the product performs to specification;
• Third party maintenance (i.e. services not tied to the manufacturer’s own products).
Typically, this approach is focussed on a range of products owned by the customer
and requires the development of capabilities to support a range of equipment (from
different manufacturers), rather than any particular supplier’s equipment. Through
enhanced knowledge of customers' requirements and needs, they can develop a
competitive advantage, undercutting manufacturers' own maintenance units, and even
over time to replace competitors’ equipment with their own;
• Supplier of scalable independent services (i.e. services unrelated to any specific
product but built around a process or technology which enables handling of volume
transactions). Here, the supply of the service is based on the principle of outsourcing
and sometimes referred to as ‘managed services’ or ‘business process management’.
Essentially, they are based on the proposition that the supplier can, due to
specialisation, knowledge or business experience, run the business process better than
the firm itself. The supplier earns revenue by replicating the service and increasing
customer numbers but improves profit by deploying process and technology
improvements to reduce costs. Examples include IT service contracts and facilities
management;
• Supplier of knowledge-based professional services (e.g. provision of advisory
services based on skill and people, rather than scalable processes). Arguably, the
different business dynamics and barriers to entry (e.g. role of information
asymmetries, reputation effects, etc.) in the provision of such service activities
requires manufacturing companies to make the most fundamental shift from product-
based to service-based business models. The scope for product-based companies to
develop a competitive edge over ‘incumbent’ specialised service providers seems
limited, resting on ability to mobilise top talent and/or greater capacity to invest in
technology processes and systems improvements;
• Hybrid offer. This incorporates a combination of product and services, but that goes
beyond the types of maintenance and aftercare services mentioned above. Examples
include systems integration projects, or customised solutions projects that knit
together products, services and skills to meet unique needs. Another form of hybrid
offer combines professional skills and scalable service processes, whereby customer-
orientated skill-based front office functions are supported by highly efficient
(scalable) back-office processes.
Drawing on the above description, Young proposes a representation of the business focus
for product-based companies’ service activities that distinguishes two dimensions30. The
first dimension relates to the extent to which the service is provided in support of the
equipment (product) supplied by the company (i.e. ‘equipment support’ versus
‘independent’31). The second dimension relates to the extent that the service is scalable
and process-based as opposed to a skill-based professional type service (i.e. ‘scalable’
30
This is an adaptation of a proposal made by Auguste, Harmon and Pandit (2006)
31
Young refers to ‘free’, rather than ‘independent’ which is used here.

versus ‘skill-based’). This results in a four-way classification of service business types as
shown in Figure 6.
Figure 6 Types of service business for product-based companies
Equipment support Independent
Scalable Maintenance Process

Managers
Skill-based Technical Professional

Advisors Advisors
Source: adapted from Young (2008)
2.4 Digital delivery and implications for business services
2.4.1 Overview of digital delivery of business services
As mentioned briefly in Section 2.1, business services are being reshaped by the
application of information and communication technologies (ICTs) and the shift to more
intensive online delivery. As noted by the OECD (2004, 2005), digital delivery of
business services includes supply of contracted-out electronically-mediated services
(outsourcing) and digitally-facilitated distributed work within firms, in which business
services inputs are supplied electronically to support the business activities of firms.
The ‘advantages’ brought to companies through digital delivery can be characterised in

terms of a shift of the frontier of richness and reach, where "richness" refers to the depth
and quality of interactions between a service provider and their clients and "reach" refers
to number of entities (e.g. suppliers and customers) that can be reached. Thus, digital
delivery offers opportunities both in terms of the potential size of the market that can be
accessed and in terms of the quality (effectiveness) of interaction and engagement with
buyers and suppliers.
Following from the above, the impacts of digital delivery will be different, depending
upon underlying technologies of different service activities. For industries with strong
economies of scale (e.g. packaged software), the extension of distribution through digital
delivery enables firms to achieve lower costs (which may result in concentration) and this
may be even further accentuated where there are network effects (e.g. standardised
packaged software). Conversely, for sectors where economies of scale may be low (e.g.
management consulting), improved access and availability to information via the Internet,
for example, may enable small firms to compete more equally and to broaden the
geographical reach of their services. At the firm level, the OECD finds that the impacts of
digital delivery can be significant, with revenue increases driven by increased sales,
access to more customers and improved customer relations and, internally, improved
efficiency of business processes and cost savings. One perhaps surprising finding was that

cross-border digital delivery is less common than might be expected32. This may be due
to the need for the communication of tacit knowledge and face-to-face contacts in many
areas of business services (as well as a range of jurisdictional and regulatory factors).
2.4.2 Digital delivery in the context of a general framework of distributed work
Morris (2000) provides a framework for classifying the forms of distribution of work
within and between organisations, based upon three dimensions of organisation, place and
time, with the extreme positions on each being ‘same’ and ‘different’. Thus, where the
service is provided ‘in-house’ (i.e. vertically integrated), the provider and client are the
‘same’, whereas if it is provided by an external supplier (i.e. bought-in), the provider and
client are different. Similarly, production of the services may take place at the same place
that it is delivered or at a different location, and it may be produced and the same time as
it is delivered (contemporaneous / time dependent) or at a different time (time
independent).
Figure 7 Characterising work by time, place and organisation
Integrated
Traditional Electronically
Work Mediated Work
Traditional Distributed
Shiftwork (Global) Work in
Workplace MNEs
Traditional 1st Generation
Face-to-Face Electronically
Workplace Time Mediated Work Time
Independent Independent
Contemporaneous Contemporaneous
Same Different
Location Location
Distributed
Contract Staff
Contracted Out
Working
Electronically
Shiftwork On-site
Contracted Out Mediated Work
Contract Staff Electronically
Working On-site Time Mediated Work Time
Independent Independent
Contemporaneous Contemporaneous
Outsourcing Digital Delivery
Bought-in
Source: adapted from OECD (2005) and Morris (2000)
The framework proposed by Morris is illustrated in Figure 7, from which we can see that
a strict definition of digital delivery would cover contracted-out electronically-mediated
work and distributed (global) contracted-out electronically-mediated work; that is to say,
ICT-enabled outsourcing. Taking a wider perspective, digital delivery might also
32
Note, the limited extent of international (cross-border) provision of services is also mentioned in Section 2.2.4.

encompass digitally facilitated delivery of business services, in which e-business
activities33 are integrated into and support the digital delivery of services.
2.4.3 Service characteristics influencing digital delivery of business services
Although increasing attention is paid to the growth and impact of ICT-enabled

outsourcing, be this local or international sourcing of business service activities (e.g. for
sectors, such as software and information technology services, R&D and technical
services, and business process services), it is difficult to provide clear evaluations of the
potential importance of digital delivery for different business service sectors (see Table
7). What is clear is that the development of digital delivery is being driven by a
combination of technological and ICT infrastructure developments (enabling services to
be digitally delivered) and supply-side and demand-side factors. In this section, we will
focus mainly on supply-side factors. However, it can nonetheless be noted that a starting
point for building a more demand-side perspective is to consider those drivers (and
inhibitors) that underpin the underlying demand for outsourcing and the choice between
external over ‘in-house’ services provision (see, also Section 2.2) and that lead business
service clients to adopt e-commerce (and other ICT-facilitated forms of supply) within
their supply chains.
Table 7 Digital delivery of business services (potential, role and policy issues)
Service type Potential Current status Major policy issues

Software development High Mature IPRs, bandwidth, congruence
IT services Moderate Mature Trade regulation, congruence
Information retrieval High Mature IPRs, bandwidth, security/authentication
services
R&D services Moderate Emergent / developing Congruence, bandwidth, IPRs, security
Design services High Emergent / developing Congruence, bandwidth, IPRs, security
Technical testing services High Developing Bandwidth, IPRs, security
Advertising High Developing / mature Bandwidth, privacy, security
Marketing Moderate Emergent / developing Congruence
Business consulting Low Emergent Congruence
Human resources Moderate Emergent / developing Congruence, bandwidth, privacy
Labour supply High Mature Labour market regulation, congruence
Recruitment High Developing / mature Congruence, privacy, security
Note: Congruence is the fit between supplier and customer in areas such as co-ordination and control
systems, objectives and values, capabilities, processes, and information technology.
Source: OECD (2005)
On the supply-side, a number of drivers can be identified that encourage business service
providers to adopt digital delivery. As mentioned above, a key driver is the increased
reach and richness in relationships that are possible, to which may be added “increasing
project size and complexity requiring more frequent and efficient interaction between
33
E-business activities refer to Internet/Intranet-based business support activities (e.g. project management, scheduling, billing
and reporting that is accessible to both the supplying firm and its clients.

suppliers and customers apart from and to supplement face-to-face interaction; the
globalisation of suppliers, in parallel with globalisation of client businesses; increasing
internal cost and efficiency considerations for suppliers; and competition among suppliers
and downward pressure on prices. Business services suppliers may also seek to increase
their ‘brand’ visibility and reach new markets, enhance customer services and support,
and improve the quality and reliability of their services” (OECD 2005).
A range of factors can be identified that influence the amenability of services to digital
delivery, these include:
• The level of standardisation: services which can be broken down into standard
components, or which are delivered in a standard form are more amenable to digital
delivery. One classification of services (e-Business Watch 2002) that incorporates the
aspect of standardisation – from least to most standardised - is:
o Project-based services, typically consisting of conducting well specified
knowledge-intensive tasks (e.g. consulting projects, research studies or designing
an advertising campaign). Projects are usually individualised (high
customisation), with crucial activities revolving around coordinating knowledge
workers and project management;
o Standardised ad hoc services, which are fairly standardised and provided on a
case-by-case basis (e.g. direct mailing campaign or providing labour on a
temporary basis). The level of knowledge/skills is typically lower than for
project-based services. Important success factors are efficient workflows,
standardised processes and the ability to create a continuous stream of new
business, either from new or repeat customers.
o Standardised continuous services, are typical of outsourcing services (e.g. office
cleaning, security services or bookkeeping). The efficient organisation of
processes and an efficient interaction between client and service provider are
vital. In addition, enterprises offering standardised continuous services have to
manage the trade-off between realising economies of scale by offering
standardised services and realising higher profit margins by offering
individualised services;
• Complexity of the task: where tasks are complex it makes the desired ‘outcomes’
more difficult to specify in advance, while requiring specific attention to the
arrangement and coordination of persons and activities involved in service provision;
• Nature of the knowledge: which affects the amenability of the service to digital
delivery. It is common to make the distinction between codified34 and tacit35
knowledge, where codified knowledge is clearly more amenable to digital delivery
than tacit knowledge. The transmission of tacit knowledge often requires face-to-face
interaction in the negotiation of meaning and in learning. This makes digital delivery
more difficult, but not necessarily impossible, and face-to-face interaction may at
least be enhanced (i.e. supplemented or extended) through digital delivery;
• The nature of the problem: here a distinction can be made between problems that
can be specified or explained independently from the solution, and problems that
34
Codified knowledge is knowledge that can be written down and readily transmitted from one person to another (e.g.
standard operating procedures, policy manuals, legislation, taxation formulae, etc.)
35
Tacit knowledge tends to resist codification and remain a part of the knowledge and skills of individuals – it is more fluid and
interpretive.

cannot be explained without reference to the solution (i.e. in working towards a
solution the problem itself becomes more clearly understood). The latter form of
problem requires more interaction and negotiation between the agents involved and
are more difficult to distribute (in space and time) than problems which can be
accurately specified (permitting them to be worked on independently and drawing on
codified knowledge);
• The context of the delivery: low context work (i.e. work that is relatively
independent from the context in which it takes place) is more amenable to digital
delivery that high context work, that requires a high degree of awareness of, for
example, activities of co-workers and clients.
We will return to many of the above-mentioned themes in Section 1, which provides a

more in-depth analysis of supplier-client relationships.
In summarising the potential for digital delivery, the OECD report notes that “The most
important characteristics affecting the suitability of business services to digital delivery
are the centrality of information exchange, the level of codification and potential for
standardisation of tasks, the complexity of the tasks involved, the nature of the knowledge
involved, the nature of the problem addressed by the service and the context of delivery”.
If we distinguish between tangible (manual) services and intangible (knowledge)
services36, digital delivery is of most direct relevance for the latter form, where the central
knowledge component of the service can be codified and supplied electronically.
However, even for services that are, by nature, predominantly tangible, digital (ICT-
enabled) aspects can be of importance for processes of coordination and management of
service production and delivery and for supporting service provider–client interactions
and supplementing face to face contact, for example. Overall, the scope for digital
delivery is greater “where the exchange of information is a central part of the business
model, where there is more scope for codification and standardisation of tasks, where
complexity of the tasks involved can be managed, where the knowledge involved either is
or can be codified, where the where the nature of the problem addressed by the service
can be specified and defined and where the contextuality of the work involved is relatively
low” (OECD 2004, 2005).
2.4.4 Use of digital delivery in the business services sector
Evidence on the utilisation of ICT and digital delivery in particular across different
business services types appears relatively limited. An E-Business Watch report from 2004
(E-Business Watch 2004), provides a limited analysis based on distinguishing knowledge
intensive business services (KIBS) from operational business services (OBS)37. As the
report notes, knowledge-intensive services such as consulting, engineering or advertising
are characterised by a strong importance of information and knowledge and access to and
exchange of information play a key role in the production of these services. Since they
are typically project-based, collaboration among employees, as well as management of
36
The distinction between these tangible and intangible forms of services, and their implications for
competitiveness/productivity performance is addressed in more detail in Section 4.2.
37
For the analysis, activities subsumed under NACE (Rev. 1.1) 74.1 to 74.4 are identified as knowledge intensive services.
The remaining business services activities, i.e. activities subsumed under NACE 74.5 to 74.8, are classified as operational
services. The classification of service activities is discussed in more detail in Section 4.1.

third-party relationships are also key characteristics of their production. In comparison,
operational services such as cleaning, packaging or security services are, to a larger
extent, characterised by manual activities on a continuous basis. Compared to knowledge-
intensive services access to and exchange of information are of lesser importance. The
continuous provision according to the same formula in operational services makes
internal processes in this sub-sector well-suited to being streamlined by the use of e-
business technologies. The E-Business Watch findings suggest that:
• KIBS tend to be better equipped with basic ICT infrastructure and are more likely to
use basic internet applications such as e-mail or the web; supporting the hypothesis
that using ICT to access and exchange information is of greater importance KIBS
than OBS (see Table 8);
• KIBS are far more likely to use online technologies to share documents or to perform
collaborative work; underlining the importance of information exchange and
collaboration for the provision of knowledge-intensive services (see Table 9);
• OBS enterprises seem to be better endowed with knowledge management systems;
though this may reflect the use of various technical solutions/systems that help to
organise information about predefined technical processes or internal workflows
which are well-suited for usage in operational services to improve internal processes
(see Table 9);
• OBS enterprises seem to use e-business technologies more intensively for the support
of sell- and buy-side activities. On the sell-side, the customised (and often
confidential) nature of KIBS projects means the degree of standardisation – an
important condition for actually selling goods online – is usually lower than OBS. On
the buy-side, the different nature of inputs necessary for the provision of services is a
probable explanation; the use of electronic tools to support the buy-side is probably
less operational for knowledge inputs for KIBS than for product/physical inputs used
by OBS (see Table 10);
• E-business scepticism is more widespread across KIBS providers (though this may
reflect the fact that e-business is simply understood in the context of buying and
selling online and not including other ICT applications, such as using the web or e-
mail or collaborating online technologies), with concerns over security being
particularly important (see Table 11).
Table 8 Knowledge-intensive versus operational ser vices: basic ICT infrastructure and use of Internet
Source: E-Business Watch (2004)

Table 9 Knowledge-intensive versus operational services: Support of internal processes and integration of mobile
workers
Table 10 Knowledge-intensive versus operational services: Support of buy- and sell-side activities

Table 11 Knowledge-intensive versus operational services: e-business scepticism and reasons for it
2.4.5 Impediments to digital delivery and policy implications
Among the most important impediments to the digital delivery of business services, the
following may be noted (OECD 2004, 2005): security and privacy concerns, external
skills availability, infrastructure and implementation costs and regulatory barriers. To
these, may be added other barriers related to business culture factors (e.g. management of
remote working and international outsourcing contracts). Some of these will probably be
addressed over time with increased adoption of digital delivery and increased learning
opportunities and familiarity both within business services and among suppliers and
customers. Nonetheless, specific policy areas include (OECD 2004, 2005):
• Network infrastructure development (e.g. bandwidth availability, network latency
and communications costs).
Despite progress in the liberalisation of communications and the introduction of
competition, there is scope for further improvement in this rapidly evolving
environment. Governments cannot afford to allow slow reform in one sector to
adversely effect the development of globally competitive firms in others. For
example, communications and converging media regulation (e.g. cable television)
should not retard the provision of low cost broadband services. Experience to date
would suggest that infrastructure-based or access competition is an area for particular
attention.
• Standards (e.g. formal and informal messaging standards, but also, more broadly, the
possibilities for developing services standards with common terminologies, and for
the quality of services provided and the competency profiles of services providers).
Standardisation (of technology, data and processes, including: identification,
authentication, signature, certification and accreditation criteria, conformance testing,
etc.) is a means to help ensure the business case through shared trusted infrastructure
and essential supporting services. In the particular case of business services, there are
special difficulties and opportunities – difficulties in the form of demands to conform
to a multiplicity of vertical industry standards, and opportunities in the form of the

potential for business services to introduce standards across industries (i.e. act as a
mechanism for inter-industry harmonisation).
• Quality certification and accreditation standards for business services (e.g.
recognition of professional qualifications and service provider quality accreditation).
Quality certification and accreditation standards of business services providers are
also an important foundation. Governments can work with industry and professional
organisations to further improve quality standards and encourage quality
accreditation, and to encourage continuous professional development (e.g. in such
areas as management consulting) through a variety of training and education
activities. Where governments are a purchaser of business services they can further
support quality certification and accreditation by being a demanding customer.
However, such standards are relatively underdeveloped compared with standards in
the goods area and it is widely recognised that a more systematic approach to services
quality and competency standardisation in conjunction with industry should be
followed.
• Intellectual property (e.g. R&D, design, software development and technical
testing).
• Privacy, security and authentication (e.g. handling customer information,
accounting and financial records).
There are a range of privacy, security and authentication issues fundamental to the
digital delivery of business services. In order to provide services to customers online,
businesses must be able to track customers and record and analyse customer
information. This raises a number of privacy concerns, relating to the use of that
information outside the immediate transaction (e.g. on selling locational and financial
information to direct marketing agencies). Clear national privacy legislation,
applicable to organisations of all sizes and in all sectors of the economy (in both the
private and public sectors), is an essential foundation. Providing information and
support to business services providers on appropriate implementation and operation
of legislation is also an important contribution that governments can make, as is
promotion of public awareness of rights and responsibilities.
Concerns relating to security of commercially confidential and payments information,
authentication of those authorised to access it and the potential for fraud are
widespread. While many of the issues depend upon appropriate technological
developments and implementation of these, there are also significant awareness and
education issues. Governments can enhance the level of confidence by addressing and
publicising regulation and standards relating to privacy, security and authentication
nationally, and those relating to cross border disputes and issues of jurisdiction
internationally.
• Public sector roles, such as commercialisation of public sector activities (e.g. R&D
and technical testing); public contracting for services and serving as a demanding user
(e.g. outsourcing leading-edge activities); leading the way (e.g. e-government,
procurement).
Governments are significant suppliers and consumers of business services, both
directly and indirectly. They can do much to encourage both demand for, and supply
of, business services. Much attention has been given to IT outsourcing, both as a

potential cost saver and as an industry development initiative. Similar potential exists
in many business services for greater business process outsourcing (e.g. marketing
and advertising, business consulting and human resources). By demanding services,
and corporatising and privatising internal service provision capabilities, governments
can contribute to the development of the business services sector. For example,
government R&D expenditures are large and growing. With increasing emphasis on
value for money, these expenditures are calling forth a wider range of R&D and
technical services providers. Existing providers, such as universities and national
research institutes, are being restructured and encouraged to seek increased contract
research funding. This is contributing to the development of the research and
technical services industry’s capabilities.
Governments can also serve as a role model, by buying and selling services online
(i.e. e-government) and supporting initiatives that aim to raise the awareness of other
organisations of the potential advantages of digital delivery alternatives. Either
directly, or working through industry and professional associations, governments can
also assist in the promulgation of realistic, vendor-independent information, tailored
to the needs of small businesses.
• Education and training (e.g. equipping workers for change at both entry level and
through lifelong learning);
One particularly important area is that of skills. Moving to digital delivery requires
new specialist skills (e.g. IT skills and organisational change management skills) and
internal retraining and updating skills in support of the business transformation.
Governments play a major role in the provision of education and can influence the
emphasis given to specific areas through information provision and target-setting.
Governments can also promote lifelong learning through direction-setting, funding
and other incentives. One area of concern is the traditional management culture of
control. Digital delivery of business services can be encouraged with greater
awareness and tolerance of remote working and the development of the necessary
skills to undertake and support management at a distance. These can be enhanced if
appropriate attention is given to the issue in business services training and education
programmes.
• Labour market flexibility (e.g. enabling contract and agency staffing);
Labour market regulation is also critical. Governments can encourage deregulation of
labour markets in order to make it easier for organisations to manage more flexibly
the border between in-house production and outsourcing. This might include such
things as the use of non-standard employment practices, to enable the use of short-
term contract and agency staffing – which would have an obvious and immediate
impact on recruitment and labour supply services, and facilitate other services
outsourcing and contracting.
• Competition policy (e.g. ensuring that business services industries remain
competitive);
Competition policy affects the supply of business services. While often characterised
by the existence of many small firms, there are a small number of very large players
in most business services markets. In such areas as telecommunications, IT
outsourcing, software development, accounting and management consulting, there are

tendencies for digital delivery to further concentration. Policy makers need to be
aware of, and responsive to, possible negative effects on competition. One key
challenge will be to appropriately define ‘markets’ in what are rapidly evolving,
dynamic and converging industries.
• Better regulation, such as harmonising and simplifying international regulations
(e.g. investment, legal, reporting and physical presence requirements).
Despite recent growth in services trade, services are not traded internationally to the
same extent as goods. Variations in regulatory regimes, investment, legal, reporting
and physical presence requirements act against the internationalisation of business
services. Governments can play a central role in regulatory and legislative
simplification at the national level and in harmonisation at both the national and
international levels. Key areas of concern for digital delivery relate to local presence
requirements, restrictions due to the non-recognition of foreign qualifications and
expertise and local purchasing preferences. Privacy, security and authentication
concerns tend to be magnified with cross-border digital delivery, requiring
international efforts to clarify and harmonise regulations. There is also further work to
be done clarifying and monitoring implementation and educating users about taxation
and border tariffs on online sales and in clarifying and harmonising intellectual
property regimes. To the extent that there are restrictions on international trade in
services and on cross-border digital delivery of business services, such restraints will
reduce demand for these services and slow their diffusion. This has a potentially
negative effect on business efficiency and competitiveness and limits the extent to
which business services providers can act as a conduit for the diffusion of business
process innovations.

3 Industry-service interactions: supplier-client
relationships and the role of co-production
3.1 Introduction
An earlier study, Miles (2007a), reviewed relations between Business Service (BS) firms
and their clients. The literature reviewed there was grouped into four perspectives:
• Economic (transaction costs and make-buy decisions)
• Geographical (BS as elements in regional competitiveness)
• Innovation (knowledge flows and coproduction of innovation)
• Management (supplier-client relations and roles of clients).
This section summarises key features of that review, but moves on to explore more recent
literature and that emerging from management perspectives. These studies include work
on the use of internal services within manufacturing firms, the transition of some
manufacturing companies into being primarily service companies – and of most interest
here, on the coproduction of services between suppliers and clients, the way in which a
specific service like consultancy may be articulated with the client firm, and more general
analyses of client roles in respect of business services38.
In reviewing this literature, it is clear that many similar themes and points are raised by
different authors. However, one note of caution is in order. The studies derive from
several different countries, though there is certainly overrepresentation of the USA (in
recent literature) and Northern European countries. Since there are reasons to think that
business organisation and the use of business services varies considerably across
countries,39 it may be that the prominence of particular themes and the implications to be
drawn for management strategy and policy formulation will need to be “tuned” to these
varying circumstances.
3.2 Asymmetric information and transaction costs
Economists have often treated services as particularly prone to information asymmetries.

De Bandt (1995) noted that clients might find it hard to:
1. Establish the BS’ competence and experience in dealing with relevant problems.
2. Assess the kind or level of skills required to deal with the specific problems that are
confronted with any accuracy – and to match these to the BS’ offerings.
38
See Kuusisto and Päällysaho (2008) for wide-ranging literature reviews.
39
For example, Arundel et al (2006) demonstrate considerable national variation in the organisation of work, even in similar
sectors, across Europe.

3. Agree with the BS on the precise services to be rendered, or on the criteria for
assessing their quality – a problem because of the highly specific and complex nature
of some services.
4. Estimate the effort required of the BS in supplying the service – whether this is a
routine or very challenging task for them.
5. Determine how far the BS is responsible for any problems arising, since the
effectiveness of the service is liable to be affected by many factors (including client
responsiveness, and unpredictable external circumstances).
It is liable to be particularly difficult for the client to achieve clarity on these issues when
the BS in question are more specialised and/or knowledge-based. We will be examining
the extent to which various services take these forms in the course of this Section.
Transaction costs, understood as the “comparative costs of planning, adapting, and

monitoring task completion under alternative governing structures” (Williamson, 1981,
pp. 552-553) have been examined from such economic perspectives. Williamson suggests
that three transaction cost criteria are important in decisions about internalisation or
externalisation of services:
• Asset specificity – how far specialised investments are required to perform the
function. The asset specificity of many BS services - requiring investment in
specialised equipment or knowledge - is a factor behind externalisation of these
functions. Furthermore, we could add in the case of Knowledge Intensive Business
Services (KIBS) that the independence of the service firm may be an important
source of legitimacy within the client and for other parties whose information and co-
operation is required.
• Metering how readily contractors' attainment of the specifications of the contract can
be monitored and measured. This is a recurrent challenge for clients of many BS,
where the product is intangible and not always well-defined.
• Frequency of contracting - how often subsequent rounds of bargaining are needed
after a first contract has been let. The nature of many BS also requires long-term
relationships (e.g. it takes time to establish trust; there are steep learning curves in
understanding the client organisation, etc.).
Taking a less economic approach, Tordoir (1993) considered the actual relationships
established between BS and their clients. He identified three main archetypal
relationships, marked by increasing interactivity:
• Sparring relations - the service in question is negotiated between BS and clients. The
communications require trust and rapport, as is needed for management consultancy,
organisational problem solving and many professional KIBS such as legal services.
Most KIBS appear to – or at least claim to – have close relationships with clients:
Nählinder (2005) found that among a thousand KIBS in Sweden, over 80% reported
typically having very close cooperation with clients (and similarly over 75% strongly
disagreed that they have few contacts with clients during the course of service
production).
• Jobbing relations - the BS performs a specialist task which requires less interaction
with the client; the client can clearly define the task and judge how well the service is
being provided; among KIBS, some engineering and technical services, and the more
routine accountancy and administrative services, may involve jobbing relations.

• Sales relations – The BS supplies more standardised services and/or produces its
services in relatively standardised ways. This characterises many BS other than
KIBS, as well as some fairly routine information services (commoditised computer
software, multi-client intelligence reports).
3.3 Standardisation, Specialisation, and Interactive Relationships
Metering and client relationships may be hard to assess, but what about the
standardisation or specialisation of the service? Standardised services would be expected
to be less difficult to meter, in Williamson’s terms; specialised services would be
expected to be more difficult. Standardised services would be expected to be more
readily handled by sales or jobbing relationships, in Tordoir’s terms; specialised services
would be expected to be more likely to be the subject of sparring relationships.
There is limited empirical evidence concerning how far various BS produce more or less
standardised services. In a German innovation survey data from the mid-1990s, firms
across the economy were asked what proportions of their income were earned from
‘standard services’ (‘those without customer specific changes’); from ‘partially
customised services’; and from ‘specialised services’ (‘bespoke [custom-made]
services’).
Hipp et al (2000) reported that, on the basis of such data, wholesale and retail trade tend
to be most standardised, followed by transport and communications, banking and
insurance and ‘other business services’. In these cases, ‘standardised services’ accounted
for over 70%, ‘partially customised services’ accounted for between 11% and 27%, and
‘specialised services’ for 10% or less of their income (as little as 1% in the Transport and
Communications sector.) KIBS in general reported more specialisation and less
standardisation, though levels of standardisation were surprisingly high. Software
services reported 76% of income from ‘standardised services’, 15% from ‘partially
customised services’ and 9% from ‘specialised services’. Other KIBS40 reported more
specialised and less standardised service supply: Technical Services, and Other Financial
Services, report earning just over half of their income from ‘standardised services’, with
25% - 30% from ‘partially customised services’ and 16% - 18% from ‘specialised
services’. (Hipp et al, 2000)
Relatively high levels of standardisation are reported by the firms in Hipp’s study – even
among KIBS. In contrast, a Swedish study (Nählinder, 2005) indicated that a most of a
sample of KIBS reported high levels of interactivity with clients. The difference may
reflect variations between BS use in Germany and Sweden, or just be down to the
different questions: “specialisation” and “interaction” are not precisely the same thing,
and it may be problematic to assume that specialisation and sparring do go hand-in-hand.
The two surveys each give a glimpse into the BS side of service-client relationships, but
these glimpses are quite partial ones. More extensive indicators would be very welcome
here.
40
There may be some KIBS in the “other business services” group.

The more standardised services may be expected to be governed by Tordoir’s “sales”
relationships, while sparring and jobbing relationships will be associated with specialised
and partially customised services.41 Each sector, however, features all three types of
services; and this varies with the type of firm. Hipp et al (2000) noted, for example, that
larger software firms tend to earn more from ‘standardised’ services, while smaller firms
have more activity in ‘partially customised’ and ‘specialised services’. The smaller firms
here are more like other KIBS - 52% of their income comes from standardised, 30%
partially customised and 19% from ‘specialised’ services.
We have few other overviews across a wide range of BS, but some more focused studies
also suggest that there is great intrasectoral variation. In a study of consultancy firms,
Creplet et al (2001) reported that some provide relatively standardised services and are
organised hierarchically, but others involve much more customisation and interaction,
and feature more flexible organisation. Thus, it is problematic to identify sectors with
levels of standardisation-specialisation; and given that many sectors feature a mixture of
different sorts of services, it is quite possible that we will find all three of Tordoir’s types
of relationship within practically any BS sector.
A given firm may also move across the Tordoir categories as it engages in different
transactions. This was explicated by Schulz (2000) in his study of environmental
services. BS firms moves across the three categories, for example as the services they
supply become more or less standardised and routine. Nevertheless, he could generally
associate specific services within this sector with the categories:
• sparring relations predominate among environmental management consultants,
auditing services, eco-labelling services, R&D services, and those supporting the
launch of new ecological products;
• jobbing relations feature in BS engaged in air pollution control, waste water and
solid waste treatment, monitoring of ground water, and environmental training and
education;
• sales relations are exemplified by BS in waste transport and disposal, acquisition of
standardised filter techniques, and remediation of specific events (e.g. cleaning up
after fuel spillages).
More impressionistic accounts have been provided by other researchers. Thus Wölfl
(2007, writing in a US context) was interested in the issue of standardisation as opposed
to customisation, as something that might help to account for the divergent productivity
trends across services. He was concerned with services in general, including consumer
and public services as well as BS), and identified three groups:
• Highly susceptible to standardisation and ‘commodisation’: impersonal and electronic
services, generally featuring very high productivity growth. Examples include
telecommunications, utilities and transportation.
• Services characterised by customised output, where achieving productivity change is
difficult (the service itself is inherently time-intensive, its production is not amenable
to with mass production or automation, acceptable product quality requires some
specifiable minimum labour input, etc.). Examples include: amusements and
41
There is unlikely to be a one-to-one mapping, and if both Hipp’s and Nahlinder’s results are to be taken at face value, it may
be that many less specialised BS still involve a good deal of interactivity. that

entertainment, legal services, medical services and education, professional services,
repair services and government services.
• Between the standardised and customised services are ‘hybrid services’ (some
providing both types of services in high-end and low-end variants). Examples
include: wholesale and retail trade, restaurants and financial services.
Another impressionistic account focused on BS, and was largely based on literature
review (especially discussions of measurement of services outputs). Metcalfe and Miles
(2007) attempted to depict the extent to which various BS engage in more or less
standardised and specialised activities. Their schematic display (Figure 8) recognises that
the outputs of specific sectors may vary between these characteristics. Only about half of
the BS were assigned a dark box (which indicates that most of their output fell into one
category).
Figure 8 Business Services impressionistically represented in terms of their degree of standardisation-specialisation
Standardised
Standardised
Ambiguous
Specialised
Specialised
Moderately
Moderately
NACE Rev. 1.1 Highly
Highly
72.1 Hardware consultancy
72.2 Software consultancy and supply
72.3 Data processing
73.0 R&D
74.11 Legal services
74.12 Accounting, book-keeping…
74.13 Market research and public opinion …
74.14 Business and management consultancy activities
74.15 Management holding services
74.2 Architectural, engineering …
74.3 Technical testing and analysis
74.4 Advertising
74.5 Labour recruitment …
74.6 Investigation and security services
74.7 Industrial cleaning services
74.81 Photographic activities
74.82 Packaging activities
74.83 Secretarial and translation activities
74.84 Other business activities n.e.c.
Key: predominant
substantial
minor but still significant
Source: Metcalfe and Miles (2007)

3.4 Co-production
3.4.1 Co-production in services
It has long been noted that services are frequently co-produced with their clients and
customers. The customer is expected to make some effort in order to consume the
service, to achieve the intended effect. This may involve being present at the time and
place of service production (as in most personal services, transport of people, etc). It may
involve contributing physical or intellectual energy in order to realise the effect (from
something as simple as selecting an item from a menu, to appropriating the physical or
informational content of the service by actively consuming it). Co-production is a feature
of services that raises questions about productivity measurement (should we be counting
customer labour as an input?) and services marketing. Much service innovation has
involved a trajectory of “self-service”, where client inputs replace those of service staff.
This is sometimes a fairly crude effort to cut costs on the part of the service provider, but
it may also improve the service experience (automated services that operate on a 24/7
basis, reduced queuing and dependence on individual service personnel).
Much of the research on co-production has focused on consumer services, where the
issues of service encounters, consumer experiences, and the so-called “experience
economy” come to the fore. But the issue of co-production is actually highly relevant to
business services. This is spelled out by Bitner et al (1997) who draw on doctoral
research by Hubbert (one of the authors) to differentiate between three levels of customer
participation: low, medium and high (see Table 12). At each of these levels, the
effectiveness of customer involvement influences the service product and thus the
productivity of the service supplier and the extent to which the service can contribute to
the client business.

Table 12 Levels of Participation across different services
Low: Customer presence Moderate: Customer inputs High: Customer co-creates the
required during service delivery required for service creation service product
Client inputs customize a Active client participation guides the

Products are standardized
standard service customized service
Service cannot be created apart from

Service is provided regardless of Provision of service requires
the customer’s purchase active
any individual purchase customer purchase
participation
Customer inputs (information,

Payment may be the only required materials) are necessary for an Customer inputs are mandatory and
customer input adequate outcome, but the co-create the outcome
service firm provides the service
Business-to-business examples:
Agency-created advertising
Uniform cleaning service
campaign Management consulting
Pest control
Payroll service Executive management seminar
Interior greenery maintenance
Independent freight Install wide area network (WAN)
service
transportation
Quoted from text:
“In some cases, all that is required “Consumer inputs are required to “Customers … have essential
is the customer’s physical aid the service organization in production roles that, if not fulfilled, will
presence … with the employees of creating the service … Inputs affect the nature of the service
the firm doing all of the service can include information, effort or outcome. All forms of education,
production work… In a business- physical possessions. … similar training and health maintenance fit this
to-business context, examples of types of information, effort and profile. Unless the customer does
services that require little possessions are required when something … the service provider
participation are less common. ... the customer is an organization cannot effectively deliver the service
Once the service has been seeking to outsource services outcome … an organization seeking
ordered, little is required from the such as payroll, customer training services for its employees will
organization other than to open its database management, or tax need to help define the nature of the
doors or provide access to the accounting.” training, identify the right employees
service provider” for the training, provide incentives for
them to learn and facilitate their use of
the training on the job.”
Source: Bitner et al (1997) pp194-195
From the cases in Table 12, it appears that many business services that centre on
peripheral and physical business processes require relatively low levels of participation.
From the cases in this Table, it appears that many business services that centre on
peripheral business processes, and on more physical business processes, require relatively
low levels of participation. In contrast, highly knowledge-intensive services require
relatively high levels of participation. It is also suggested that more standardised services
require less participation, while more customized or specialised services requires high
levels. (However, the notion of standardisation/customisation may need clarification;
pest control or greenery maintenance activities are liable to vary from site to site and time
to time, presumably, to a greater extent than, say, provision of laundry or other routine
services).

Furthermore, the term “participation” is a very wide one. Participation could involve
many dimensions, that is many ways in which the clients have to relate to the service
process. Bitner et al discuss information, effort and property being involved (though
some of the property in their cases is informational property such as receipts). The cases
of low participation, and some of the cases of medium participation, involve allowing
service supplier personnel access to the client premises (e.g. office cleaning, pest control,
greenery maintenance), to client goods (which may be intermediate goods as in uniform
cleaning, or both inputs and final outputs as in freight transport and some repair and
maintenance services), to client data (e.g. payroll services – but all service transactions
are liable to involve some data transfer). Client personnel are liable to interface with
service personnel, in order to facilitate these types of access: these interfaces may be very
routine ones, though some interpersonal interaction (emotional labour) may often
accompany this. This might be particularly prevalent in business services that are not
featured in the Table, such as personnel transport services (presumably a low
participation case – medium and high participation cases might include corporate
hospitality services and health and training services), where there is prolonged contact
between client and service staff.
As higher levels of participation are involved, we would expect to see greater levels of
person-to-person interaction accompanying the business-to-business service transaction,
then. This will underlie much of the customer “essential production roles” identified by
Bitner et al.
The management literature has been beginning to address these issues further. Another
US-based study, by Bettencourt et al (2002), further explores the roles of clients and the
implications that this poses for service providers – focusing on KIBS, and the high
participation business service activities associated with them, which they describe as
“complex, unstructured, and highly customized to meet a particular client's unique
needs”. The KIBS firm needs knowledge and competence from the clients if it is to
successfully design, produce, and deliver its service solution. Exactly what these client
inputs are is unlikely to be known from the outset, and thus co-production roles will
emerge and evolve in the course of a relationship. Some of the knowledge possessed by
clients is liable to be codified (Bettencourt et al mention current technology platforms and
formal reporting relationships), but the client will have to locate this and provide it to the
supplier. Some will be tacit (Bettencourt et al mention knowledge concerning the identity
of key players are, and how and the logic behind organisational practices in the client
firm). The efficacy of these knowledge transfers will increase the likelihood of
successful service production and delivery, producing efficiencies for client and
supplier42.
Bettencourt et al stress the competitive advantages to KIBS that may be yielded by

understanding and managing their clients’ roles in co-production, and seem to implicitly
assume that the situation is generally going to be a win-win one. In practice, where
complex projects require much mutual cooperation and ongoing negotiation, there are
liable to be trade-offs and winners and losers may emerge. Thus Bitner et al (1997)
42
For an interesting study that sets out to map the different ways in which knowledge is produced in such KIBS-client
interactions, see Fosstenløkken et al (2003).,

included clients acting as competitors to the service organization alongside the two other
roles that are often encountered (clients acting as productive resources and as contributors
to service quality, satisfaction and value). They noted that a given service transaction,
and, we would add, even more so a sequence of transactions, may display elements of
each role.
Kuusisto (2008) outlined four types of relationship between client and BS, again
indicating different possibilities for coproduction:
• Customer consumes the service. Here there is little participation from the client, who
simply makes use of the service provider’s performance. Examples include office
cleaning and renting equipment;
• Customer co-performs the service. Here the client is a productive resource,
performing some tasks essential for the service, though the service solution is by the
service provider. Examples include foreign language training, and many web-based
services (e.g., related to marketing support, quality control, maintenance,
administration security, etc.);
• Customer co-creates the service. The core service solution is generated by the client
in interaction with the service provider. Examples include many KIBS - business
consulting, R&D, etc.;
• Customer co-designs the division of labour. The BS supplier and the client identify
points of common interest, and then decide on the services/products each will produce
(which may include co-creation and/or co-performance as well as consumption).
Several KIBS examples are suggested by Kuusisto: a supply chain consultant, a
systems integrator, and a specialised software company, who work together to create
service solutions for their markets.
Kuusisto points out that, despite giving some illustrative examples in this list, particular
BS and client firms may vary in the relationships adopted from occasion to occasion.
3.4.2 Client roles and co-production
Bettencourt et al (2002) identify several features of “role responsibilities” for clients

required for their effective participation in co-production of the service solution with the
KIBS firm:
1. communication openness;
2. shared problem solving;
3. tolerance, accommodation;
4. advocacy;
5. involvement in project governance;
6. personal dedication.
Table 13 presents the framework used by these authors, and Table 14 summarises their
comments on these features.
Kuusisto (2008) points out that as well as the motivation to be involved in service
innovation, there is also the issue of customer capabilities required for co-production to
happen effectively. Motivation is affected by such factors as: importance of the BS
(and/or service provider) to the client, how important the participation is seen for shaping
the quality of the service results and the BS-client relationships. The client’s capability is

shaped by factors such as innovation knowledge and skills, available people and time, and
readiness to engage in a mutual innovation activity.
Table 13 Client co-production behaviours in a KIBS context
Behavior Definition Examples Benefits

Communication The extent to which the client lead is Articulates to XYZ a clear vision Optimal solution from
Openness forthcoming, honest, and clear in of the solution desired complete
sharing pertinent information for Communicates clear understanding of client
project success with the service expectations and requirements for environment
provider project outcomes to XYZ Accurate problem
formulation
Effective utilization of
client competence
Shared Problem The extent to which the client lead Is proactive at identifying and Optimal solution
Solving takes individual initiative and shared resolving potential problems with results from give-and-
responsibility for developing solutions the proposed solution Raises take process
and resolving issues and problems that potentially problematic issues in a Multiple perspectives
arise in the relationship. timely manner reflected in final
solution
Effective utilization of
client competence
Tolerance The extent to which the client lead Is patient when minor problems Reduced tension and
responds in an under-standing and arise enhanced working
patient manner in the face of minor Responds to project relationships
project encumbrances, glitches, and complications in an understanding Functional conflict
inconveniences. manner resolution
Accommodation The extent to which the client lead Is receptive to XYZ attempts to Reduced tension and
demonstrates a willingness to influence the direction of the project enhanced working
accommodate the desires, approach, Relies on the advice and relationships
and expert judgment of the service recommendations of XYZ Effective utilization of
provider. service provider
competence
Advocacy The extent to which the client lead Gains internal commitment Active involvement of
acts as a vocal advocate and among key client stake-holders multiple client
salesperson for the project and its (i.e., secures buy-in to the project) stakeholders
merits within client firm. Sells key client stakeholders on Sense of ownership
the merits of the project among eventual users
of project solution
Involvement in The extent to which the client lead Periodically monitors the Client responsibilities
Project takes an active role in monitoring development of the XYZ solution are fulfilled in a timely
Governance project progress toward stated project Stays informed concerning and proficient manner
goals. project key issues Additional check and
balance on meeting
project budget and
schedule goals
Personal The extent to which client-led Stays personally involved in the Functional working
Dedication behaviours reflect a sense of personal project as it progresses relationships from joint
obligation for project success by Makes sure that he/she is acceptance of
performing individual responsibilities in available and easy to reach by XYZ responsibilities
a persistent conscientious, and Client responsibilities
responsive manner. are fulfilled in a timely
and proficient manner
Source: Bettencourt et al (2007)

Table 14 Client roles and responsibilities in co-production
What Why
Communication Openness
Foremost, such communication includes the client sharing Close relationships between service providers and clients
intimate knowledge of business processes, strategic goals, require coordinated actions to be successful... especially
and industry and market conditions in which it competes. true when the nature of their relationship and output is
… it also involves the client openly communicating complex and customized. Optimal knowledge-based
information about project and relationship expectations as solutions that satisfy client project goals and that are
well as their vision and priorities for the project. … carefully orchestrated to fit within the client's technology
especially critical in the early stages of a project when the and business environment demand open and honest
nature of the problem is being assessed and possible client communication of all information that is pertinent to
solutions are being formulated the project.
These situations demand clients who are willing to think Optimal knowledge-based solutions require give-and-take
critically and accept an active rather than passive role in between the service provider and the client. The client
Shared Problem Solving
solution development. This includes taking initiative to: brings a unique perspective and unique sources of
communicate potential problems or holes in solution competence to the relationship that must be tapped for
development; ask thoughtful questions during planning success … shared problem solving is critical because the
meetings; and provide constructive feedback concerning complex and customized nature of many knowledge-
proposed solutions. based projects means that problems and adjustments are
unavoidable. … many problematic relationships stem from
clients who assume that their role is limited to paying a
fee in exchange for a service rather than assuming a
shared role in problem solving and solution development.
What is needed … is a client who displays tolerance… The uncertainty and joint coordination inherent in complex
who responds in an understanding and patient manner in knowledge-based service projects inevitably produce
the face of small project glitches and inconveniences. minor complications and unexpected inconveniences as
Tolerance
Clients who respond … in such a manner promote the project and relationship develop. The client's response
effective and open working relationships with the service to these complications and inconveniences can play a key
provider that can contribute to functional conflict resolution. role in either promoting relationship goodwill or tension
with the service provider. These issues can lead to major
conflicts that strain the working relationship and ultimately
lead to sub-optimal project outcomes and client
dissatisfaction.
Effective co-producing clients see the "big picture" and Effective partnerships rely on flexibility and the willingness
maintain their focus on the primary project goals. … they of both service provider and client partners to
are willing to compromise on minor points and defer to the accommodate the needs and approach of the other
Accommodation
expert judgment of the service provider in order to reach partner. … optimal knowledge-based solutions rely not
their primary project goals and maintain a functional only on insights from clients, but also from the service
working relationship with the service provider. provider. … some clients are not receptive to the input
and suggestions of the service provider as the details of
the solution are being worked out … this limits the ability
of the service provider to bring the full magnitude of their
expertise to bear on resolving problems and developing
solutions. Tension and sub-optimal results are a natural
consequence …

What Why
Successful projects require internal relationship advocacy Project success often hinges on the active involvement
by the client project lead … responsible for acting as an and input of multiple constituencies within the client firm,
internal proponent for the project, "selling" key internal including the ultimate users of the project solution. … new
constituents on the project's merits, and garnering their projects and changes within organizations may be viewed
Advocacy
support and involvement in the project. He or she prepares as threats to individual "turf" within the firm; as such, the
these internal constituents for their individual roles in motivation of eventual users is highly dependent upon
making the project successful and helps them develop a active participation in the project or change process and
sense of ownership concerning the project outcomes. … clear communication of project vision and benefits.
advocacy behaviors can … facilitate a sense of ownership
among key client constituencies for project outcomes that
will lead to heightened individual contributions to the
project and increased acceptance of the final solution.
Clients … are actively involved in project governance Successful projects are defined by clients not only in
throughout, including assuring that the project reaches its terms of effective solutions, but also in terms of cost and
Involvement in Project
stated goals by monitoring the progress of internal timing of project deliverables. However, it would be unfair
constituents and the service provider, keeping abreast of to place the burden of meeting project cost and timing
Governance
key project issues, and acting as a liaison with internal goals on the service provider without due consideration of
staff. … they may request periodic verbal and written the role that the client plays in project governance. Clients
progress reports or have mechanisms established for can serve as an additional check-and-balance to the
addressing key action items for which they are service provider that the project is moving toward project
responsible. They may also attend meetings that do not goals according to expectations.
require their involvement so they can keep up with project
progress and issues.
… client leads are committed to fulfilling their individual Although many individuals may be involved in working
role responsibilities in interactions with the service with the service provider from the client side of the
Personal Dedication
provider. This includes meeting personal deadlines, relationship, the personal dedication of the client's project
conscientious completion of expected tasks, lead is especially necessary for effective partnerships and
responsiveness to the queries of the service provider, and goal attainment. The client lead serves as a liaison and
easy accessibility. Beyond these specific actions, the decision maker for the client organization.
impact of persistence, enthusiasm, and extra effort by
client leads in fulfilling individual responsibilities cannot be
overestimated.
Source: Bettencourt et al (2007)
3.4.3 Service provider’s management of co-production
Bettencourt et al (2002) address the challenge for KIBS providers of ensuring that their
clients perform the role responsibilities featured in Table 13 effectively: that they know
what is expected of them (role clarity), are motivated to engage in desired behaviours
(motivation), and have the necessary knowledge, skills, and abilities to perform the roles
(these authors do not use the term “absorptive capacity”, but the idea is the same). The
KIBS provider can positively affect these three aspects of the clients they serve by a
number of means:
• Client selectivity (not taking all clients, but using criteria including issues such as
project urgency and criticality, service complexity; client firm philosophy and
organisation; dedication of client resources to the project);
• Client training, education, and socialization (ensuring that expectations are set
appropriately from the outset; participating in joint planning; development of trust;
holding training and information sessions – including communication about client
roles; building opportunity for informal association of project leaders);

• Project leadership and client performance evaluation (matching authority levels;
rewarding transformational leadership and partnership-building; stimulating self-
evaluation and evaluation of clients at project completion).
In addition, traditional project management skills (e.g. effective project organisation and
planning) remain important for ensuring that deadlines are met and problems diagnosed
early. The point however is that KIBS co-production activities require additional project
leadership skills that can enhance such aspects of the client role as the motivation
necessary for achieving “more subtle and voluntary co-production behaviours”. These
skills include “conflict resolution, team building, effective and honest communication,
creative problem solving, and consideration for the needs of others”.43 The KIBS firm
has its own responsibilities, in selecting such leaders and supporting them with “the
necessary staff, budget, and material resources to support client coordination efforts”.
This analysis, which rests on the scope for viewing clients as "partial employees" of the
business service firm, results in some useful advice for such firms, and suggests some
ways in which relationships between business services (especially KIBS) and their clients
may result in more or less satisfactory outcomes. There are certainly implications for
management training and associated policies and educational strategies. The
competitiveness of KIBS may rest on their management of such issues, and the benefits
that the economy derives from business services will reflect the capabilities on both sides
of the relationship44.
Päällysaho (2008) reviews a number of studies suggesting that there can be additional
benefits to BS providers from engaging in co-production with clients. For instance, there
is evidence that successful service innovation is more probable and rapid under these
circumstances. Some of the studies reviewed encompass BS other than those falling into
the classic KIBS sectors, such as logistics firms.
One limitation of the studies of BS-client relations as so far developed is that it does little
to differentiate among the various members of staff in the business service firm and its
client. In addition to project leaders on both sides, there are likely to be numerous other
staff members who are in contact. We later review a study of the use of consultancy
services that identifies divergent views from different types of staff in the client firms.
3.4.4 Service clients’ management of co-production
The Bettencourt et al (2002) study provides an unusually detailed picture of co-

production management viewed from the KIBS’ perspective. Beyond an extensive and
rather practically-oriented literature on project management, and another on the
outsourcing of information systems, there has been relatively limited analysis of co-
production management from the clients’ perspective.
43
See also Dawson (1999).
44
See Bettencourt et al (2002) for further detailed suggestions about managerial practice, including templates for
investigating existing capabilities.

With the growth in outsourcing and especially off-shoring over recent years, there have
been various attempts to address the ‘make-or-buy’ / ‘internalisation-externalisation’
choice in terms of transaction cost approaches. Geis (2007) combines this with a legal
perspective. He argues that the growth of off-shoring is not simply a product of
globalisation and improved telecommunications, but also reflects improved capabilities to
reduce the agency costs of outsourcing (though improved technology is one element here,
too, along with standardisation and similar developments). He identifies five mechanisms
that can be used in the contractual arrangements between service supplier and client:
1. Staged commitment through an interlocking, multi-contractual framework (this
approach is often used to deal with more complex business services, in any case, but
multiple, asynchronous contracts can also allow firms to stage their commitment – in
other words, they are free to reduce the scope of a project or move to a different
supplier if supplier-related problems arise);
2. The use of redundant agents or the retention of duplicate activity within the firm (this
may impose costs of its own, but involves keeping some of the project in-house,
splitting up chunks of the project among several providers, and other ways of
enhancing competitive elements in the business service);
3. Incentive compatible compensation (for instance, penalties and rewards associated
with timeliness and quality of service);
4. Explicit monitoring and control rights (allowing principals or designated third parties
to inspect financial records and operating procedures – the latter may be important,
for instance, in seeing how a call centre or marketing service is organised);
5. “For cause” and “for convenience” exit rights (providing the legal power to terminate
an outsourcing contract before the contemplated term expires).
Gallouj (1997), while also being oriented around information asymmetries, looked at the
wider context of contracts. He also considered how the BS was being chosen, and thus
described client choices in terms of four steps of action and associated methods:
1. Search for general information on suppliers.
2. Evaluation of potential suppliers - the call for tender.
3. Evaluation of tenders.
4. Presentations by the selected consultancies.
The first step, draws on past contacts, knowledge within the organisation, examination of
publications and conference presentations, etc.45 Uncertainty about BS providers may be
reduced by signals of quality such as certification (qualifications, membership of
professional associations, etc.) and reputation (e.g. brand name, comments in the trade
press). The second step, calling for tender, involves two areas of work: (1) applying
service-relevant selection criteria to a list of potential suppliers; (2) formulating the call
for tender so that it states the problem and the sort of solution required explicitly, in
sufficient detail to ensure an appropriate service offer, allowing for flexibility and
innovation where needed. (This is where the contractual issues noted by Geis arise.) The
third step, evaluation of tenders, rests on the BS suppliers' understanding of the problem,
proposals for solving it, and evidence of capabilities to accomplish this. A short-listing of
candidates usually results, with a small number being chosen to present their proposals, in
45
Gallouj notes that search costs can be high. The would-be client’s resources of time and effort are limited. A satisfactory
BS offer may be sought in a timely fashion, rather than putting a lot of work into finding the “optimal” BS.

the fourth and final step. The criteria employed in step three are here employed in more
detail, focusing on the precise methodology and personnel proposed, project
management, details of BS delivery and interactions, etc. Further steps could be added to
this account, which only deals with the initial contracting of the BS. In some respects
these could be deduced from the account of Bettencourt et al (2002). But there have also
been a few more direct studies of clients using BS.
Sjøholt (2001), on the basis of a number of Norwegian investigations, concluded that

more sophisticated clients make better use of transnational consultancy firms.
Difficulties were often attributed to the consultants, but the clients also recognised that
some unsatisfactory experiences were a result of the client’s lack of focus and of
preparedness to make effective use of the BS. Success seemed to be most likely with
well-defined and controllable tasks, where learning was more systemic. Broader and
more intangible assignments (e.g. strategic consultancy) were often more difficult.
Successful clients have the capabilities to define, coproduce and absorb BS inputs. They
can:
• Formulate what their problems are at the outset and in the course of the interaction;
• Establish long-term “sparring” relations (Tordoir’s term) with BS suppliers;
• “Absorb” BS inputs.
Sjøholt paid attention to the teams that were formed for the purposes of interaction
between consultant and client. In difficult cases, the composition and these teams was the
source of difficulty - organisational and strategic issues require explicitly trans-
disciplinary teams. Some tasks are suited to generalist approaches, while others are better
suited for specialised professional advisers. (The latter may be quite adequate for
management of relatively ‘routinised’ BS relationships, for instance).
One important issue concerns just who in the client firm is dealing with the BS. Most
studies take the client as a single agent, when in reality firms are composed of individual
employees with different skills, knowledge, capabilities. This was an issue addressed in a
PricewaterhouseCoopers (2006) study of the use of consultancies in the UK. One
question asked concerned how satisfied respondents were by the results of the consulting
project, and satisfaction levels were found to decline as the project hierarchy is
descended. Thus, the proportion of respondents saying they were completely satisfied
with the project ranged from 48% of decision-makers, 45% of influencers, 28% of project
managers, to 11% of people seconded to the project, and 17% of end-users. Those client
staff seconded into a project to work with the consultants were only half as likely as the
decision-makers, who set up the project, to believe that communication between
themselves and the consultants was open and honest – suggesting that we need to be
cautious in evaluating management claims about BS-client relationships. Typically,
managers claimed that success follows from credibility, having a clear sense of purpose,
good communication and ensuring commitment and buy-in. PricewaterhouseCoopers
added that it is important to take such practical steps as “setting up joint teams, taking a
flexible approach and ensuring that the people who work side by side with the consultants
gain personally from the experience” (p5).

This PricewaterhouseCoopers study examined BS-client relationships in light of the
different types of employee in terms of location vis-à-vis the project, contrasts successful
and unsuccessful projects, and explores the different experiences associated with different
reasons for undertaking use of the service:
1. People: Gaining access to specialist skills (this accounted for almost half of the
consulting projects studied);
2. Perspective: The need for outside, independent or innovative input, on management
decisions (around a third of the projects);
3. Political factors: Using of consultants to push through, or provide a plan for
managing, change; or to help take difficult decisions;
(A fourth factor mentioned was Process: the ability to access a tried-and-tested
methodology.)
Among the results were:

• The more knowledgeable a consultant has proved to be, the more satisfied the client
is – 74% of satisfied with the work done by consultants thought their consultants
knew what they were talking about, compared to just 17% of dissatisfied clients, who
believe they do their consultants’ work for them;
• Clients who were satisfied with their consultants overwhelmingly said they had been
listened to, while no dissatisfied clients said the same. Clients involved in small
projects were far more likely to positive about this than those involved in large-scale
ones. When the consultants had been brought in for political reasons, people were
more likely to be negative;
• Completely satisfied clients were more likely to have invested in ensuring the
consultants were able to hit the ground running. Unhappy clients were particularly
likely to have gone back over the proposal a consulting firm had written at the start of
a project, but less likely to have developed a business case for the project quantifying
the expected benefits. Those responsible for particularly successful projects have
typically thought very seriously about how best to measure progress and value the
contribution consultants can make;
• More than 80% of decision-makers, but less than 60% of those seconded to the
project, were clear about why the consultants had been hired and who was
responsible for what; over 30% of the latter group were unclear as to what the
consultants were doing (much higher than any other group). (The exception was
where the consultants had been called in for political reasons, when those seconded to
the project reported to have a much clearer idea of what was going on than their
managers);
• The gap between satisfied and unsatisfied clients was high in terms of evaluations of
the level of communication in the project. (It was less of an issue in process-related
projects, and more likely to be an issue the larger a project is or the longer it lasts.)
Those seconded into the project were half as likely as decision-makers to believe that
communication between themselves and the consultants was open and honest;
• Lateral relationships between the consultants and the client staff involved in the
project are determinants of success: the great majority of respondents from successful
projects believed their work with consultants represented genuine partnership
working, while very few dissatisfied clients did. Successful consulting projects
almost always involved joint client-consultant teams; and two-thirds of satisfied
clients saw team work as having been so effective that it was hard to tell whether

someone was an employee or a consultant (Less than a third of dissatisfied clients
thought so);
• When asked what they would do if they had the chance to run a particular consulting
project over again, the most common responses were (a) being clearer to their own
staff about the rationale for bringing consultants in, and (b) putting more effort into
gaining internal commitment. The third most important factor was paying the
consultants according to the results of their work. This overall result largely reflects
the pattern for “people-related projects, where consultants have been hired to provide
specialist input, in the sample. The top priority for perspective-related projects is
response (b) above (perhaps because the benefits of using consultants in such projects
are less tangible). In process-related projects, clients felt they could have benefited
from a more formalised process for selecting the consulting firm. These projects were
also seen to suffer particularly from lack of internal sponsorship (perhaps because
scale and complexity make it harder for people to see their gains from a project and
their ownership of the results).
3.5 Knowledge and innovation
PricewaterhouseCoopers’ (2006) study of the use of consultants in UK business found

that individual learning was important in successful cases: 70% of satisfied clients with
report having also gained personally from the experience, but only 6% percent of those
who were dissatisfied (This is irrespective of the size of the project, the role of the person
responding and the project lifetime). Learning means that employees of the client
company should be able to behave in new and different ways, which sounds very much
like a precondition for innovation, if not innovation itself.
The style of relationships between BS and clients, as discussed above, is liable to have
substantial implications not only for the way in which the service is produced and for the
form and extent of client participation in service specification and production. It also
impacts on the extent to which there is exchange of knowledge and mutual learning
between the partners, and what sorts of knowledge and learning are involved. Tordoir-
type “sparring” relationships are more likely to feature mutual learning and thus to induce
profound change on both sides of the service relationship. (This is not invariably the case.
The client can observe the practices of a “jobbing” service supplier and decide to emulate
them – in self-provision of the service, or elsewhere. Furthermore, a “jobbing” BS can
still be involved in delivering relevant information, intelligence and even skills. For
example a training company may be contracted to deliver a standard training package, for
example that involved in the European Computer Driving License. This will by
definition engaged in increasing knowledge levels among the staff of the client in
question, and naturally involves high levels of engagement by these staff members. But
the contractual relationship may well be a “jobbing” one – though higher levels of
training will typically involving more “sparring” negotiation of the precise skills to be
developed.)
Returning to the point about variety within BS sectors, Creplet et al (2001) noted that
some of the consultancy firms they studied provide relatively standardised services and
are organised hierarchically; others involve much more interpersonal interaction and are
liable to feature more flexible organisation. Consultants who deliver relatively

standardised solutions to the clients are distinguished from experts, who confront
complex or novel problems and generate original solutions to them (often with co-
production). The two roles provide different types of knowledge and learning. The
consultant role develops and transfers of knowledge as to best practice, and may thus
enhance the daily operation of clients. The expert role provides more strategic vision,
generates more novel knowledge about business processes and relationships, and may
effect more long-term change.
Empirical work on these themes is limited. Nählinder (2005) reported that in her sample
of Swedish KIBS (unfortunately there is little sub-sectoral disaggregation in this
publication) responses to an enquiry as to whether they help clients “develop products or
routines” elicited strong agreement from over 40%, agreement from over 23% agree, and
“agreeing somewhat” from 17% - leaving less than 20% disagreeing that they make such
contributions. It would be interesting to know what responses would arise from less
knowledge-intensive BS. Hipp et al (2000) did contrast different services in their
German survey, but the question examined was whether the product had improved the
client’s performance. Specialised firms were much more prone to believe this to be an
impact of the service – 51% of specialised firms seeing this as an important effect as
against 27% of those who saw their products as wholly standardised (equivalent answers
for “improved customer productivity” were 47% and 17%).
Hipp et al (2003) presented more detailed results, reproduced in Table 15 below. In most
BS sectors a majority of firms reported positive impacts on client performance and
productivity resulting from their own (the BS’) innovations.46 The KIBS, especially
software services, were most likely to report this; finance and other services least likely.
It should be noted that Hipp et al express some reservations about the reliability of the
questions here, since service firms undertaking innovation in their service processes but
not their products also reported positive impacts on clients. Whether this indicates
confusion, or tells us again that service process and service product are hard to
disentangle, is open to question. It could even be, for example, that a change in process
toward greater co-production with clients, is not registered as a change in the core service
product, but is seen as benefiting clients particularly.
46
Note that some of these firms may have been producing consumer services.

Table 15 Effects of the Service Innovations by ‘Standardisation-Particularisation’ and Sector of Activity
Temporal / Service Range Service User’s

Spatial / User Quality Productivity /
Type of service Availability Friendliness Performance
Wholly Standardised 74% 72%↓↓ 72% 33%↓↓
Largely Standardised 75% 81% 77% 52%
Customised 73% 90%↑↑ 79% 61%↑↑
Bespoke 70% 86% 73% 63%↑↑
Service Sector
Trade 75%↑ 76%↓↓ 77% 54%
Transport & Comm. 73% 82% 84%↑↑ 48%
Banking & Insurance 73% 87%↑↑ 66%↓↓ 40%↓↓
↑↑ ↓↓
Other Financial Services 71% 90% 63% 49%
Software 70% 92%↑↑ 87%↑↑ 83%↑↑
↓↓
Technical Services 64% 77% 76% 51%
Other Business Services 77%↑ 83% 74% 56%
Other Services 67%↓ 78% 73% 44%↓↓
All Firms 71% 81% 75% 51%
Note: The arrow symbols indicate significant differences between the observed proportions citing these ‘effects’
as important, and those ‘expected’ if there were no difference in these proportions by ‘standardisation-
particularisation’ classification or by sector. Upward arrows indicate firms of a particular type were more likely to
identify the identified effect as important, whilst downward arrows indicate they were less likely to identify the
identified effect as important. Single arrows indicate this significance was at the 5%-10% level, double arrows
that it was at 5% or above
Source: Hipp et al (2003).
These studies assess benefits to clients (albeit as estimated by the BS providers), but do
not indicate how and where these are achieved. Miles (2007b), again focusing on KIBS –
though some of the analysis is relevant to other BS – attempted a summary formulation of
the way in which the BS could support innovation in client organisations (Table 16). The
essence of this analysis is to indicate that different sorts of learning may be achieved at
different points in the service interaction, reflecting changing client roles in specification
and co-production.

Table 16 KIBS role in services and innovation
KIBS
Innovation in KIBS KIBS-related Innovation in Client
Role
New methods of searching for, synthesising, and presenting Service may alert clients to scientific and technological
Informative
relevant information. (Examples: use of patent analysis and possibilities or trajectories - for example, from analysis of
bibliometric methods in technology watch type of underpinning literature, of competitor strategies, of
environmental scanning, use of visualisation techniques to regulatory developments.
represent such results.)
New methods of monitoring and analysing data, and By clarifying nature of the problem, client’s innovative
presenting relevant information. (Examples: new sensors in strategies can be focused more effectively on search for
monitoring environmental impacts, computer models for solutions. Interaction with KIBS in problem definition
Diagnostic
modelling such impacts, Internet-based communications for provides opportunities for mutual learning and even
accessing data from and delivering results to client, and use coproduction of innovations.
of various means for reporting to clients.) Interaction with

client in problem definition provides opportunities for mutual
learning and even coproduction of innovations.
As Informative and Diagnostic services. Reduce risks of adopting innovations by using service’s
Advisory
superior knowledge of alternative possibilities, prior
experience, best practice, etc.
Innovation in KIBS services and production processes. E.g. Reduce risks of implementing innovations by reducing need
training services have extended the range of subjects and for (or accelerating process of) learning by doing.
Facilitative
types of skill they tackle; they have innovated in the use of Opportunities to learn from a wider knowledge base than
multimedia and in face-to-face instructional settings. Rapid provided in-house, and sometimes to experience solutions
prototyping services are using computer links to exchange tried out elsewhere.
designs and results with clients, and new equipment to
construct their models.
Innovation in the elements of systems being combined As facilitative.

Turnkey
together, and in the applications to which these capabilities

may be applied. Opportunities to learn from doing in
concrete circumstances.
Specialisation on the service can allow for learning from Reduces need for detailed knowledge of service, freeing
Managerial
diverse applications, for specialised innovative efforts; resources to concentrate on core competences (though
knowledge-intensive elements may evolve out of relatively sufficient knowledge to ensure appropriateness of service
routine services as more knowledge of strategic application provision is still required). Increases opportunities to benefit
of services to client functions, beyond the immediate from scale economies and KIBS’ innovation.
problem, is acquired.
Source: Miles (2007b)
3.6 Managerial and policy implications
The first point to be made is that the literature and data on industry-services linkages is
relatively underdeveloped. For example, we do not even know very much about just
what contributions BS make to other sectors of the economy – though we can examine
expenditures on BS. The scale of BS use suggests that client firms find these services
valuable for their operations. On the other hand, there are persistent complaints in the
trade press about “cowboy consultants” and contracts that fail to deliver (especially in IT

services). Even the PricewaterhouseCoopers (2006) study reported undercurrents of
dissatisfaction with consultancy services, and there is little reason to think that this would
not be the experience with many other KIBS, at least47.
In recent years there has been a growth in literature on the use of KIBS – on managerial
practices that can support effective selection and use of KIBS on the part of clients, and
that can contribute to satisfactory relationships, reputation-building and subsequent
business on the part of the KIBS suppliers. We have reviewed above some key
contributions to this literature, whose main message is that the coproduction relationship
(essential for many services) needs to be planned for and managed on both sides. This
management extends well beyond the points of service design and delivery, and requires
interpersonal skills as well as service-specific knowledge and capabilities. In some cases
the sorts of skill mentioned in the literature on “complex product systems” will be
required: ability to coordinate and negotiate evolving divisions of labour and points of
interface and hand-over.
What are the ways in which policy might contribute to better supply and use of business
services (including in-house services)?
One obvious set of issues for policy concerns the skills discussed above on both BSA and
client sides. There is scope for developing more training in these skills (for instance, in
business schools) and raising awareness of the requirements for such skills (for instance,
through case studies of more or less successful relationships). There are likely to be
particular sets of firm (for instance SMEs) where these skills are relatively
underdeveloped.
BS are important elements of the productive and innovation systems of countries and
regions, but it is difficult to know how far the supply of BS is really adequate for these
economies48. Certain BS often feature in regions’ cluster policies, but it is likely that
others are equally important for the health of regional economies. Further examination of
the role and rationale for such cluster policies, and the extent to which they reflect real
shortcomings in local BS availability, would be valuable.
Comparative research might also explore variations across countries, regions, sectors, and
other structural dimensions, to explore how far there are variations in the use of various
BS – in the extent to which services are outsourced, the effectiveness of the use of BS,
and the effectiveness of this use. It is likely that there are lessons to be learned from
others’ experience, even if we need to be cautious about assuming that practices
developed in one context will be transferable to different cultures, places, industries.
Thus case studies and benchmarking of management practices will be useful alongside
broader statistical analyses49.
47
One interesting direction for future research would be to undertake studies similar to the PriceWaterhouseCoopers one, for
a wider range of BS and their clients.
48
Another line of research would be one seeking to benchmark BS supply and use across regions, where it might be possible
to constructive a predictive tool (using multivariate regression, for instance) to explore regional inequalities in BS provision.
49
For statistical analysis, it would be helpful to develop instruments that can be applied to assess the impact of BS use from
the perspective of clients, and to relate this to structural and strategic factors that may have shaped the outcomes. For
example, impacts could be addressed in terms of questions about cost-saving and other performance gains, as well as
contributions to innovation and efficiency; decisions about using the BS could be related to questions about the extent to

In general, the information asymmetries associated with many BS imply that any policy
measures that could enhance clients’ abilities to assess BS providers could help potential
clients make better selections, and encourage some who are now wary of using BS to
adopt such services. The public sector is itself a client for many BS, and could use its
own cases not just as case studies, but also as a basis of assessing BS performance. In
addition to schemes such as awards for highly satisfactory BS inputs, use could be made
of social networking systems to provide ratings and reviews of BS suppliers50.
Finally, BS are obvious targets for innovation support schemes, and innovations centring
on supplier-client relations and the management of complex projects would seem to be
particularly promising areas for further work.
3.7 Future analysis – key services and sectors
For a systematic understanding of BS-industry relationships, it would be most appropriate

to study the whole range of BS; but where resources are limited then a set of BS might be
chosen to reflect key parameters: KIBS and non-KIBS; technology-intensive versus
labour-intensive BS, for instance. (Within KIBS we could contrast technology-based
KIBS such as computer services - or within these some subset such as computer security
or disaster recovery services - with more traditional professional services such as
accountancy or legal services.) The types of input provided by the BS are also possible
criteria for choice, with services dealing with material goods (e.g. logistics) being
different from those dealing with people (e.g. recruitment services) and with data (e.g.
telecommunications). Another relevant dimension might be the extent to which the BS
are competed with, or complemented by, in-house services in the client sectors (For
instance, many industries employ transport workers and many industries purchase
transport services)51.
There are likely to be other factors involved in making a selection: for instance, particular
services might be interesting because they are ones where there are evident differentials
in productivity growth across countries (or notable differences in the sectoral composition
of their client base)52. Or the selection might be influenced by specific policy concerns,
for example investigating the reality of telecommunications deregulation.
Bearing these considerations in mind, the literature review above does not provide very
strong indications as to which BS might be a priority for further analysis. There are many
ways in which BS vary from each other, and thus many ways in which they can be
which there was scope for competitive supply, whether longstanding providers are being used; the sparring or jobbing
relationship could be the subject of further questions, and the extent to which there is “metering” of the service provision
and interaction of different sorts in the service production process could also be examined, etc.
50
It will be necessary to design and moderate such a system carefully to avoid claims of libel, breach of commercial secrecy,
and the like.
51
More generally, it could be worth making a systematic comparison of the distribution of service work across BS and their
client industries. The challenge will lie in matching occupational categories in BS and client industries.
52
Though for international comparative research it might be simpler to select BS whose user industries are relatively similar
across countries – which would suggest either that the services were effectively the same across the countries (differences
in user patterns might reflect a predominance of different BS subsectors within the broad category), or that there are
substantial differences in the style of use of the BS (which might make it difficult to make direct comparisons).

grouped53. And we have seen that some of the most important factors we have considered
– for example the extent and style of co-production – are liable to vary within sectors and
even within firms from project to project. But the review does suggest that we might
contrast those services that supply more standardised inputs (and thus which should be
contributing to efficiency) with those whose inputs are more customised and specialised,
and which are often co-produced with the client, where there is more scope for mutual
learning and innovation. Assessment of performance impacts of the latter is likely to be
more difficult, just as the measurement of productivity and productivity growth in these
BS is particularly difficult. This is a challenge that has to be grasped, however, if we are
to better understand the economies and innovation systems in which we are working, and
which our management strategies and especially our policies are intended to influence.
53
For a KIBS-related overview, and a helpful attempt at classification, see Viitamo (2007).

4 Classification of service sectors
4.1 Official industrial (statistical) classification of services
Historically, for statistical purposes the market services sector has always been treated as
something of a residual falling out after primary and secondary (manufacturing) sectors
have been accounted for. That this has negative implications for the observation of
service developments and in turn, given the growing share of economic activity
accounted for by service activities, details of (dis-)aggregated economic development has
been well recognised. At the same time, this lack of statistical attention to market services
has appeared to go hand in hand with a lack of attention to service-relevant policy
assessments and development when compared to that devoted to industry.
Though the origins reach back further in time, the European Industry Classification
(NACE)54 was introduced in 1970 in order to establish a common statistical classification
of economic activities within the European Community in order to ensure comparability
between national and community classifications and hence national and community
statistics. The version that most will be familiar with is NACE Revision 1 (adopted in
1990) and the subsequent revision (NACE Rev. 1.1., 2002), established a direct link
between the European classification and the internationally recognised ISIC Rev. 3
developed under the auspices of the United Nations. With effect from 1 January 2008 a
new revision, NACE Rev 2, has started to be implemented.
An overview of the classification of market services under NACE Rev 1.1 and NACE 2 is
provided in the Annex (see Table 34 and Table 35 to Table 39). One important
development from the perspective of informing policy relevant analysis and discussion is
that NACE Rev. 2 makes some steps towards reflecting the current emphasis on
knowledge and information services and technologies through the definition of the
Section J “Information and Communication” (including publishing, broadcasting and
media etc., telecommunications, computer and other information services); in particular,
this removes publishing from manufacturing and places it within the services sector. This
change represents a move in the direction of providing a statistical classification basis for
defining and measuring the ‘quaternary sector’55 and brings the European classification
more in line with that already being used in the USA.
54
"Nomenclature statistique des Activités économiques dans la Communauté Européenne" - Statistical classification of
economic activities in the European Community.
55
In this context, the quaternary sector can be defined as covering those functions that produce and handle information. See
also, Section 1.2.

At first glance, when compared to earlier versions, NACE Rev 2 appears to provide a
significant expansion of the detail of business services sectors. However, although NACE
Rev 2 provides greater disaggregation of business service sectors in terms of broad
categories of activities (i.e. Section, Division and Group headings), it is relatively limited
in terms of the definition of ‘new’ sectors/activities at the level of classes and sub-classes.
With respect to what may be termed the business services ‘cluster’, Table 17 provides an
over view of the main service sectors/activities under NACE Rev 2. In terms of changes
from the previous NACE, among the main revisions the following can be noted:
• Publishing activities (NACE Rev. 2, Div. 58) is now clearly separated from printing
activities and the scope of publishing has been extended to include online publishing
activities, which was previously part of computer related activities. Further a specific
class now exists for software publishing;
• Computer activities (NACE Rev. 2, Div. 62) and Information services activities
(NACE Rev. 2, Div. 62) now distinguish between the role of development, support
and management of computer/information technology systems (Div. 62) and data
processing and maintenance activities (Class 63.1). Though the latter is achieved
through partly combining previously separated activities of data processing and
database activities;
• Professional scientific and technical activities (NACE Rev. 2, Div. 69 to 74)
broadly speaking provides a similar breakdown as under NACE Rev 1.1 with respect
to legal and accounting activities, technical testing, advertising, market research and
opinion polling, and management consultancy activities. The new classification
should however enable (at the class level) for the separate identification of
‘architectural activities’ from ‘engineering and related technical consultancy’ and
between ‘public relations and communications activities’ and other forms of
‘management consultancy services’;
• Administrative and support services (NACE Rev. 2, Div. 77 to 82), perhaps of
most relevance here are the disaggregation of employment activities (3 classes:
placement agencies, temporary employment agencies, other human resources
provision), security and investigation classes (3 classes: private security, security
systems, investigation activities), and industrial cleaning activities (3 classes: general
buildings, other building and industrial, other) together with the creation of a ‘new’
class of ‘combined facilities support activities’;
• Under the group of other professional activities (Div. 74) and office administrative
support and other business support (Div. 82), we can basically find the residual parts
of the previous class of ‘miscellaneous business activities’ (NACE Rev 1 class 74.8)
with more or less the same level of disaggregation at a four digit-level, though with
the creation of a new class for ‘specialised design activities’.
Overall, the greater disaggregation at the level of broad service categories may bring
about greater differentiation of services within macro and meso-economic level empirical
analysis that is typically undertaken at a 2-digit level. However, for more detailed sectoral
analysis that may be required for industrial policy design, the changes under NACE Rev.2
are modest and consist mainly of the reorganisation of existing service classes. Thus, the
new classification per se seems unlikely to have little impact on resolving existing
problems related to the lack of detailed data on ‘business service’ activities.

Table 17 Business services “cluster” under NACE Rev. 2
Division Group Class ISIC

Rev 4
SECTION B — MINING AND QUARRYING
9 Mining support service activities
9.1 Support activities for petroleum and natural gas extraction
9.1 Support activities for petroleum and natural gas extraction 910
9.9 Support activities for other mining and quarrying
9.9 Support activities for other mining and quarrying 990
SECTION E — WATER SUPPLY; SEWERAGE, WASTE
MANAGEMENT AND REMEDIATION ACTIVITIES
Waste collection, treatment and disposal activities; materials
38 recovery
38.1 Waste collection
38.11 Collection of non-hazardous waste 3811
38.12 Collection of hazardous waste 3812
38.2 Waste treatment and disposal
38.21 Treatment and disposal of non-hazardous waste 3821
38.22 Treatment and disposal of hazardous waste 3822
38.3 Materials recovery
38.31 Dismantling of wrecks 3830*
38.32 Recovery of sorted materials 3830*
39 39 Remediation activities and other waste management services
39 Remediation activities and other waste management services 3900
SECTION J — INFORMATION AND COMMUNICATION 5630
58.2 Software publishing
58.21 Publishing of computer games 5820*
58.29 Other software publishing 5820*
62 62 Computer programming, consultancy and related activities
62.01 Computer programming activities 6201
62.02 Computer consultancy activities 6202*
62.03 Computer facilities management activities 6202*
62.09 Other information technology and computer service activities 6209
63 Information service activities
63.1 Data processing, hosting and related activities; web portals
63.11 Data processing, hosting and related activities 6311
63.12 Web portals 6312
63.9 Other information service activities
SECTION M — PROFESSIONAL, SCIENTIFIC AND TECHNICAL
ACTIVITIES
69 Legal and accounting activities
69.1 Legal activities
69.1 Legal activities 6910
69.2 Accounting, bookkeeping and auditing activities; tax consultancy
69.2 Accounting, bookkeeping and auditing activities; tax consultancy 6920
70 Activities of head offices; management consultancy activities
70.1 Activities of head offices
70.1 Activities of head offices 7010
70.2 Management consultancy activities
70.21 Public relations and communication activities 7020*
70.22 Business and other management consultancy activities 7020*
Architectural and engineering activities; technical testing and
71 analysis
Architectural and engineering activities and related technical
71.1 consultancy
71.11 Architectural activities 7110*
71.12 Engineering activities and related technical consultancy 7110*

Rev 4
71.2 Technical testing and analysis 7120
72 72.1 Scientific research and development
Research and experimental development on natural sciences and
engineering
72.11 Research and experimental development on biotechnology 7210*
Other research and experimental development on natural sciences and
72.19 engineering 7210*
73 Advertising and market research
73.1 Advertising
73.11 Advertising agencies 7310*
73.12 Media representation 7310*
73.2 Market research and public opinion polling
73.2 Market research and public opinion polling 7320
74 Other professional, scientific and technical activities
74.1 Specialised design activities
74.1 Specialised design activities 7410
74.2 Photographic activities
74.2 Photographic activities 7420
74.3 Translation and interpretation activities
74.3 Translation and interpretation activities 7490*
74.9 Other professional, scientific and technical activities n.e.c.
74.9 Other professional, scientific and technical activities n.e.c. 7490*
SECTION N — ADMINISTRATIVE AND SUPPORT SERVICE
ACTIVITIES
Leasing of intellectual property and similar products, except
77.4 copyrighted works
77.4 Leasing of intellectual property and similar products, except copyrighted works 7740
78 Employment activities
78.1 Activities of employment placement agencies
78.1 Activities of employment placement agencies 7810
78.2 Temporary employment agency activities
78.2 Temporary employment agency activities 7820
78.3 Other human resources provision
78.3 Other human resources provision 7830
80 Security and investigation activities
80.1 Private security activities
80.1 Private security activities 8010
80.2 Security systems service activities
80.2 Security systems service activities 8020
80.3 Investigation activities
80.3 Investigation activities 8030
81 Services to buildings and landscape activities
81.1 Combined facilities support activities
81.1 Combined facilities support activities 8110
81.2 Cleaning activities
81.21 General cleaning of buildings 8121
81.22 Other building and industrial cleaning activities 8129*
81.29 Other cleaning activities 8129*
Office administrative, office support and other business support
82 activities
82.1 Office administrative and support activities
82.11 Combined office administrative service activities 8211
82.19 Photocopying, document preparation and other specialised office support activities 8219
82.2 Activities of call centres
82.2 Activities of call centres 8220
82.3 Organisation of conventions and trade shows

Rev 4
82.3 Organisation of conventions and trade shows 8230
82.9 Business support service activities n.e.c.
82.91 Activities of collection agencies and credit bureaus 8291
82.92 Packaging activities 8292
n.e.c. : not elsewhere classified
* : part of
4.2 Towards a policy relevant typology of services
The previous section provided a brief overview of existing statistical classification of

service activities. In this section, we look at some recent efforts to derive a general policy
relevant taxonomy of service activities. Given that the focus of this study is on the
competitiveness of services used by industry and, in turn, the impact of these services on
the competitiveness of client sectors (industry) we look towards the development of a
taxonomy based on distinguishing the productivity characteristics and drivers of service
activities/sectors.
In this regard it is important to bring attention to the demarcation between traditional

approaches to (manufacturing) productivity analysis and that applicable to services. This
is particularly the case in the context of the shift in the economic paradigm towards the
knowledge economy and flexible production modes. This gives emphasis – particularly in
the context of services - to the importance of factors such as product variety, product
innovations, individualised and customised products and service-product packages. It also
recognises that the standard productivity model that separates the producer from the
customer is insufficient in the context of service processes where the customer may
actively participate in the production of the service (i.e. co-production), see Section 2.1.
For producer services56, Kox and Rubalcaba (2007) provide a taxonomy – shown in
Figure 9 - that distinguishes between those services that may be categorised as network
type services (e.g. distribution, transport and logistics, financial services,
telecommunications, and energy) and business services, which they define as “a set of
service activities that – through their use as intermediary inputs – affect the quality and
efficiency of the production activities by complementing or substituting the in-house
service functions”. This definition emphasises the possibility of a choice over possible in-
house provision of the service by the client or, alternatively, recourse to external supply
provides the main distinguishing factor between business services and other (network-
type) producer services. In turn, it is this possibility for substitution between in-house and
external provision that leads to discussion of externalisation and outsourcing of services
and those explanations for the growth of the business services sector that point to the
comparative advantage that external provision may enjoy over internal provision. At the
same time, this distinction between other (network-type) producer services and business
services is not clear cut, and the possibility for firms to internally provide some network-
type producer services may, for example, simply be related to the size of the business
56
Based on the main client-base (customer segment) for the service provided, a distinction may be made between consumer
services – i.e. services that are primarily consumed by private individuals – and producer services that are primarily used
as intermediate inputs into the production processes of businesses.

(e.g. choice of own-transport and logistics services over their externally supplied
equivalent).
Within the category of business services, Kox and Rubalcaba distinguish between
operational services that supply relatively standardised business services, and knowledge-
intensive business services (KIBS) that generally produce client-specific services with
high knowledge content. In relative terms, operational services are mainly concerned with
provision of manual skills, while KIBS are based on knowledge and information in the
production and delivery of services. Viitamo (2007) considers that the taxonomy of Kox
and Rubalcaba can be seen in terms of the generality of the service functions, with the
highest generality (i.e. lack of client specific characteristics) associated with network-type
services, while operational business services – although also relatively standardised – are
more specialised in supporting specific functions. Finally, knowledge-intensive business
services have the highest degree of customer specificity.
Typically, the combination of the general nature (i.e. lack of client specificity) of
network-type services and associated economies of scale in their provision mean that in-
house production is usually neither a viable or cost-effective option. Moreover, the fact
that such services are relatively standard means that a significant level of in-house
complementary knowledge (to make effective use of the service) is not normally required.
By contrast, though increasingly subject to outsourcing, knowledge-intensive business
services typically require the retention of a complementary in-house knowledge base.
Meanwhile, operational business services are situated in-between these two situations.
The above characterisation of services, also, points to the relative importance of client-
supplier relationships in service production processes. Many service activities are
characterised by co-production between the supplier and the client, with the client
providing important inputs into the definition, production, and delivery of the service. To
the extent that these inputs are required, client-supplier relationships are of increased
importance, and the production process/system can be described as technologically open.
The taxonomy of Kox and Rubalcaba, serves to highlight some of the key – inter-related
– dimensions of different service types that may be summarised as follows:
• Choice over ‘in-house’ versus ‘external’ production of services;
• Manual skills versus knowledge skills;
• General / standardised versus client specific / customised services;
• Closed system (no co-production) versus open system (co-production).

Figure 9: Overview of the categorisation of producer services
Software and computer services

Strategy and management consultancy
Knowledge
Accounting, tax and legal advice
intensive
Marketing services, opinion polling
business
services (KIBS) Technical services, engineering
Research and development
Business services Personnel training, headhunting
Security services
Facility management, cleaning
Business Operational
Administration, bookkeeping
related business
Producer services Temporary labour recruitment
services
services Other operational services (e.g. catering,
photography, translation, call centres)
Leasing and renting
Real Estate
Distribution and trade services
Transport and logistics
Network-type
Banking, insurance, stock exchange
services
Telecommunication, courier
Energy services
Consumer services partly used by enterprises (business travel, company health service, social
insurance services)
Source: author adapted from Kox and Rubalacaba (2007)
Viitamo (2007) sets out to provide a general analytical framework of service productivity
and a taxonomy of services that builds on the interdependent nature of service definitions,
classifications and performance measures. As with Kox and Rubalcaba, he integrates the
characteristics of manual versus knowledge skills and standardised versus customised
services but integrates explicitly the relative capital intensity of service provision. Thus,
his taxonomy builds on three critical dimensions of services:
• Labour intensive versus capital intensive services. The first dimension – following
the neoclassical model with two types of inputs, labour and capital -relates the
relative labour intensity of the service activity.
• Tangible versus intangible services. The second dimension is concerned with
relative intensity of tangible to intangible inputs (and/or outputs) and complexity.
Here, a distinction is made between capital intensive processes that rely on
technological assets and capabilities in service production and creation of value added
to the customer, and labour intensive processes based on non-technological assets and
capabilities consisting of specialised human skills, expertise and talent. Thus:
o For capital intensive services: this dimension relates to the relative dominance of
low technology over high-technology service production. Thus, in terms of
technology level and sophistication, a contrast may be made between ‘tangible’
capital technologies (machines and equipment) of low complexity and more
complex capital technologies integrating increased intangible know-how.
o For labour intensive services: the corresponding dimension concerns the relative
dominance of manual skills over knowledge (information intensive) skills in
service production processes. Thus, as with high-technology service production,

labour intensive service with high information content are characterised by high
intangibility of service processes and outcomes. By contrast, services based on
manual skills, are more easily to reproduce in codified form, permitting
utilisation of economies of scale.
• Standardised versus customised services. The third dimension concerns the degree
of customisation enabled by production technology and implemented in corporate
strategy. This can be seen as defined by the balance between effectiveness
(customisation) and efficiency (standardisation).
Each of these dimensions can be defined over corresponding continua: (i) labour-capital
intensity (i.e. measured by the capital to labour ratio); (ii) degree of tangibility of
processes and service outcomes, which for labour intensive services relates to tangible-
intangible production skills (i.e. knowledge-manual skills service intensity) and for
capital intensive services relates to tangible-intangible production capital (i.e. high-low
tech production intensity); and (iii) degree of standardisation/customisation.
Figure 10 illustrates the first two of these dimensions, with the vertical axis showing the
capital to labour intensity (ratio) and the horizontal axis illustrating the degree of
intangibility and complexity of the service process. Moving to the left brings us towards
the so-called manual services, which are characterised by their ability to bring about
‘physical’ transformation (i.e. they focus on doing things). Moving to the right, we have
the knowledge based (or professional) services, which show high knowledge intensity in
their processes and outcomes (i.e. they focus on how to do and why things happen).
Including the third dimension (degree of standardisation/customisation), Viitamo
provides a taxonomy based on eight archetypes of the three dimensional space of critical
service characteristics (see Figure 11). In turn, this forms the basis for considering the
implications of service characteristics for service productivity.
Figure 10 Two dimension space for service clusters
High labour
intensity Intangible
Tangible production
production skills
skills
Low information High information

intensive intensive
Manual Knowledge
Services Services
Low tech High tech

intensive intensive
Tangible Intangible
production production
capital High capital capital
intensity
Source: adapted from Viitamo (2007)

Figure 11 Eight cluster archetype for service processing (three-dimensional space for service clusters)
High labour
intensity
Low information High information
intensive intensive
Labour-intensive Tailored
tailored managerial
processing problem solving
Labour-intensive Information-
repetitive intensive repetitive
processing processing
Customised Customised
Standardised Standardised
Manual Knowledge
Services Services
Capital-intensive
Tailored technical
tailored
problem solving
production
Capital intensive Scale-intensive
networked networked
production processing
Customised Customised
Standardised Standardised
Low tech High tech

intensive intensive
High capital
intensity
Drawing the elements of the preceding discussion together, and leaving aside for the
moment the issues of knowledge versus manual-based services and labour versus capital
intensity, we can distinguish three dimensions that relate to the core of the demand and
production/delivery processes for externally supplied services. First, as emphasised by
Kox and Rubalacaba is the possibility of choice between in-house provision of services
and external provision. Thus, we consider that there is a distinction between:
• Substitutable services, i.e. for which there exists a feasible choice between in-house
and external provision;
• Non-substitutable external services, i.e. services provided by (specialised) external
services providers that require capabilities beyond the scope of in-house provision57;
• Non-substitutable internal services, i.e. service provided in-house that require
capabilities that are so specific as to be unobtainable from specialized service
providers or, alternatively, services for which there is no effective access to the
external supply market.
It is evident that the boundaries between these categories are not fixed. With the
expansion and increased efficiency of external supplied service, and changes in the
possibility to codify service activities that allow greater scope for externalizing service
functions, the balance of the trade-off between internal and external provision of
‘substitutable’ service is continually changing and provides one of the driving forces for
57
This could also include service for which the volume of services required is insufficient to reach the minimum level at which
it is feasible to supply the service in-house or where, for example, economies of scale mean that the higher cost of in-house
provision is prohibitively expensive when compared to an external alternative.

outsourcing. At the same time, much of the growth of external provision of (business)
services goes beyond switching to more efficient external supply. Rather, as pointed out
by Miles (2007), it is a matter of organisations responding to external challenges that
require capabilities – to respond to a major technical or environmental challenge, for
example - that did not exist in-house and that cannot be developed (at least in the short
term). This points us to the fact that as challenges arise they may require the creation of
new services functions/capabilities. In terms of the inter-linkages between services and
manufacturing, it may be that these capabilities are initially developed within the service
sector and never develop in manufacturing, thus remaining ‘non-substitutable’, or
corresponding capabilities may develop in manufacturing over time so that they become
‘substitutable’. Alternatively, the starting point for initial development may be in
manufacturing but become more generalised, for example, as the ‘market’ for such
functions/capabilities expands58.
The second dimension relates to the generality of the services process and/or output.
In the earlier discussion, a general correspondence was made between network-type
services, considered to have the highest generality (i.e. lack of client specific
characteristics), operational business services, which though relatively standardised are
more specialised in supporting specific functions and, finally, knowledge-intensive
business services that have the highest degree of customer specificity. The strength of this
perceived correspondence between higher knowledge and greater customisation
(customer specificity) on the one hand, and lower knowledge (greater manual content)
and more standardisation, on the other, is possibly disputable. This is particularly the case
if we consider that some services manual services which, as described earlier, are
characterised by their ability to bring about ‘physical’ transformation (i.e. they focus on
doing things) can be highly customised (specialised).
The distinction between standardised and customised services is, however, undoubtedly
relevant in terms of defining the supply and demand side conditions of service provision.
Standardised services by definition are not client specific, thus they are more reproducible
which increases their potential market scope. Moreover, they can typically be more easily
evaluated in terms of their quality aspects (for example, because clear specification of the
service process or output is possible, because of previous experience, or because
comparative measures of the service can be observed in the ‘market’) enabling the
provider and/or customer to specify quality standards. By contrast, customised services
(e.g. many knowledge intensive services) are tailored to the requirement of the client and
quality aspects are likely to be more dependent on customer (or supplier) perceptions of
the service delivered. Between these relative poles, modular forms of services can be seen
as an attempt to apply both the economies of scale associated with standardised services,
while raising customer value through providing greater variation and customer
specification. Thus, we can see modularisation of services as an attempt to adjust the
trade off between efficiency and effectiveness in order to raise overall productivity. From
the above, we can distinguish:
• Standardised services, i.e. for which, either through common supply conditions or
common demand requirements, the same service is provided to all customers;
58
This can be seen in the way that many typically industrial activities/functions are now firmly established as part of the
tertiary (service) sector (e.g. maintenance workers and technicians, engineering, research and development, etc.)

• Customised services, i.e. services tailored to specific customer requirements;
• Modular services, i.e. either from differentiation of standard service offers to
enhance effectiveness, or through reduction of customization of (customer orientated)
services in order to raise efficiency.
Discussion of customisation brings attention to the third dimension, which relates to the
openness of the service production process and the extent of co-production between the
provider and the customer. Many service activities characterised by co-production
between the supplier and the customer, which tends be enhanced the more customised
and/or the more intangible is the service to be provided. Thus, we can distinguish
between open and closed service production systems, where the extent to which the
service provision approaches the latter type of system is typically greater for more
standardised is the services (since there is less requirement for provider-customer
interaction). By contrast, the more specific the requirements of the customer, the
complexity of the service required, or the more intangible the service output, then the
greater will be the likelihood that customer will be engaged in co-production of the
service and the production system will be (technologically) open. This distinction
presumes that co-production is either not necessary (closed system) or is required and
takes place (open system). Of course, a third possibility is that there is a failure for co-
production to take place when it is necessary for production of the service. This can be
seen as a sub-set of the category of non-substitutable internal services described earlier,
whereby external provision is not possible because of a failure between the potential
supplier and potential customer to create the open system necessary for (external)
production of the service to occur. Thus we can distinguish:
• Closed system, i.e. with essentially no client participation in the service process.
Frequency of transactions (in terms of clients served) may be low but would typically
be expected to be high. While the level of service intensity would be low;
• Open system, i.e. with significant producer-client interaction and a high level of
service intensity;
• Non-compatible system, i.e. where no producer-client interaction can be established
and either the service is not produced or is produced ‘in-house’.
In order to consider the implications for productivity (competitiveness) of service

provision, it is necessary to consider the basis for assessment of services productivity.
Taking into account the specific nature of service functions, and drawing on productivity
and marketing literature that integrates discontinuous processes and customer
specification in the concept of services productivity, services productivity can be
considered as a function of resources, activities and outcomes (see Figure 12). In this
construction, the start of design processes starts from the outcomes, stressing the link
from activity to results (i.e. effectiveness). While efficiency, seen as the more traditional
measure of productivity, concerns the link between resources and activity. Usually, a
trade off exists between the two that (in theory) yields maximum productivity (McGee
2007). In this respect, the central issue for service productivity in terms of production
process is taken as the relative importance within services processes of:
• Efficiency of production, which relates to the utilisation of resources in undertaking
the service activity (i.e. quantitative measure of how much input is required);
• Effectiveness of production, which relates to the degree to which the required end
results are achieved. In other words, it is concerned with how well a service activity is

performed which, in turn, determines the quality of service outcomes for the customer
(i.e. qualitative measure of how well the service activity is performed).
Figure 12 Productivity as a sequential process
Effectiveness Dimension
Qualitative Measures
Concern for Quality
Asks: How well?
Resources + Activity = Results Productivity
Efficency Dimension
Quantity Measures
Concern for Quantity
Asks: How much?
Source: McGee (2002, 2007)
On this basis, building on the earlier discussion, we can consider that the more that a
service combines the characteristics of being standardised and produced in a closed
system, and is incapable of being produced in-house (i.e. is a ‘non-substitutable external
services’59) then the greater will be role of efficiency in determining overall productivity.
Conversely, effectiveness will be more important for services that combine characteristics
of being customised and produced in open systems, and for which internal production is
potentially a closer substitute (i.e. a substitutable service function)60. Thus we can see, on
the one hand, one set of conditions pushing towards efficiency and scale effects as
important. And, on the other, another set of conditions pushing towards effectiveness and
specialist provision of services.
4.2.1 A productivity-based typology of service sectors
Building on the above three dimensions, which can be considered to define the basic
parameters of the relationship between the service provider and the customer, we can
include the further dimensions of labour/capital intensity and tangible/intangible (or
manual/knowledge) intensity suggested by Viitamo, which define the basic characteristics
of the service provided and its production. On the one hand, we can define four cluster
archetypes of specialised (tailored) ‘effectiveness’ driven services types (top of Figure
13). Among these it can be expected that there will be a greater prevalence of underlying
services processes requiring high-tech capital and knowledge skills. On the other hand,
59
For this purpose we can consider that the main defining characteristics of the category of ‘non-substitutable external
services’ (i.e. that require capabilities beyond the scope of in-house provision) relate to the existence of scale and network
effects that make internal provision either unfeasible or inefficient (or both). Although it could be the case that this is the
result of other factors and market and non-market barriers (e.g. intellectual property rights, professional standards and
accreditation, etc.)
60
This assumes that for trade-offs over standard services based on efficiency grounds, the ‘potential client’ will be able to
evaluate and choose the most efficient option between ‘in-house’ and external provision. For other ‘substitutable’ services,
the issue of matching (specialized) customer service needs to (specialized) service supply, the trade off over ‘in-house’ and
external provision will be far more critically dependent of quality of service and hence effectiveness.

are four more generalised ‘efficiency’ driven services types characterised by scale
economies (including network economies) and with a greater prevalence of underlying
services processes requiring low-tech capital and manual skills. Thus, we have again the
taxonomy based on eight archetypes of the three dimensional space of service
characteristics proposed by Viitamo (see Figure 14). From these – as also suggested to
Viitamo – we could integrate additional variants of ‘modular-type’ services that aim at
adjusting the trade off between efficiency and effectiveness in order to raise overall
productivity61.
61
it needs to be recognised that the three dimensions characterising service processes/outcomes are continua, and thus the
discrete representation provided is a stylised simplification with – in the absence of empirical analysis – a possibly arbitrary
allocation/partition across the clusters.

Figure 13 Productivity-based services typology
Labour intensive
Tailored Tailored
(manual) information
labour management
processing services
Manual Knowledge
intensive Tailored Tailored - intensive
(manual) technical
capital management
production services
Capital intensive
Specialisation
Knowledge
skills
High tech
"Effectiveness"
Externalisation Customisation Co-production
Substitutable Customised Open / discrete

function supply production
Tangible Intangible
(manual) Non-substitutable Non-compatible (knowledge)
Modulised
service internal function production service
supply
Non-substitutable Standardised Closed / continuous

external function supply production
"Efficiency"
Manual
skills
Low tech
Scale effects
Labour intensive
Labour-based Labour-based
repetitive repetitive
manual information
processing processing
Manual Knowledge
intensive Capital- Technology- intensive
intensive intensive
networked networked
production processing
Capital intensive

Figure 14 Archetypes of service clusters
Productivity driver
“Specialised” “Generalised
Effectiveness Efficiency
Tailored Labour-based
P-KIBS (management Accounts and finance
Labour
information repetitive
consulting, legal (payroll, invoicing etc.), call
management information
services) centres
services processing
Intangible
T-KIBS (process
Production process / output
Tailored Telecommunications, Technology
Capital
engineering and design,
Production technology
technical internet-services, banking intensive
architectural services,
management and finance, general networked
customised R&D,
services software processing
specialised software)
General retail, catering and

Specialised trade Labour-based
Tailored accommodation, general
Labour
services, specialised repetitive
(manual) labour facilities management
manual
Tangible
facilities management
processing (security, cleaning, building
(labour based). processing
maintenance)
Tailored Specialised facilities Capital
Capital
Transport services, energy
(manual) management intensive
and water, renting and
capital (capital/machinery networked
leasing
production based). production
T-KIBS : knowledge intensive business services that mainly provide technology support
P-KIBS : knowledge intensive business services that mainly provide support with social and administrative matters
Figure 15 Archetypes of service clusters and determinants of productivity trajectories
Service type Interaction Productivity

Knowledge (K) / Manual
CLUSTER DESCRIPTION
Labour (L) / Capital (C)
Frequency / volume
Intensity / service
Standardised (S)
Effectiveness
Tailored (T) /
Complexity
Openness
Efficiency
intensive
(M) skills
content
(A) Tailored information management services L K T Open Low High High No Yes
(B) Tailored technical management services C K T Open Low High High No Yes
(C) Tailored (manual) labour processing L M T Open Low Low High No Yes
High Yes No
(D) Tailored (manual) capital production C M T Open Low Low
(?) (?) (?)
(E) Labour-based repetitive information processing L K S Closed High High Low Yes No
No
(F) Technology-intensive networked processing C K S Closed High High Low Yes
(?)
Yes
(G) Labour-based repetitive manual processing L M S Closed High Low Low No
(?)
(H) Capital intensive networked production C M S Closed High Low Low Yes No

Given the three dimensions of the production/delivery processes for externally supplied
services the different service clusters can be associated with a set of productivity
implications (see Figure 15). At the two extremes we have:
• Tailored information management services (A), which covers ‘problem solving
activities’ that are typically highly complex and require high service intensity and
close interaction between supplier and customer. This places a very high priority on
the effectiveness of the service but, with low fixed costs and high unit labour costs,
reduces the importance of efficiency considerations;
• Capital intensive networked production (H), which can be considered to show the
closest similarity to ‘traditional’ manufacturing, as production is typically a
continuous and closed process. The service output has low complexity and low
service intensity and quality is insensitive to the scale of production, while production
itself is associated with high fixed costs and low unit labour costs. Accordingly,
effectiveness plays a very limited role and the most relevant productivity
consideration is operational efficiency.
In between these extremes:

• Tailored technical management services (B), which display similar characteristics
to cluster A in terms of complexity, intensity and openness and, accordingly a similar
prioritisation of effectiveness. However, although there is a high knowledge intensity,
as this knowledge is embedded to a greater extent in capital (and can therefore be
managed more systematically and strategically) then the effectiveness of the service
outcome is more predictable ex ante than for cluster A;
• Tailored labour processing (C), which most closely corresponds to classical service
activities, are characterised by low complexity but nonetheless require customer
participation and hence open systems. The relative importance of effectiveness over
efficiency in this case is best viewed in comparison to its generalised counterpart (i.e.
cluster G), and in the need to balance these in the context of discrete and tailored
processes;
• Tailored capital production (D), is similar to cluster H but the scope for exploiting
economies of scale is reduced because of the discrete nature of production.
Nonetheless, to the extent that the ‘quality’ of the service can be defined ex ante
(which may be the case where the service is well-defined before delivery and
embedded in the process) then effectiveness may be a less relevant productivity
driving-factor than for other ‘tailored’ service clusters. Under these conditions, and
where frequency is uncertain (i.e. depending on the particular service provided) then
the relative importance of efficiency over effectiveness cannot be defined a priori;
• Labour based repetitive information processing (E), represents the non-customised
counterpart to cluster A, characterised by the supply of standardised information
services (though this may be modularised to different customer segments).
Standardisation implies that effectiveness of the service can be relatively well defined
(subject to customer’s absorptive capabilities) while enabling significant scale
economies in processing high volumes of customers;
• Technology intensive network processing (F), as with cluster H, this cluster is
characterised by high capital intensity and a networked business structure. The
emphasis on knowledge skills (as opposed to manual skill for cluster H) implies that
scale economies, and the coordination and production of the service rely heavily on
information and communication technologies. Although the service output is complex

(suggesting greater relative importance for effectiveness compared to cluster H), the
high capital intensity, high volumes and low service intensity characteristics of the
service place the priority on operational efficiency;
• Labour based repetitive manual processing (G), displays similar underlying
characteristics to cluster H except that it is based on physical labour rather than the
application of capital. A priori, as with cluster H, the most relevant productivity
consideration is operational efficiency, although the dependence on physical labour
may imply that the possibilities for economies of scale may be limited if increases in
the volume of processing (transactions per unit of time / labour) results in a decline in
quality and decreased effectiveness.

5 Industry use of market service: evidence from
input-output data
5.1 EU-wide estimates of services use by industry sectors
In its mid-term review of industrial policy62, the European Commission provisionally

identifies a number of industrial sectors subject to ‘tertiarisation’63 and that a priori
should be considered under the ‘industry and services initiative’64. These industry sectors
are indicated in Table 18, together with estimates of the share of inputs of market services
(and labour) in total production costs. Utilising a more detailed breakdown of service
inputs65, Figure 16 shows the share of market services (inputs) in production value for
industrial sectors. This same data are used to provide a breakdown of the composition of
market service inputs for each industry sector, shown in Figure 1766. The data illustrate
that market services represent a significant percentage of total costs for many industrial
sectors67 and that in some cases these services costs are close to or even exceed labour
costs68.
In terms of the relative importance of different services in total market service inputs, the
following may be noted:
1. Transport services for basic and intermediate goods industries (wood and wood
products, pulp and paper, non metallic mineral products, basic metals);
2. Post and communications for printing and publishing;
3. Finance for construction, textiles, wearing apparel, and wood products;
4. Renting for construction;
5. Computer services for office machinery and equipment, and other transport
equipment;
62
“Mid-term review of industrial policy: a contribution to the EU’s growth and jobs strategy”, COM(2007)374.
63
The term ‘tertiarisation’ refers to the shift in employment towards service activities, and the growing impact of service
performance (cost, quality, and productivity) on the competitiveness of industry. The provisional identification of industry
sectors subject to ‘tertiarisation’ has been mainly based on statistical analysis of industry sectors with high shares of service
inputs relative to total costs using input-output tables (use of services) contained in the Commission report “EU industrial
structure 2007 – challenges and opportunities”.
64
The industry/service initiative, programmed for the period 2008-09, will “conduct a detailed screening and competitiveness
analysis of the service sectors and their impacts on industrial monitoring. The outcome would be the identification of all
obstacles to improved competitiveness, and possible market failures, which might justify actions to address specific
problems in individual industrial and/or service sectors”. Source: Ibid. footnote 62
65
Data are taken from the statistical annex of the Commission’s publication “EU industrial structure 2007 – challenges and
opportunities”.
66
The data for this Figure are given in Annex 1 (Table 40)
67
e.g. ‘tobacco products’, ‘radio, television and communication equipment’, ‘chemicals and chemical products’, ‘publishing
and printing’, ‘scientific and other instruments’, ‘non-metallic mineral products’, ‘office machinery and computers’.
68
e.g. ‘tobacco products’, ‘office machinery and computers’, ‘radio, television and communication equipment’, ‘chemicals and
chemical products’, ‘food products and beverages’.

6. R&D services for radio, television and telecommunications equipment, chemicals
industry, other transport equipment, and scientific and other instruments;
7. Other Business Services for tobacco, leather, scientific and other instruments,
electrical machinery and equipment, wearing apparel, and food and beverages.
Table 18 Industries identified subject to tertiarisation and share of market services and labour in cost structure
Cost structure (% of Ratio

Tertiar- production value) Market
Industry I-O Sector
isation Market Services /
Labour
Services Labour
Food products and beverages 13.2 15.5 0.85
Food, drink and tobacco
Tobacco products 19.2 14.5 1.33
Food and
Cosmetics
life science
Pharmaceuticals (see Chemicals)
industries
Biotech
Medical devices Scientific and other instruments 15.4 30.7 0.50
Office machinery and computers 14.5 13.2 1.10
Information and communication
Radio, television and
technologies (ICT) 19.1 19.3 0.99
communication equipment
Mechanical engineering Machinery and equipment n.e.c. 13.7 28.3 0.48
Machine and
Electrical machinery and
system Electrical engineering 13.4 26.4 0.51
apparatus n.e.c.
industries
Motor vehicles Motor vehicles 9.9 16.6 0.60
Aerospace
Defence industries Other transport equipment 10.8 21.8 0.49
Shipbuilding
Textiles 10.5 23.8 0.44
Textiles
Fashion and Wearing apparel 9.5 23.6 0.41
design Leather and leather goods
Leather 7.4 23.1 0.32
industries Footwear
Furniture Furniture; manufacturing n.e.c. 12.4 27.6 0.45
Non-energy extractive
Not available
industries
Basic metals 9.4 17.4 0.54
Non-ferrous metals
Fabricated metal products 10.0 29.8 0.33
Cement and lime
Ceramics Non-metallic mineral products 14.8 25.0 0.59
Basic and
Glass
intermediate
Wood and products of wood Wood and wood products 10.5 20.8 0.50
goods
Pulp, paper and paper products Pulp, paper and paper products 11.8 18.5 0.64
industries
Printing and publishing Publishing and printing 16.7 26.5 0.63
Steel (see Basic metals)
Chemicals and chemical
17.6 18.0 0.97
Chemicals, rubber and plastics products
Rubber and plastic products 12.9 26.6 0.48
Construction Construction 12.7 24.2 0.52
Source: based on European Commission calculations using Eurostat’s Input-Output Tables

Figure 16 Share of market services in total production value (2001), industry sectors
0 2 4 6 8 10 12 14 16 18 20
tobacco products
radio, television and communication equipment
chemicals and chemical products
publishing, printing
scientific and other instruments
non-metallic mineral products
office machinery and computers
machinery and equipment n.e.c.
recycling
electrical machinery and apparatus n.e.c.
food products and beverages
rubber and plastic products
construction
furniture; manufacturing n.e.c.
pulp, paper and paper products
other transport equipment
textiles
wood and wood products
fabricated metal products
motor vehicles
wearing apparel
basic metals
refined petroleum products and nuclear fuels
leather
Other BS Computer services R&D Finance Post & Telecom Real estate Renting Trade Transport
Figure 17 Composition of market service inputs (2001), industry sectors
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
radio, television and communication equipment
other transport equipment
tobacco products
scientific and other instruments
office machinery and computers
chemicals and chemical products
wearing apparel
electrical machinery and apparatus n.e.c.
leather
construction
motor vehicles
machinery and equipment n.e.c.
rubber and plastic products
textiles
furniture; manufacturing n.e.c.
food products and beverages
refined petroleum products and nuclear fuels
publishing, printing
fabricated metal products
basic metals
non-metallic mineral products
pulp, paper and paper products
wood and wood products
recycling
Other BS Computer services R&D Finance Post & Telecom Real estate Renting Trade Transport

5.2 Patterns of services use by industry sectors across Member States
Despite Eurostat’s efforts towards greater harmonisation of Input-Output data, obtaining

fully comparable estimates of service inputs across countries is hampered by the presence
of differences in statistical methods and sources utilised across Member States. Some
comments relating to these differences are provided in the following text but it is beyond
the scope of this report to provide a detailed description of all relevant methodological
issues and consequences for the analysis. Accordingly, caution should be exercised in
evaluating the data presented, particularly in so far as they concern across country
comparisons.
For each Member State for which recent data are available, Table 19 provides a
breakdown of market service inputs used by industry, while Table 20 provides estimates
of the share of market services in total production value for individual industry sectors.
Some comments relating to Table 19 are warranted before making any comparison of the
relative importance of service inputs across industry sectors. With respect to market
services, country difference are particularly evident in the treatment of inputs from the
wholesale distribution sector, for which some countries do not include wholesale services
in ‘use’ tables, while for others inputs identified as coming from the wholesale sector can
account for a substantial proportion of total intermediate consumption (use) of service
inputs (e.g. Ireland, Italy). Similarly, the wide divergence in the shares of transport
services in total service inputs to industry appears to go beyond what could be expected
on the basis of underlying economic and geographical considerations (e.g. note the
negligible shares of land transport for France, Ireland and Netherlands). These differences
have, in turn, implications for the relative shares of other service inputs that make cross
country comparisons difficult.
Notwithstanding the above comments, some broad patterns do emerge from the data.
Firstly, in terms of the share of total market service in industry cost structures, this ranges
from around a quarter for Ireland to as low as 6% for Lithuania. In broad terms, there
appears to be a positive relationship between the size of the share of market services in
total industry cost structures and the overall level of economic development, with higher
levels of service inputs in ‘old’ Member States and lower levels in the ‘new’ Member
States. In terms of the composition of service inputs to industry across Member States,
there appears to be quite some heterogeneity in the relative importance of different
service inputs. As noted above, much of this apparent heterogeneity may stem from
differences in statistical methods and sources utilised across Member States. Nonetheless
we can see that as the overall share of service inputs in total cost rises, the proportion of
service costs related to transport functions (particularly land transport) and financial
intermediation tend to fall. In the opposite direction, increases in the share of market
services in total industry cost structures – which, as noted, appear related to higher levels
of economic development - tend to be associated with increasing proportion of ‘other
business service’ and ‘research and development’ in total market service inputs to
industry.

Table 19 Composition of market service inputs by country (share of total market service inputs, %) 2004 or nearest available year
Luxembourg (04)
Netherlands (04)
Czech Rep. (04)
Lithuania (04)
Germany (04)
Denmark (03)
Slovenia (03)
Portugal (03)
Hungary (04)
Slovakia (04)
Belgium (04)
Sweden (04)
Estonia (04)
Finland (04)
Austria (04)
Poland (03)
Ireland (02)
France (04)
Spain (01)
Italy (04)
UK(03)
Motor vehicles trade and automotive fuel 0.2 0.2 1.9 0.4 0.8 0.2 1.3 1.8 3.3 1.8 1.3 2.3 1.1 1.3 5.3 2.9 2.8 2.8 3.2 2.2 1.4
Wholesale trade 27.0 5.0 6.9 2.1 2.1 13.5 6.5 4.9 5.4 2.1 4.1 6.8 1.2 5.6 1.1 0.7 1.6
Retail trade 0.0 0.0 0.1 1.1 0.1 0.5 0.1 0.0 0.0 0.2 0.6 0.2 0.0 1.4 0.2 0.1 0.0
Hotel and restaurant services 2.5 0.4 1.4 2.1 1.0 0.3 5.0 3.4 1.4 1.9 2.0 3.1 4.2 1.4 2.5 1.3 5.8 2.0 6.1 2.1 3.6
Land transport; transport via pipeline services 2.6 0.1 8.6 0.9 6.9 16.4 5.0 9.1 14.8 15.1 3.3 12.1 11.8 10.9 17.3 15.7 11.4 16.6 10.9 26.9 27.4
Water transport services 0.0 0.0 1.7 0.0 0.6 0.1 0.0 1.7 0.3 0.6 0.0 0.1 3.3 0.0 0.1 2.2 0.0 0.0 0.6 1.1 4.8
Air transport services 0.4 0.2 0.7 0.6 2.2 0.2 1.1 1.1 1.0 1.0 0.3 1.4 1.0 0.3 0.1 1.3 0.0 1.5 0.7 1.1 0.2
Auxiliary transport services; travel agency services 0.3 0.1 15.7 5.7 5.9 4.7 4.7 3.2 8.0 2.3 0.4 2.5 6.6 3.6 4.1 6.4 12.6 1.4 1.6 2.8 13.7
Post and telecommunication services 2.0 0.8 4.3 2.7 4.2 5.7 4.7 4.8 4.9 4.0 3.5 4.0 3.1 4.6 6.6 5.9 5.1 8.1 3.6 4.4 9.8
Financial intermediation services 3.5 5.4 4.1 7.6 6.6 5.0 10.1 7.4 8.1 8.4 9.1 11.9 6.4 9.4 6.1 6.3 12.4 6.9 18.3 7.5 10.4
Insurance and pension funding services 2.2 1.2 0.3 2.5 1.7 1.5 1.0 1.6 0.9 5.3 1.7 1.9 3.1 1.8 0.7 0.3 1.4 1.6 6.1 1.5 4.7
Services auxiliary to financial intermediation 0.1 0.0 2.0 2.6 0.2 1.0 0.7 0.4 0.6 0.5 0.4 0.0 1.3 1.2 0.6 0.6 0.2 0.7 2.3 0.2 0.6
Real estate services 1.8 8.9 5.2 4.8 14.4 9.2 8.0 5.8 7.1 10.2 5.7 10.2 3.3 5.6 5.5 10.9 3.9 5.5 3.8 7.1 7.3
Renting services of machinery and equipment 2.0 3.3 2.9 3.8 7.2 2.2 6.7 5.4 5.2 10.9 6.4 6.0 5.0 3.0 2.5 7.4 0.5 5.5 0.8 5.9 3.6
Computer and related services 1.7 1.0 6.0 4.4 2.4 7.2 4.3 5.4 1.2 5.1 4.2 5.5 2.9 2.3 3.5 2.2 2.2 3.0 0.7 4.9 0.4
Research and development services 8.2 0.8 9.7 2.5 4.7 3.0 1.5 2.7 1.6 14.1 3.1 2.7 1.5 1.4 0.3 3.6 3.6 1.2 0.9 0.3
45.1
Other business services 45.4 72.4 45.2 41.3 39.5 29.9 40.8 35.0 31.3 47.6 30.4 41.9 48.7 36.2 34.9 32.3 39.3 38.7 30.4 10.2
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Notes: Figures are calculated on the basis of available ‘use’ tables at purchaser prices
Source: Author’s calculation based on Eurostat database of supply, use and input-output tables
97
Table 20 Share of market services in total production value by industry sector and country (%), 2004 or nearest available year
Luxembourg (04)
Netherlands (04)
Czech Rep. (04)
Lithuania (04)
Germany (04)
Denmark (03)
Slovenia (03)
Portugal (03)
Hungary (04)
Slovakia (04)
Belgium (04)
Sweden (04)
Estonia (04)
Finland (04)
Austria (04)
Poland (03)
Ireland (02)
France (04)
Spain (01)
Italy (04)
UK(03)
Mining of metal ores 18.7 20.0 14.0 17.1 12.7 28.9 13.4 2.9
Other mining and quarrying 29.2 13.1 12.2 22.0 19.1 19.5 19.6 23.2 26.0 12.5 22.3 29.1 11.4 23.8 22.7 16.6 11.3 20.7 23.7 20.2
Food & beverages 14.8 18.0 17.1 17.1 12.4 12.1 9.8 14.8 13.0 10.5 12.8 14.6 12.6 8.3 8.6 9.5 6.4 10.6 10.5 4.2
Tobacco 22.9 28.8 28.7 19.6 2.2 16.2 20.5 16.4 19.3 15.7 3.9 20.4 22.4 16.2 18.8 15.6 17.4
Textiles 12.6 12.2 22.5 18.1 9.8 14.6 12.1 11.7 14.7 13.4 12.1 12.1 12.4 8.3 9.3 9.0 6.8 7.0 10.2 9.2 7.9
Wearing apparel etc. 11.3 12.1 23.3 19.9 10.9 18.5 16.2 15.2 11.9 12.7 11.9 11.5 21.0 10.8 14.4 6.6 5.1 10.4 7.8 7.9 6.0
Leather & footwear 9.8 11.3 15.8 5.7 12.2 12.7 18.4 10.9 7.6 12.2 9.3 11.7 9.1 6.8 3.0 6.3 7.1 7.5 3.9 16.1
Wood & wood products 13.3 5.1 18.4 12.6 11.8 12.2 10.9 7.5 11.8 10.3 11.9 11.3 14.7 10.2 10.2 8.1 10.5 8.1 8.8 9.1 7.9
Paper & paper products 11.5 21.0 16.1 12.5 13.9 14.5 8.8 17.3 13.9 10.8 14.8 12.7 9.3 12.8 13.1 7.5 11.2 11.4 14.8 11.4
Publishing, printing & recorded media 54.5 24.0 23.3 21.7 19.7 19.7 18.5 16.3 11.8 18.1 10.4 24.9 21.5 9.5 16.4 20.0 22.2 14.0 18.2 9.9
Coke, refined petroleum products & nuclear fuels 12.6 3.9 12.0 16.3 4.5 5.7 2.9 10.5 4.2 4.3 7.9 6.5 13.9 12.9 12.2 5.9 8.1 0.6 4.7
Chemicals & chemical products 35.2 8.3 24.8 24.4 21.2 16.3 12.0 20.1 20.0 16.1 12.0 16.2 13.5 14.4 12.3 10.6 12.2 12.8 16.3 8.9 7.0
Rubber & plastic products 11.7 11.8 14.5 16.0 14.5 11.1 16.4 9.2 15.9 12.9 14.0 11.7 10.3 10.9 8.2 10.4 10.2 7.9 9.0 9.9 4.3
Non-metallic mineral products 16.5 14.2 24.5 19.6 19.3 15.7 16.0 11.4 19.8 16.5 13.8 16.1 15.0 14.9 13.6 12.9 8.7 10.0 11.7 12.7 6.2
Basic metals 6.7 14.0 9.2 17.1 11.7 6.8 11.6 4.7 12.8 10.5 8.4 10.9 9.1 11.9 5.0 2.6 6.6 7.6 5.9 8.1 25.0
Fabricated metal products 9.3 7.9 15.1 12.7 10.6 9.5 15.0 8.2 11.7 10.8 12.5 13.1 11.0 13.1 9.2 7.5 8.1 9.0 8.2 8.2 3.6
Machinery & equipment n.e.c. 14.1 14.9 16.7 18.8 14.2 14.5 14.5 10.4 12.1 10.9 16.3 14.5 13.1 13.8 13.1 9.5 8.2 11.4 9.9 7.5 8.2
Office machinery & computers 31.1 15.8 16.7 24.0 7.6 12.1 7.7 15.8 7.2 12.5 8.6 41.0 8.3 4.1 11.0 18.9 30.1 12.4 10.2 15.3
Electrical machinery & apparatus 18.3 10.2 28.7 16.2 15.1 13.4 17.4 6.4 10.5 11.7 13.9 12.2 16.2 10.8 11.5 7.5 7.1 10.2 9.8 8.7 4.7
Radio, television & communication equipment and apparatus 16.4 25.3 19.2 27.6 10.5 6.6 13.1 10.6 53.4 14.8 18.5 8.7 20.1 3.4 11.6 5.5 7.8 7.5 4.0
medical, precision & optical instruments etc. 19.4 11.2 17.1 21.5 14.4 20.7 14.7 11.5 12.9 11.2 18.4 14.1 15.2 14.6 10.4 6.9 9.3 15.4 13.4 13.4 8.0
Motor vehicles 10.4 18.6 15.0 12.3 6.7 12.0 8.3 9.9 9.6 6.8 8.1 8.6 7.1 4.9 8.3 4.9 8.6 4.5 2.1 13.8
Other transport equipment 4.9 10.9 18.8 12.7 9.4 13.8 7.0 13.7 12.5 14.4 11.1 11.9 21.5 13.2 20.5 11.2 14.3 12.1 6.1 7.0
98
Luxembourg (04)
Netherlands (04)
Czech Rep. (04)
Lithuania (04)
Germany (04)
Denmark (03)
Slovenia (03)
Portugal (03)
Hungary (04)
Slovakia (04)
Belgium (04)
Sweden (04)
Estonia (04)
Finland (04)
Austria (04)
Poland (03)
Ireland (02)
France (04)
Spain (01)
Italy (04)
UK(03)
Furniture; manufacturing n.e.c. 15.5 19.8 17.9 15.3 14.5 12.5 13.8 13.2 11.9 10.6 12.2 10.8 13.0 7.8 8.0 10.6 8.5 7.9 6.4 5.7
Recycling 12.9 36.6 35.8 17.3 20.4 13.2 17.6 13.5 7.0 12.4 19.9 13.3 15.0 35.0 8.0 21.2 8.6 13.3 10.4 19.0 19.9
Construction 12.6 40.5 11.5 15.9 15.5 9.3 15.7 17.7 8.5 13.5 8.7 9.8 9.8 12.2 11.3 13.8 9.1 7.3 5.7 7.4 4.6
All above sectors (weighted average) 25.5 22.2 17.9 17.7 15.2 14.0 13.9 12.6 12.6 12.5 12.4 11.9 11.9 11.5 10.0 9.8 9.2 9.2 8.4 7.7 6.1
All above sectors (unweighted average) 17.2 15.2 18.4 18.0 15.9 13.7 13.5 11.4 14.1 12.3 14.4 12.6 14.8 13.5 11.3 10.6 10.7 11.3 10.2 9.9 9.6
Notes: Figures are calculated on the basis of available ‘use’ tables at purchaser prices, and value of total sector output at basic prices
99
Table 21 Relative importance of service inputs by industry sector
Other business services

Financial intermediation
Motor vehicle trade and
Renting of machinery &

Hotel and restaurants
Retail trade (except
Land transport; and
Computer services
Auxiliary transport
Post and telecoms
Auxiliary financial
Wholesale trade
Water transport
motor vehicles)
Research and
development
Air transport
Real estate
equipment
Insurance
services
services
pipeline
fuels
Mining of metal ores o -- -- - ++ o -- + o o + -- -- -- -- - o
Other mining and quarrying ++ - - o +++ o o + o + +++ o o ++ - -- o
Food & beverages - o o o ++ o -- ++ - o o o o -- - -- +
Tobacco - -- -- o o - + o o o o o o - o -- +++
Textiles -- o - o o o o o o ++ o o o o - -- -
Wearing apparel etc. o o o o o - o o ++ + o o + - o -- o
Leather & footwear -- o o o o - o - o o o - o - o -- o
Wood & wood products o o o o + o -- o o o + o o o - -- --
Paper & paper products - + - o +++ o o ++ - o + o o o o -- o
Publishing, printing & recorded media o o o ++ o -- o - +++ + o o +++ o ++ - +++
Coke, refined petroleum products & nuclear fuels -- -- - -- o o - o - - o - -- -- - - --
Chemicals & chemical products - o o o o + + o o o + + - -- + +++ +++
Rubber & plastic products - o - o + o o o o o o o o o o o o
Non-metallic mineral products + o o o +++ o o o + + ++ o o o o -- o
Basic metals - o - - o o -- o -- o o o - - - -- --
Fabricated metal products o o - + o - o o o o o -- + o - -- -
Machinery & equipment n.e.c. - ++ o + o -- o o + + o o o o + o +
Office machinery & computers - o - o - - o o + o - o o - +++ o o
Electrical machinery & apparatus - - -- + - - o o + o o o o -- o o o
Radio, television & communication equipment -- o o o -- -- + o o o - o o - ++ o o
Medical, precision & optical instruments etc. -- o o ++ - - ++ o +++ o o o + o + + +
Motor vehicles o -- -- - -- - o o -- -- -- - -- -- o o --
100
Financial intermediation
Motor vehicle trade and
Renting of machinery &

Hotel and restaurants
Retail trade (except
Land transport; and
Computer services
Auxiliary transport
Post and telecoms
Auxiliary financial
Wholesale trade
Water transport
motor vehicles)
Research and
development
Air transport
Real estate
equipment
Insurance
services
services
pipeline
fuels
Other transport equipment -- o - o -- - ++ - - + o o o o + o +
Furniture; manufacturing n.e.c. - ++ o o o - o o + + + o + - - -- o
Recycling + - o o ++ o o o o o o - + o o -- o
Construction ++ -- - o - -- -- -- o o + o o +++ - -- o
Notes: relative importance is based on the proportion of reporting countries for which the share of service inputs in total production costs (output at basic prices) of the industry sector is above
the average for all industry sectors. The sample of countries and sectors covered is as shown in Table 19 and Table 20; for most sectors this implies a sample of 21 countries. Scale as follows:
+++ >85% of member states report above average shares for the industry
++ 75-85% of member states report above average shares for the industry
+ 60-75% of member states report above average shares for the industry
o 25-60% of member states report above average shares for the industry
- 15-25% of member states report above average shares for the industry
-- <15% of member states report above average shares for the industry
101
The high proportion of ‘other business services’ in total use of service inputs is one of the
main features of Table 19. In all cases, with the exception of Lithuania, the share of this
category is above 30 percent, and above 40 percent for Ireland, Sweden, France,
Germany, Denmark, the Netherlands, Belgium, and Hungary, and exceeding 70 percent
in the case of Luxembourg.
Comment
The apparent positive relationship between larger and more developed countries and the importance
of the business service sector suggested by this data is echoed elsewhere in the analysis of the
structure of economic activity. Taking a broad definition of business services (to include renting,
69
computer related services, and research and development), Kox and Rubalcaba (2007) find a similar
relationship, with EU Member States with a low income per capita having less developed business
service sectors (see Figure 18). Though not implying a direction of causation, they infer that
the development of the business services sector is associated with a process of structural change in
the economy as average income goes up.
Figure 18 Correlation between GDP per capita and the share of business service in total employment in Europe, 2000
Source: Kox and Rubalcaba (2007)
Deciphering patterns in the share of service inputs in cost structures across industry
sectors (Table 20) is far from straightforward. Sectors such as ‘motor vehicles’, ‘coke,
refined petroleum products & nuclear fuels’, ‘leather’, ‘basic metals’, and ‘fabricated
metal products’ appear to be associated with relatively low shares of market service
inputs. Meanwhile, a very varied range of sectors such as ‘mining’, ‘publishing and
printing’, ‘tobacco products’ and chemicals tend to have relatively high shares of service
69
Kox, H. and L. Rubalcaba (2007), “Business services and the changing structure of economic growth”, CPB Memorandum
183, June 4 2007

inputs. These findings are broadly in line with the earlier estimates shown in Table 18 and
Figure 16 but, again, it appears that there is considerable heterogeneity across countries in
the apparent importance of total market services in production costs for individual
sectors.
To examine the relative importance of different services inputs for individual industry
sectors, the possibility to use direct cross country comparisons is hampered by the scale
of observed differences in service input shares across countries which, as noted earlier,
probably also reflects differences in underlying sources and methodologies used for
calculating I-O (‘use’) tables. To overcome this problem, a simple measure is to calculate
the proportion of countries for which the share of service inputs in total production costs
for a given industry is above the average for all industry sectors as a whole70. This
information is shown in Table 21; for example, in over 85 percent of Member States (in
the sample) the sector of ‘other mining and quarrying’ has above average shares of inputs
of land transport and insurance.
Overall, the pattern of relative importance of different services in total market service
inputs indicated in Table 21 is broadly in line with that described earlier in Section 5.1
(Figure 17):
1. Land transport services, particularly for basic and intermediate goods industries
(mining, pulp and paper, non metallic mineral products, basic metals) and also for
food and beverages, and recycling. With, auxiliary transport services, also
relatively important for most of these sectors as well;
2. Post and communications particularly for printing and publishing, and precision
equipment. And, also clothing and, to a lesser extent, machinery sectors;
3. Finance for textiles and wearing apparel and, insurance for mining and non-metallic
minerals;
4. Renting for construction and mining;
5. Computer services for office machinery and equipment, publishing and printing, and
communication equipment;
6. R&D services for the chemicals industry and, to a lesser extent, precision equipment;
7. Other Business Services for tobacco, publishing and printing, and chemicals.
5.3 Individual country estimates of service use by industry
One major problem for analysis of service inputs using ‘harmonised’ input-output data is
the high level of aggregation of sectors, both for industry users and service inputs
(intermediate consumption) This is particularly the case for the category of ‘other
business services’ (corresponding to NACE Rev 1.1. category 74) which, as noted above,
typically accounts for over 30 percent of total market service inputs to industry. To shed
some light on the use of the components of this ‘other business services’ category, this
section utilises individual country data that allow for more detailed analysis of service
inputs.
70
Note, this measure does not take into account the ‘intensity’ of service inputs (i.e. but how much the share is above or
below average), only whether the share is or is not above average.

The analysis has been undertaken using data for three countries – the UK, Denmark and
Spain71 – which provide more detailed information on the ‘other business services’
category; as shown in Table 22. Figure 19 to Figure 21 show the ranking of industry
sectors in terms of the cost of service inputs in production value, while Figure 22 to
Figure 24 show the composition of service inputs for each industry sector. For the latter
group of Figures, the sectors are ordered (approximately) according to the combined
relative share of ‘network-type’ and ‘low-tech’ services72 compared to the combined
share of ‘professional’, ‘operational’ and ‘high-tech’ service73.
Although these data tend to reflect the main patterns of service use outlined in the
previous section, the heterogeneity across countries is evident. For example, construction
sectors (civil engineering and construction of new buildings) – driven by inputs from
architectural activities and technical consultancy - are the most intensive users of business
services in Denmark, but construction is a mid-ranking sector in the UK and one of the
least intensive users of service inputs in Spain. Despite the many examples of this type,
there are nonetheless some clear patterns of service input use – for those service activities
not identifiable from harmonised I-O data – that can be identified. In terms of their
relative importance for industry sectors the most noticeable are:
1. Advertising, for final consumer orientated sectors (e.g. tobacco, beverages,
confectionery, other types of food processing, soaps and toilet preparations, printing
and publishing, consumer electrical good etc.);
2. Market Research and management consultancy, (UK only), which in many cases
goes hand-in-hand with advertising inputs;
3. Architectural and technical consultancy, which is dominated by construction
sectors and civil engineering, and also for transport goods sectors (e.g. aircraft and
space craft, other transport equipment), and some chemicals segments and
pharmaceuticals.
At the same time, it is difficult to identify common patterns across the different
countries/sectors in terms of relative importance of inputs of ‘legal’, ‘accountancy’,
‘security’ and ‘industrial cleaning’ services that tend to represent only a small
proportion of total service inputs/costs to industrial sectors.
71
Detailed data for UK and Spain, together with estimates of relative importance of service inputs for industrial sectors in
these countries are provided in the Annex (see Table 41 to Table 44).
72
This covers: transport services, post and courier services, finance and insurance services, renting and real estate.
73
This covers: telecommunication services, computer services, R&D services, professional services, advertising and
operational services (e.g. security, industrial cleaning) where identified and other business services.

Table 22 Input-output business services data availability (UK, Denmark, Spain)
United
NACE Rev. 1.1 Denmark Spain
Kingdom
72.1 Hardware consultancy

72.3 Data processing (combined)
(combined) (combined)
72.2 Software consultancy and supply
73.0 R&D
74.11 Legal services
74.12 Accounting, book-keeping… (combined)
74.13 Market research and public opinion … Part of ‘other’ BS
74.14 Business/management consultancy activities Part of ‘other’ BS Part of ‘other’ BS
(combined)
74.15 Management holding services Part of ‘other’ BS Part of ‘other’ BS
74.2 Architectural, engineering …
74.3 Technical testing and analysis (combined) Part of ‘other’ BS (combined)
74.4 Advertising
74.5 Labour recruitment … Part of ‘other’ BS Part of ‘other’ BS Part of ‘other’ BS
74.6 Investigation and security services Part of ‘other’ BS Part of ‘other’ BS
74.7 Industrial cleaning services Part of ‘other’ BS
74.81 Photographic activities Part of ‘other’ BS Part of ‘other’ BS Part of ‘other’ BS
74.82 Packaging activities Part of ‘other’ BS Part of ‘other’ BS Part of ‘other’ BS
74.83 Secretarial and translation activities Part of ‘other’ BS Part of ‘other’ BS Part of ‘other’ BS
74.84 Other business activities n.e.c. Part of ‘other’ BS Part of ‘other’ BS Part of ‘other’ BS

Figure 19 United Kingdom: share of market services* in total production value (%, 2004), industry sectors
Other mining & quarrying

Soap & toilet preparations
Inorganic chemicals
Alcoholic beverages
Other food products
Articles of concrete, stone etc.
Knitted goods
Pharmaceuticals
Carpets & rugs
Cement, lime & plaster
Footwear
Grain milling & starch
Fertilisers
Pesticides
Tobacco products
Made-up textiles
Paints, varnishes, printing ink etc.
Sports goods & toys
Other chemical products
Soft drinks & mineral waters
Other transport equipment
Jewellery & related products
Structural clay products
Other textiles
Wearing apparel & fur products
Ceramic goods
Confectionery
Domestic appliances nec
Construction
Printing & publishing
Transmitters for TV, radio & phone
Glass & glass products
Aircraft & spacecraft
Rubber products
Paper & paperboard products
Electrical equipment nec
Textile finishing
Pulp, paper & aperboard
Industrial gases & dyes
Bread, biscuits etc.
Plastic products
Medical & precision instruments
Fish & fruit processing
Furniture
Textile weaving
Wood & wood products
Iron & steel
Structural metal products
Cutlery, tools etc.
Other metal products
Metal boilers & radiators
Mechanical power equipment
General purpose machinery
Machine tools
Insulated wire & cable
Special purpose machinery
Electric motors & generators etc.
Textile fibres
Shipbuilding & repair
Metal forging, pressing etc.
Weapons & ammunition
Dairy products
Metal castings
Miscellaneous manufacturing nec, recycling
Plastics & synthetic resins etc.
Meat processing
Receivers for TV & radio
Organic chemicals
Motor vehicles
Animal feed
Office machinery & computers
Sugar
Agricultural machinery
Leather goods
Electronic components
Man-made fibres
Non-ferrous metals
Oils & fats processing
Coke ovens, refined petroleum & nuclear fuel
0.0 5.0 10.0 15.0 20.0 25.0 30.0
Land transport Rail transport Water transport

Air transport Ancillary transport Post & courrier
Renting Real estate Banking
Insurance Auxillary finance Telecommunications
Computer services Architectural activities & technical consultancy Research & development
Legal activities Accountancy services Market research, management consultancy
Advertising Other business services
*Note: excluding retail and wholesale trade services, hotels and restaurants
Source: Author’s calculations

Figure 20 Denmark: share of market services* in total production value (%, 2004), industry sectors
Civil engineering
Construction of new buildings
Publishing of newspapers
Manufacture of fertilizers etc.
Mfr. of pharmaceuticals etc.
Publishing activities, excluding newspapers
Mfr. of industrial gases and inorganic basic chemicals
Extr. of gravel, clay, stone and salt etc.
Mfr. of leather and leather products
Mfr. of dyes, pigments and organic basic chemicals
Mfr. of toys, gold and silver articles etc.
Mfr. of bread, cakes and biscuits
Manufacture of tobacco products
Mfr. of beverages
Repair and maintenance of buildings
Mfr. of other electrical machinery and apparatus
Mfr. of domestic appliances n.e.c.
Mfr. of concrete, cement, asphalt and rockwool products
Recycling of waste and scrap
Processing etc. of fruit and vegetables
Mfr. of paints, printing ink and mastics
Manufacture of sugar
Mfr. of medical and optical instrum. etc.
Mfr. of pulp, paper and paper products
Mfr. of wearing apparel; dressing etc. of fur
Printing activities etc.
Mfr. of starch, chocolate and sugar products
First processing of iron and steel
Bakers' shops
Mfr. of glass and ceramic goods etc.
Mfr. of cement, bricks, tiles, flags etc.
Mfr. of transport equipment excl. ships, motor vehicles etc.
Mfr. of detergents and other chemical products
Mfr. of furniture
Mfr. of office machinery and computers
Mfr. of radio and communicat. equipm. etc.
Mfr. of agricultural and forestry machinery
Mfr. of vegetable and animal oils and fats
Manufacture of pesticides and other agro-chemical products
Mfr. of textiles and textile products
Mfr. of builders' ware of plastic
Manufacture of other plastic products n.e.c.
Processing etc. of fish and fish products
Mfr. of rubber products and plastic packing goods etc.
Mfr. of machinery for industries etc.
Mfr. af marine engines, compressors etc.
Production etc. of meat and meat products
Mfr. of wood and wood products
Mfr. of dairy products
Mfr. of construct. materials of metal etc.
Mfr. of other general purpose machinery
Mfr. of plastics and syntethic rubber
Mfr. of hand tools, metal packaging etc.
Manufacture of motor vehicles etc.
Building and repairing of ships and boats
Mfr. of basic non-ferrous metals
Casting of metal products
Mfr. of refined petroleum products etc.
Mfr. of basic ferrous metals
0.0 5.0 10.0 15.0 20.0 25.0

Air transport Ancillary transport Renting
Real estate Banking Insurance
Auxillary finance Telecommunications, post and courier Computer services
Software services Architectural activities & technical consultancy Research & development
Legal activities Accountancy services Advertising
Industrial cleaning Other business services

Figure 21 Spain: share of market services* in total production value (% 2001), industry sectors
Other mineral products
Cement, lime and plaster

Mining - non metallic ores
Ceramics
Tobacco
Beverages
Chemicals
Mining - metal ores
Dairy processing
Glass and glass products
Other food industries

Office and computer equipment
Printing and publishing
Rubber and plastics

Textiles
Paper
Radio, television and communication equipment and apparatus

Basic metals
Medical, precision and optical instruments, watches and clocks
Metal products
Furniture and other manufacturing
Coke, refineries and nuclear

Machinery and equipmet
Leather and footwear

Clothing
Electrical machinery and equipment

Wood and cork
Meat processing
Motor vehicles
Construction
Recycling
0.0 5.0 10.0 15.0 20.0 25.0 30.0
Land transport Rail transport W ater transport

Computer services Architectural activities & technical consultancy Legal and accountancy
Market research, management consultancy Advertising Security services

Figure 22 United Kingdom: composition of market service inputs* (2004), industry sectors

Tobacco products
Confectionery
Alcoholic beverages
Pharmaceuticals
Office machinery & computers
Other food products
Shipbuilding & repair
Medical & precision instruments
Transmitters for TV, radio & phone
Motor vehicles
Made-up textiles
Pesticides
Machine tools
Carpets & rugs
Coke ovens, refined petroleum &
Mechanical power equipment
Footwear
Leather goods
Paints, varnishes, printing ink etc.
Jewellery & related products
Construction
Animal feed
Electric motors & generators etc.
Furniture
Other textiles
Knitted goods
Meat processing
Textile weaving
Rubber products
Cutlery, tools etc.
Plastic products
Textile finishing
W earing apparel & fur products
Plastics & synthetic resins etc.
Sports goods & toys
Dairy products
Paper & paperboard products
Man-made fibres
Ceramic goods
Non-ferrous metals
Textile fibres
Metal castings
Miscellaneous manufacturing nec,
W ood & wood products
Organic chemicals
Sugar
Pulp, paper & aperboard
Inorganic chemicals
Iron & steel
Articles of concrete, stone etc.
Fertilisers
0% 20% 40% 60% 80% 100%
Land transport Rail transport W ater transport

Computer services Architectural activities & technical consultancy Research & development
Legal activities Accountancy services Market research, management consultancy
Advertising Other business services

Figure 23 Denmark: composition of market service inputs* (2004), industry sectors
Construction of new buildings

Publishing of newspapers
Mfr. of pharmaceuticals etc.
Repair and maintenance of buildings
Mfr. of office machinery and computers
Civil engineering
Manufacture of tobacco products
Publishing activities, excluding newspapers
Mfr. of toys, gold and silver articles etc.
Mfr. of other electrical machinery and apparatus
Mfr. of paints, printing ink and mastics
Mfr. of detergents and other chemical products
Mfr. of starch, chocolate and sugar products
Processing etc. of fruit and vegetables
Mfr. of beverages
Mfr. of industrial gases and inorganic basic chemicals
Mfr. of medical and optical instrum. etc.
Mfr. of dyes, pigments and organic basic chemicals
Mfr. of transport equipment excl. ships, motor vehicles etc.
Mfr. of agricultural and forestry machinery
Mfr. af marine engines, compressors etc.
Building and repairing of ships and boats
Casting of metal products
Mfr. of other general purpose machinery
Manufacture of sugar
Manufacture of pesticides and other agro-chemical products
Mfr. of domestic appliances n.e.c.
Mfr. of machinery for industries etc.
Mfr. of bread, cakes and biscuits
Mfr. of radio and communicat. equipm. etc.
Printing activities etc.
Mfr. of vegetable and animal oils and fats
Mfr. of builders' ware of plastic
Manufacture of other plastic products n.e.c.
Mfr. of hand tools, metal packaging etc.
Mfr. of dairy products
Mfr. of construct. materials of metal etc.
Manufacture of motor vehicles etc.
Mfr. of leather and leather products
Production etc. of meat and meat products
Bakers' shops
Mfr. of furniture
Mfr. of pulp, paper and paper products
Processing etc. of fish and fish products
Mfr. of glass and ceramic goods etc.
Mfr. of plastics and syntethic rubber
Mfr. of refined petroleum products etc.
Mfr. of wearing apparel; dressing etc. of fur
Mfr. of wood and wood products
Mfr. of rubber products and plastic packing goods etc.
Mfr. of concrete, cement, asphalt and rockwool products
Mfr. of basic ferrous metals
Mfr. of basic non-ferrous metals
Mfr. of textiles and textile products
Mfr. of cement, bricks, tiles, flags etc.
Recycling of waste and scrap
Extr. of gravel, clay, stone and salt etc.
Manufacture of fertilizers etc.
First processing of iron and steel
0% 20% 40% 60% 80% 100%

Air transport Ancillary transport Renting
Real estate Banking Insurance
Auxillary finance Telecommunications, post and courier Computer services
Software services Architectural activities & technical consultancy Research & development
Legal activities Accountancy services Advertising

Figure 24 Spain: composition of market service inputs (2001), industry sectors
Radio, television and communication equipment and apparatus
Medical, precision and optical instruments, watches and clocks
Machinery and equipmet
Tobacco
Chemicals
Motor vehicles
Clothing
Rubber and plastics
Ceramics
Mining - metal ores
Dairy processing
Meat processing
Beverages
Metal products
Paper
Textiles
Construction
Basic metals

Wood and cork
Recycling
0% 20% 40% 60% 80% 100%

Computer services Architectural activities & technical consultancy Legal and accountancy
Market research, management consultancy Advertising Security services

6 Industrial policy development and business
services
6.1 Introduction
In this chapter, we discuss the main developments in EU industrial policy both in broad
terms and in relation to the business services sector. The purpose is to establish the
general framework of current and possible future development of an EU ‘business
services related policy’. This assessment is organised around the following elements:
• The main challenges for EU industry and the ways in which (business) services can
contribute to enhancing industry’s responses to these challenges;
• The current structure of EU industrial policy and its correspondence to the business
services sector;
• The possible role that can be played by other complementary measures in other
policy areas;
• The background and recent development of EU industrial policy initiatives related to
the business services sector.
6.2 EU industry policy challenges and their interaction with business

services
6.2.1 Main challenges for EU industrial policy
The current direction of EU industrial policy thinking can be viewed in relation to the
EU’s evaluation of the main challenges facing EU industry. In this context, the mid-term
review of industrial policy74 identifies three main challenges for EU industry:
1. Globalisation: “globalisation is no longer exclusively about trade in goods. More
recently, the range of activities that companies trade and outsource has been
increasing as ICT, organisational innovations and the growing skills base in India
and China allow companies to slice-up value chains and outsource intermediate
inputs and tasks. In this changing environment competitive advantage lies in
optimising the global value chain. In doing so companies need to control the
important parts of the value chain such as innovation and customised products,
sometimes through clusters that anchor innovative capacity in Europe. Companies
are also increasingly providing integrated solutions consisting of bundles of services
and manufacturing activities”;
2. Rapid technological change: “Rapid advances in science and technology create
opportunities for manufacturers to adapt and exploit new technical possibilities.
74
“Mid-term review of industrial policy - A contribution to the EU’s Growth and Jobs Strategy” COM(2007)374

However, EU manufacturing remains specialised in medium-tech sectors and has not
taken advantage of the fast growth of certain high tech sectors, nor has it fully
exploited the potential of ICT uptake. Heavy product regulations in certain markets
tend to hamper the necessary upgrading of industry. Standards, Intellectual Property
Rights (IPR), and procurement practices could also be made more supportive of
innovative industries. While improving demand is important for the innovative
capacity of industry, some industries are held back by unfavourable market
structures. The lack of a large, unified defence market prevents the sector from
reaching its full innovative and economic potential. To some extent this also applies
to pharmaceuticals.”;
3. Climate change and the environment: “The EU has set ambitious environmental
goals to increase energy efficiency and reduce greenhouse gas emissions by at least
20% by 2020, and to promote renewable energy sources. So far, European industry
has already made significant advances in improving its energy efficiency. It is also
well placed to grasp the opportunities of the emergence of environmental industries.
Environmental industries in Europe are at the global forefront on technologies
generating a turnover of approximately 2.2% of EU GDP, and employing 3.4 million
people. To overcome regulatory and other obstacles, which can however prevent the
full exploitation of the new market opportunities, a range of policy tools including
market based instruments and well designed regulation will be needed. When
realising these policy tools, due account must be taken of the competitive position of
those energy intensive industries that are exposed to international competition”.
To which, a fourth and fifth challenge may be added:
4. Productivity and employment growth. During the first part of the present decade,
industrial policy looked at the productivity gap between the US and Europe. This gas
was concentrated in some EU industries and some IT-using services (O’Mahony and
van Ark, 2003). The changes and the generalisation of the delocalisation trends,
mainly due to the dynamism of China as major industrial exporter, led the European
Commission to develop an integrated approach to industrial policy (2004) where
competitiveness was a main objective through areas such as knowledge, internal
market, cohesion or sustainable development). Nowadays, the productivity gap still
exists, although differences can be found depending on the particular sectors. In any
case, industrial employment continues to decline is most categories and productivity
performance seems to be hardly compatible with employment growth.
5. Demographic change: where low fertility rates in the EU are associated with a
decline in the number and an aging of the underlying population. The report from the
High Level Group chaired by Wim Kok75 emphasised the importance of the
demographic challenge for the Lisbon Strategy: ageing could cause potential annual
growth in GNP in Europe to fall from 2-2.25% today to 1.25% in 2040, with all that
entails for entrepreneurship and initiative in our societies.
The following sub-sections will examine the role that (business) services can play in the
response of industry to four of these main challenges, namely technological change,
globalisation, climate change and the environment, and productivity growth.
75
Facing the Challenge: the Lisbon Strategy for growth and employment. Report from the High Level Group chaired by Wim
Kok (November 2004).

6.2.2 Business services in the context of the challenge of globalisation
There are two main dimensions to the role of business services in the context of
globalisation. The first comes from service contributions to the industrial
competitiveness. A second one refers to the off-shoring process taking place within
business services activities. Business services are at the heart of the current globalisation
wave (Rubalcaba 200776) and a modern industrial company can hardly be competitive and
successful in the global economy if it does not make effective use of business services. In
some cases, companies need services to increase the quality of their products and
processes. In other cases companies need services that directly advise them on
international strategy. Other services help in marketing abroad or allow companies to
concentrate on their most important tasks.
From the above, business services are of interest because of the effects they produce in
client companies, and the response given to the globalisation challenge is one of the
major impacts. At the same time, there are business services which do not participate
directly in the globalisation process, but globalisation would not be feasible without a
certain use of business services. Figure 25 shows the main interactions between business
services and globalisation, from both the supply and demand points of view. The
following paragraph will explain the basic elements of the demand approach (i.e. use of
business services) and the supply approach (i.e. the business service sector).
Figure 25 Relationship between business services and globalisation
Demand side – globalisation and the use of business services

Services contribute decisively to the integration of markets and business competitiveness.
In some cases (communications, transport, tourism) they bring together realities that are
geographically distant. In others cases (legal services, strategic consultancy, language
services, fairs and exhibitions, etc.), they create links between realities that are distant
from the economic and socio-cultural points of view. Unlike goods, whose globalisation
can establishes a conflict between what is local and what is global (i.e. goods distributed
76
Rubalcaba (2007) “Business services in the global economy: new evidence from a European perspective”. RESER
Working paper no. 2.

globally replace goods produced locally), services benefit from a complementarity that
tends to rise above certain cases where conflicts appear. There are services that exist
precisely because of economic, social, geographic or cultural diversity. In the same way
that tourism requires the existence of different destinations, language services need the
diversity of languages and fairs need the diversity of businesses, products and
innovations. Many services contribute to integrating markets through diversity, and this is
very important in the case of the European Union. Services not only facilitate the
completion of a single or integrated market but, furthermore, they foster market
integration from and not against local diversity.
Services facilitate and promote what is referred to as "glocalisation", whereby the aim of
services globalisation is to obtain better "localisation" or “re-localisation” and better
adjustment to the regulatory, economic, social and cultural parameters of the region in
which companies operate. Glocalisation resolves the conflict between the defenders and
detractors of globalisation, by offering a globalisation tailored to local needs. Business
services contribute as a response to the need to transform global into local and vice-versa.
That is the work of consultants, lawyers, trade shows or marketing specialists when they
advise on ways to respond to local needs. The differentiation and competitiveness of
business services is based precisely on the capacity to distinguish those elements that
combine at optimum level and in a synergetic and complementary way, what should be
global and what should be local. Table 23 provides an illustration of how business
services improve access to productive inputs (capital, labour and knowledge), markets
(new and old markets, brands and reputation) and locations (outsourcing,
communication).

Table 23 Why business services are important for enterprises facing globalisation: the role of business services satisfying
global needs
Needs and opportunities of/for enterprises derived from globalisation

Global access to capital and production of globally competitive technical innovation (e.g.,
Financial auxiliary services; Engineering and technical services; Tests and quality control;
Research and development Design)
Global access to labour and use of new global skills in local markets (e.g., Selection and
provision of personnel; Head hunting; Professional training; Outplacement; Temporary work)
Global use Access to and management of global knowledge (e.g., Computer and other ICT services;
of Inputs Internet and intranet services; Consultancy on information technologies and knowledge
management)
Outsourcing and off-shoring to low-costs countries (e.g., High-skilled ICT services,
accountancy and reporting; Low-skilled operational services, call centres)
Transport and communication between different locations (e.g., Logistics and transport
services; Communication services)
Access to new markets (e.g., Management consultancy; Market research; Export aid; Fairs
and exhibitions; Legal services)
Global Adaptation of global products into local needs & creation of new needs (e.g., Advertising and
Product direct marketing; Public relations and press offices; Market research and management;
Markets Distributive trades; Services related to Internet: B2B, B2C, web pages)
Global reputation (e.g., Brands and mark services; Communication services; Environmental
services and CSR)
77
Source: Rubalcaba and van Welsum (2007)
Supply side – globalisation of business services sectors

A second dimension in business services globalisation is the way in which they
themselves become global and, in turn, can provide new opportunities to industrial
companies. The role of emerging countries within the flow of international services is
strongly linked to a series of events that have frequently attracted the attention of
economists during recent years. Off-shoring would be the term defining all of them,
although there are different dimensions. Service off-shoring or service global sourcing is
generating a new challenge to industrial companies that can choose between national
sourcing and international sourcing.
Enterprises in different countries with different history, languages and commercial

partners look for different strategies to solve the dilemma between local or national
sourcing and international off-shoring. Figure 26 shows this dilemma and the elements
enterprises take into consideration when choosing between the two options. An OECD
(2004b) report explained that to compete with the internal cost savings achieved through
internal off-shoring and offshore joint ventures, multinational outsourcers (i.e. providers
of outsourced services to others) moved part of their activities offshore through FDI and
subcontracting. With multinationals accessing the same cost base, indigenous offshore-
based firms responded by opening front-office operations in developed country markets
in order to compete in the country of origin of outsourcing with the multinational
enterprises (MNE) providers of outsourced services. This, in turn, has compelled MNE
providers of outsourced services to extend their off-shoring activity. This is an example
of the type of explanations behind the business criteria to solve the off-shoring dilemma.
77
Rubalcaba and van Welsum (2007) Business services in European Growth, Palgrave-MacMillan, London

Figure 26 Business criteria to solve the off-shoring dilemma
Lower costs Lower costs
Better quality
BUSINESS
CRITERIA TO
SOLVE THE
TOWARDS TOWARDS
OFFSHORING
LOCAL OR INTERNATIONAL
DILEMA Better quality
NATIONAL SOURCING
SOURCING Social, cultural
and linguistic New markets
similarities
Multinational-
oriented
Strategy
More flexibility More flexibility
and fluent and 24 hours
contacts co-production
Other reasons Other reasons
6.2.3 Business services in the context of the challenge of technological change and
innovation
In the context of the ‘new technological revolution’, some services have been and are
essential for facilitating the change processes required by technological development.
Telecommunications, computer-related enterprises and leisure companies lead
technological markets in international stock exchanges, and they promote and act towards
the development of the e-economy. These services companies have played a direct and
significant role in the globalization process. However, there are other, less publicised
services that are ignored by the media but that are nonetheless also behind these changes.
For example, advanced services linked to engineering, computer and related activities,
and electronic commerce are three business services most strongly associated with the
‘technological revolution.’ They facilitated the production, expansion and use of new
technologies that have become the infrastructure for e-economy technologies. Many new
services, such as ICT services, have been and still are the main forerunners of new
Internet-related businesses. At the same time, their growth is based on the incorporation
and improvement of this technology.
In short, new technologies have also paved the way for new services. Technological
changes promote the emergence of new business services activities by means of
innovation processes, although service innovation has more dimensions than just
technological development. Innovation and technological change needs explain the
growth of various types of services and the increasing use of services by industry.
Moreover, the knowledge spill-over effects by business service firms are often related to
tacit and embedded types of knowledge (Kox and Rubalcaba, 2007). Circulation of
knowledge is difficult to control once it has been created and, in this context, knowledge-
intensive business service firms have a role in conceptualising and disseminating tacit

forms of production and market knowledge. By being able to look in the “knowledge
kitchen” of clients, knowledge intensive business service firms may select best-practice
information with regard to different competence areas. Such knowledge is subsequently
disseminated, thus helping other firms to get closer to the efficiency frontier in those
competence areas.
6.2.4 Business services in the context of the challenge of industrial productivity gaps and
employment
Beyond the inter-linkages between business services, industrial competitiveness and

globalisations, other challenges in the areas of productivity and employment can be
identified related to the role of services in industrial growth:
1. Productivity growth from the use of business services. Business services are
activities performing relatively badly in terms of their own productivity growth rates,
but some of them are important since they make their industrial clients more
productive. A part of the industrial productivity gains is due the use of advanced
business services. The challenge here is to identify and promote better conditions for
industry-service interactions such that productivity transmission channels from
business services to industry function in an effective way.
Kox and Rubalcaba (2007) demonstrated that the input of business services in other
industries gives rise to measurable positive impacts on firm efficiency, innovation
and productivity. The inputs of computer-related services have more or less
revolutionised production. Other parts of BSS industry had a less spectacular but still
important role for efficiency and innovation. By creating and diffusing knowledge,
KIBS firms are drivers and facilitators of innovation in many industries78. The
increased availability of business services has removed many scale indivisibilities for
human capital and knowledge assets. It thus improves the position of small- and
medium-sized firms, and hence, the structural flexibility of the economy. These
indirect contributions to aggregate productivity growth and aggregate economic
growth may compensate for the weak productivity performance of BSS industry
itself. The challenge for the future is whether the indirect growth contribution of the
BSS sector will remain strong enough to future productivity growth.
2. Employment balance from the use from business services. The challenge here is to
keep the positive balance between employment generated by the overall business
services economy and employment lost due to the transfer from in-house services to
the external services. In other words, the question from an employment perspective is
if the net employment position is positive in overall terms.
It should be noted that the growth of business service industry is not an optical
illusion caused by outsourcing of existing jobs (Kox and Rubalcaba, 2007). Though
such simple outsourcing does play a role (cleaning, catering, maintenance, security,
call centres), it represents only part of the story. Even for the relatively simple
services, new knowledge-intensive elements are added, like total facility
78
Guerrieri et al. (2005) find evidence that international trade in BSS products also goes along with international knowledge
spill-overs, as measured through patent citations.

management by cleaning firms, security management by private security agencies,
and customer-relations management by call centres. The growth of BSS industry is
first and foremost the expression of a more complex social division of labour,
especially related to knowledge functions in production. From this perspective, the
current tertiarisation 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. Many current BSS products are new specialisations and new services that can
hardly be compared to the “pre-existing” in-house services functions.
6.2.5 Business services in the context of the challenge of climate change and the
environment
The OECD and Eurostat joint definition describes the environmental goods and services
industry (eco-industries) as consisting “of activities which produce goods and services to
measure, prevent, limit, minimise or correct environmental damage to water, air and soil,
as well as problems related to waste, noise and eco-systems. This includes cleaner
technologies, products and services that reduce environmental risk and minimise
pollution and resource use” (OECD-Eurostat 1999)79. As can be seen, this definition
covers a range of activities including both equipment manufacturing and provision of
services, and also research and engineering services. It also covers various segments
defined according to the type of environmental system (e.g. water, air, soil) and type of
damage/pollution (e.g. waste, noise, etc.). Within the scope of eco-industries are a wide
range of sectors80 of which many are in fact service functions and that jointly probably
account for the majority of employment and value added (see, for example Table 24).
The origin of many ‘eco-industries’ is based on traditional, now mature, markets driven
by the demand for essential commodities such as water supply and services like waste
collection. However, recent eco-industries are based on investment needs created by new
environmental legislation and their growth is determined by legal requirements and
follows cycles depending on the time-frames given to comply with new regulatory
standards or targets. This includes compliance with EU objectives and other national legal
requirements like water quality targets and production targets for energy from renewable
sources. Often companies operating in eco-industries have emerged from industrial
manufacturing companies and, in more traditional segments, their development is
associated with a trend towards increasing service offerings due to a combination of high
competition in manufacturing activities and higher profitability in service activities81. In
common with the development of many other business service sectors, growing demand
for eco-services reflects increased outsourcing to specialised service providers and
increasing need for integrated ‘eco-solutions’ (e.g. environmental management and
monitoring)82. In this way, eco-services play an essential role in enabling industry to
79
OECD-Eurostat (1999), “The environmental goods and services industry: manual for data collection and analysis”.
80
These include, for example: (i) air pollution and control; (ii) waste management; (iii) soil remediation; (iv) noise and vibration
control; (v) waste and waste water treatment; (vi) environmental monitoring; (vii) renewable energy sources; (viii) eco-
construction; (ix) clean technologies and processes; (x) environmental consulting.
81
See also Section 2.3.
82
Source: Ernst & Young (2006): “Study on Eco-industry, its size, employment, perspectives and barriers to growth in an
enlarged EU”, Final report prepared for European Commission Dg Environment, August 2006

adapt to and make a positive contribution to addressing the challenges of climate change
and environment.
Table 24 Typical structure of the environmental goods and services industry in OECD countries by business activity
Environmental goods and services industry business Share of the total environment industry
activities
Equipment manufacturing 25-35%
Provision of services 40-50%
Research and development 2-4%
Engineering services 5-10%
Construction and installation of facilities 15-25%
Note: shares are based either on value added or employment. These indicative estimates are derived from the
results of environmental goods and services industry surveys and studies in OECD countries
Source: Drouet 1997, as quoted in OECD-Eurostat (1999)
6.3 EU industrial policy framework and the integration of service issues
6.3.1 The general framework of EU industrial policy
The Treaty of Paris signed in 1951 which created the European Coal and Steel
Community can be considered as the archetype of earlier interventionist industrial policy.
Since then, the nature as well as the intensity of EU industrial policy has undergone
significant changes due to the shifting perspectives of economic analysis and the
deepening of market integration. At present, Pelkmans (2006)83 makes a distinction
between two groups of policies that are not part of industrial policy but which influence
industry. In the first one, ‘policies not for industry’ but affecting it are included (e.g.
macroeconomic policies; redistributional tools; agricultural and services policies; tax
policy; energy; infrastructure; land use, etc.). The second group consists of ‘policies
directly affecting the industry but not meant (only) for industry’ (such as price controls,
buy national campaigns, overall export promotion, or specific environmental policies).
Beyond these, Pelkmans defines a ‘(wide concept of) industrial policy’ that is composed
of three main blocks: framework aspects; horizontal industrial policy, and sectoral and
specific industrial policy. Following – somewhat loosely – this approach, we can
distinguish84:
• Framework aspects, which consists of those policies – mainly regulatory in nature –
that shape the potential scope and extent of integration of (international) markets, and
the setting of the ‘rules of the game’ governing the functioning and competition
within markets. Thus we can identify two sub-blocks:
- Market scope and integration, which concerns both ‘international trade policy’
and ‘internal market policy’ (i.e. free movement and right of establishment). In
particular, for the EU, this covers policies aimed at deepening and strengthening
integration of the Internal Markets;
83
Pelkmans, Jacques (2006) “European Industrial Policy” Bruges European Economic Policy Briefings (BEEP Briefing) No.
15.
84
This description does not include regional/cohesion policy, though this can clearly be relevant given that differences in
regional performance can be associated with industrial structure, and aspects of regional/cohesion policy can have specific
sectoral dimensions.

- Market functioning, which concerns ‘competition policy’ (including state aid
and network industries) and also competitive public procurement systems. In
addition, from an EU perspective it includes ‘better regulation’ efforts aimed at
simplifying and improving the regulatory environment and reducing
administrative burden on enterprises. This may be extended to policies aimed at
addressing issues such as (lack of) international standards, mutual recognition etc.
• Horizontal aspects, which are typically defined as such because of their cross-
cutting nature but we can also see them as complementary policies – mainly non-
regulatory in nature – that are aimed at assisting enterprises to improve their
performance/competitiveness. These cover a number of themes – often closely
interlinked – such as Knowledge and innovation; Human capital and skills;
Entrepreneurship and SME development; Better Regulation;
• Sectoral aspects, which consist of policies that seek to address sector-specific
dimensions of the framework and horizontal aspects described above, or other sector-
orientated policies aimed at addressing specific market failures. At the same time,
however, it must be recognised that the current EU approach to sectoral policies tends
to be rather non-interventionist, consisting largely of consultation processes, high-
level working groups, simplification of sector-specific legislation etc.
6.3.2 Business services within the EU industrial policy framework
The above-mentioned ‘aspects’ of EU industrial policy can be utilised to provide a

general policy framework for initiatives related to business services, as shown in Figure
27. Here, the three main types of policies complement each other around a central theme
of the interaction between industry and services. Moreover, some particular policies can
be located as a mix between two types of policies. Internal market policies, for example,
are part of the framework policies for industry but, at the same, it can be sector specific
since it addresses particular problems of services. A similar dynamism may apply when
talking about service innovation. It can be part of horizontal policies – innovation policies
- but, at the same time address particular service specific needs. The way in which service
needs and horizontal and framework policies are taken into account can reinforce
synergies between industry and services.
Figure 27 Policy framework for EU industrial policy initiatives and business services
FRAMEWORK POLICIES
Market Functioning
Market Integration
Macroeconomic
Internal Market
conditions
INTERACTION:
INDUSTRY-
SERVICES
SECTOR SPECIFIC
HORIZONTAL POLICIES
POLICIES
Service
innovation

The challenges described in Section 6.2 provide the backdrop for the current direction of
EU industrial policy initiatives. The mid-term review of industrial policy85, identifies a
range of cross-cutting or horizontal policy initiatives, which are grouped into 5 main
headings each covering a number of related themes:
1. Knowledge: R&D and innovation; IPR / counterfeiting; Skills; Access to Finance
(for SMEs);
2. Better regulation: administrative burden and complexity of sectoral regulations;
Internal market; Health and safety; Technical standards;
3. Environment and energy: Climate change; Waste; Water; Air; Intensive energy
users;
4. Trade: Access to markets; Access to raw materials; Trade distortion, subsidies, anti-
dumping; Regulatory issues;
5. Structural change: Anticipation (of structural change); Tertiarisation.
As shown in Figure 28, these five horizontal initiatives can be located around the policy
framework described above. Some of them, for example better regulation, may affect
different types of actions and policies (e.g. internal market, macroeconomic conditions,
services innovation). Despite the fact that there are clear services dimensions to many of
the key challenges identified as facing EU industry, it is only within the theme of
structural change that specific attention is given to services, and in particular to the
interaction between industry and services.
Here, the mid-term review notes that: “One of the main structural changes has been the
shift in employment towards services in highly developed economies. This … reflects the
deepening international division of labour and a disaggregation of previously integrated
vertical value chains. As a consequence, industry and services are inextricably linked.
The cost, quality and productivity of certain service sectors, in particular Knowledge
Intensive Business Services, have an impact on the competitiveness of industry. For
example, regulations which affect the performance of professional and other business
services, financial services or the retail and distribution sector also have an impact on
the competitiveness of industry as a whole. Furthermore, industry is both a user and
provider of a growing range of services related to innovative technologies and products.”
Thus, it is recognised that the shift toward a services-based industry (i.e. through the
increasing use of services inputs and increase production of services output, many related
to industrial goods) may require a specific focus and a set of particular actions affecting
both framework and horizontal policies and service specific policies.
85
COM(2007) 374, 04.07.2007.

Figure 28 Policy framework for EU industrial policy initiatives, current themes and business services
BETTER
REGULATION
ENERGY &
ENVIRONMENT FRAMEWORK POLICIES
TRADE
Market Functioning
Market Integration
Macroeconomic
Internal Market
conditions
INTERACTION:
INDUSTRY-
SERVICES
SECTOR SPECIFIC
HORIZONTAL POLICIES
POLICIES
Service
innovation
KNOWLEDGE
STRUCTURAL
CHANGE
Under the heading of ‘structural change’ a number of specific elements are identified that
are already included under (or are related to) existing industrial policy initiatives and
others – more specific to the business services sector – that are not. Among the topics that
are already included under other industrial initiative are: R&D and innovation, skills,
internal market, standards, access to markets and trade distortion, and regulatory issues.
Under each of these ‘topics’ the emergence of service specific needs may be envisaged,
including needs that call for a particular focus on business services. These, in turn, would
support the extension of industrial policy initiative towards service-oriented actions, for
example in areas such as: follow-up and promotion of training, skills and new
employment opportunities in business services; support to organisational innovation and
service innovation; support to the demand for KIBS (e.g. linked to the support to ICT);
measurement and recognition of intangible assets; actions at regional level (demand and
supply).
6.4 The broad framework of EU services-related policy and the role of

complementary policies for business services
From a broad perspective, the varied and diverse policies on services - at both national
and EU levels - can be classified in regulatory and complementary (mainly non-
regulatory) policies. There are two key regulatory policies that affect services:
competition policy and internal market policy. Apart from the mainly regulatory policies,
there is a series of mainly non-regulatory policies, and also complementary policies,
aimed at responding to market and systemic failures in services (see Section 7.2).
The regulatory and complementary dimensions of services policies are different but,
nonetheless, closely interrelated. As shown in Figure 29, in the case of sectoral policies
(business services, telecommunications, transport, tourism, financial services, etc.) and
policies on employment and qualifications, both regulatory and complementary policy
aspects can be at work. For example, labour market regulations, and also training and

qualification policies (non-regulatory to a large extent) are a key factor concerning
employment. Figure 29 also includes policies planned for the promotion of
entrepreneurship, which is largely related to all the other policies, whether regulatory or
non-regulatory, although particularly to policies on regulation, innovation and
competition improvement. Innovation and R&D policy is also linked to regional policy
and to that intended for the improvement of statistical and analytical knowledge on
services.
To date, most attention has focussed on promoting competition and market integration
through internal market and competition policies. In particular, the “Directive on Services
in the Internal Market”86, approved at the end of 2006, established a general legal
framework which benefits several service activities, including business services. The
directive endorsed the freedom to establish a business in another Member State, the free
movement of services between Member States and the harmonization process aimed to
increase mutual trust between members. The framework supports the removal of barriers
which may be dismantled quickly and the launching of a process of evaluation,
consultation and complementary harmonisation of specific issues, which will make
possible the progressive and coordinated modernisation of national regulatory systems for
service activities. The adoption of the Directive - that will have to be implemented by not
later than 28 December 2009 - should constitute an important turning-point in achieving a
genuine internal market for services, provided the provisions of the Directive are properly
transposed into the national legislation of Member States.
Figure 29 Policies for a competitive services economy
Internal market and

GATS
Regulatory Policies Competiton policy
Better regulation
Services Sectoral policies Employment and

Policies (transport, tourism, etc) qualifications policies
Entrepreneurship
policies
Complementary Policies Knowledge and

(mainly non-regulatory) statistics on services
Innovation and R&D

policies
Quality and standards

Regional policy
policy
86
Directive 2006/123/EC of the European Parliament and of the Council dated 12 December 2006.

Internal market and competition policies will certainly contribute to achieving the main
EU economic policy objectives of growth, competitiveness and social welfare but it
seems clear that much more could be done in addition. In this respect it can be strongly
argued that preference should be given to a comprehensive services policy which includes
direct impacts on some of the intermediate objectives influencing business efficiency:
innovation and R&D policies; regional policy; quality and standards policies;
employment and qualification policies; information and knowledge policy and policies to
promote entrepreneurship. In this context, the following sub-sections discuss the main
categories of complementary policies in relation to business services.
6.4.1 Quality and standards policy
For many business services it is hard for buyers to assess in advance the services that they
will receive and, in some instances, even after the service has been delivered. Information
asymmetries may be particularly important where the service to be provided is non-
standard and/or based on specialised knowledge, implying that the markets for such
services are not transparent. The lack of transparency in the output of BS, combined with
a relative absence of quality standards, means that service users lack objective criteria and
‘value for money’ indicators when making ex ante choices over service providers.
Similarly, the lack of standards implies an absence of objective performance criteria
against which the service can be evaluated during or after its delivery (ex post).
The uncertainty that service users face in evaluating business service providers may be
reduced by signals of quality such as certification (qualifications, membership of
professional associations, etc.). Moreover, in many business services markets there are
already strong reasons for this sort of intervention because of the important social
externalities involved in the service they provide: for example (Kox and Rubalcaba
2007b):
• Accountancy: important for safeguarding of reliable information, which is essential
for trust in capital markets and for the financial system as a whole;
• Legal services: important for upholding the legitimacy of the constitutional state and
legal system;
• Engineering: safeguarding the reliability of technical systems;
• Architects: special role in upholding the amenity value of the urban environment, and
the quality and aesthetic value of housing and other buildings.
At the same time the lack of harmonisation of these types of professional standards is
seen as a major impediment to opening up markets to international competition.
Nonetheless, concerns – be they real or exaggerated – over possible charlatanism,
independence, reliability, and accountability of such professional services partly explain
why policymakers hesitate to remove regulation barriers and ‘red tape’ with regard to
multi-professional cooperation.
Certification and associated standards and regulations provide a basis for assuring a
certain level of quality of professional services and may also provide a ‘benchmark’ for
establishing a legal basis for liability in the event that the service provided fails to meet
the prescribed service level. For many other services that are not subject to specific
professional regulations and are not covered by professional liability (insurance)

requirements, clients (and service providers) may face even greater difficulties and
uncertainty in establishing ex post where responsibility and liability lies if problems arise
with the service delivered. This may be particularly the case for services with a high
degree of complexity or customisation, or when there is an important element of co-
production involved. In such cases, sector-based or professional codes of conduct and
‘best practice’ guides may provide some general guidance but are unlikely to be
sufficiently comprehensive to address situations much beyond the clearest cases of failure
in service delivery.
Moving beyond professional ‘quality’ standards per se, there is a further issue of the role
of technical standards for business services that provide (both service providers and
users) with common terminologies, technical specifications and procedures, conformance
testing, certification, accreditation etc. Thus, in addition to the role that standards may
play in terms of signalling quality and competency of service providers, they are
important for defining technical standards of services to be provided and ensuring that
service technologies are transferable across business service providers and their clients.
As noted in Section 2.4.5, with respect to digital delivery of business services, there are
“special difficulties and opportunities – difficulties in the form of demands to conform to
a multiplicity of vertical industry standards, and opportunities in the form of the potential
for business services to introduce standards across industries (i.e. act as a mechanism for
inter-industry harmonisation)” (OECD 2005).
In this respect, the Directive on Services (2006/123) recognises the role of standardisation
in the creation of an Internal Market for services. Specifically, it points out the
importance of making information on the meaning of quality labels (and other distinctive
marks relating to these services) easily accessible as a way to increase transparency and
promote assessments based on comparable criteria with regard to the quality of the
services offered and supplied to recipients. The European Commission has issued formal
mandates to the European standards organisations to identify priority areas where
standardisation of services would be most useful. On the basis of identified priorities, it
supports service standardisation by requesting to the European Committee for
Standardisation (CEN) to develop specific standards or to propose a standardisation
programme.
As suggested by CEN, standardisation within services activities is increasingly being

used to promote best practices, to spread knowledge throughout the market, and to set
benchmarks against which businesses can measure the quality and performance of their
own services or the services they are purchasing, thus improving competitiveness and
increasing efficiency. Standardisation developments in the services sector domain have
included postal services, tourism, translation services, real estate services, business
support services, management consultancy, and facility management, among others.
Further, the initiatives at the European level are focused on banking and transport
services (e.g. requirements on multimodal tracking and tracing systems), and issues
around data exchange and protection (e.g. evaluation criteria for IT security) (Blind,
2003).

By and large, both with respect to quality and technical standards, the business services
lags far behind manufacturing both in terms of the adoption of such standards and in their
international harmonisation. This fact can be seen from Figure 30, which shows that the
number of normative documents87 – including Commission mandates, EU Directives and
other documents related to the work of the different technical and project committees –
related to standardisation is very reduced for the services sector88 when compared to other
industries in the economy. However, the development of such standards for business
services – be they in the form of regulations, industry standards, codes of conduct or,
even, performance indicators such as customer satisfaction measures – may play an
important role in addressing information asymmetries and facilitating integration of
markets through greater harmonisation which, in turn, should permit scale economies and
greater efficiency in production of the service.
Figure 30 Available normative documents sorted by sector
Services Food Chemistry

800
700
600
500
400
300
200
100
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: based on CEN quarterly statistics
6.4.2 Innovation and R&D policy
Innovation has been traditionally associated to R&D, although this source of innovation
plays a far less significant role in services as a whole than in industrial innovation
processes. The methods of obtaining innovation in services are more varied and complex,
as it is far from easy for service companies to identify and to define the ‘systematic base’
in the absence of R&D processes formalisation. In services, a part of R&D is not
statistically registered (e.g. because it is not conducted in an R&D department or because
such a department does not exist), and many programmes of innovation investment are
not considered or perceived as R&D initiatives. Current debates grapple over whether the
87
Normative documents excluding amendments.
88
We refer to services as considered by the European Committee for Standardisation (CEN), although no specific documents
refer to business services in particular.

definition of R&D is appropriate, or whether it should be modified, or another one
created specifically for services. It seems that there is at least a margin for its revision, so
that the registration level of the innovative activity in services can be improved.
There is a received wisdom that services perform less technological R&D, and therefore
they inevitably use and benefit less from existing (technologically oriented) R&D and
innovation schemes. Nevertheless, business services investments in R&D, particularly in
those more technological-related (engineering services, computer related services, among
others) are of large importance, and in some cases even above those levels developed in
manufacturing industry. In fact, computer and software services rank among sectors with
the highest R&D intensity, although spending on R&D tends to be concentrated in larger
firms (e.g. SAP, Microsoft, Oracle, IBM etc.) particularly in the EU89.
BS firms are also major users, facilitators and generators of non-technological

innovations that, due to their measurement limitations and lack of relevance in statistics,
are not well recognised and supported by national financial systems and innovation
funding programmes at regional, national and EU levels. These refer to organisational
changes, marketing developments, new product and process concepts and new interface
combinations, among others, which are partially under- recognised and under-valued by
economic system as a whole. This, in turn, has implications both for the valuation of
business services firms and for their access to finance.
Therefore, different R&D and innovation-related policies should be taken into

consideration in order to further favour the development of innovation activities within
the services sector. These may refer to the promotion of more and more effective
technological and non-technological elements, the organisation and recognition of R&D
functions in service firms, and the extension of the financial and funding support devoted
to service innovation functions and developments. However, designing and implementing
dedicated services R&D and innovation schemes seems not to be the only way to address
services innovation90. In this respect, the rationale for a service innovation approach is
also related to the need to overcome market and systemic failures (as considered in
Section 7.2) that may be negatively affecting the innovation performance of such
industry. In this respect, some policy correction measures are described in Table 25.
89
Business expenditures on R&D in the business services sector are dominated by the sector of computer and related
activities and while there has been rapid growth in R&D expenditures by this sector, many other business service sectors
show relatively static of even declining patterns of expenditures. At the same time, statistics on BERD for business service
sectors can be particular sensitive to sector (re)classification of firms (e.g. in to and out of services and manufacturing
sectors). See, for example, Grablowitz, Delicado, and Laget (2007), “Business R&D in Europe: Trends in Expenditures,
Researcher Numbers and Related Policies”, European Commission Joint Research Centre - Institute for Prospective
Technological Studies Directorate General Research
90
In terms of specific innovation policies aimed at the services sector, when comparing innovation policies for services in the
EU to those for manufacturing companies Arundel et al (2007) concluded that specific areas for possible policy intervention
would include using public procurement as a demand factor and improving support for innovation programmes for service
sector firms. In addition, encouraging service sector firms to use intellectual property, improving the use and access to
public science and improving financing for service firms could be applied under specific conditions. Similar results were
obtained by Cruysen & Hollanders (2008) who studied the current market failures in the service sector in Europe, especially
in regards to innovations and what kind of policy interventions might be needed.

Table 25 Services innovation approach from a market and systemic failure rationale
Failure Type Remarks Examples of correction measures
- Remove market barriers

Highly segmented services - Control mergers regulations, strategic firms’ behaviours, competitive
Market power markets with specific tendering
knowledge leading firms - Supporting the formation and start-ups of new innovative SMEs
- Pro-competition policies
- Facilitating resource allocation of knowledge production and

Lack of specific intellectual
diffusion
Externalities property rights for BS
- Reinforcement of the appropriability system in services
products
- Incentive of KIBS use
The particular nature of BS - Seek for transparency in markets (i.e. price and tariff structure)
Asymmetric services (intangibility, less - Promote financing facilities by means of soft credits, grants, etc.
information tradability, etc.) may lead to - Public investment to reduce uncertainty problems
major uncertain transactions - Standardisation of BS products (i.e. quality standards)
Predominance of SMEs in - Measures launched to fulfil services specific requirements for

Capability BS sector may hamper innovation
adaptation to changes - SMEs oriented policies
Tacit knowledge and

intangible developments
- Enabling collaborative schemes between both research and industry
Network make interaction even
and users and producers around emerging technological opportunities
harder to achieve in BS
sector
- Institutional set-up of an innovation system more adapted to services

The intangible nature of BS
sector
services products may
- Public procurement incentives
Institutional neglect its certain
- Recognition of intangible innovation assets
recognition within the
- Supporting the creation of a European common market for services
institutional framework
- Ensuring an efficient and sound financial market
- Investment in transport and communication facilities

Predominance of SMEs in - Academic schemes more BS services-related
BS sector may lead to - Science and technological parks
Infrastructural
infrastructural - Establishment of university and research institute positions and
underinvestment laboratories in emerging technological fields
- Creating new departments in universities or research centres
Appropriation and the role of intellectual property rights (IPR)

Protection of intellectual property rights is seen as a specific problem for business
services, particularly KIBS. Because of their intangible nature, business service products
are difficult to integrate within normal intellectual property protection systems (e.g.
patents, copyright, etc.). A specific difficulty relates to the fact that successful business
services are often built on the tacit knowledge and specific skills of service workers, it is
difficult for service companies to protect themselves against the possibilities that
employees may leave and then utilise the same knowledge and ideas for their own
benefit. Other, specific problems connected to digital piracy arise in relations to ICT
related business services and in the context of digital delivery of business services.
One important concern is that the lack of mechanisms to enable business services
providers to safeguard returns on investment in R&D and services innovation results in
underinvestment and lower than optimal take-up of innovation by business services. The
use of IPR protection measures differ significantly across service sector and in

comparison to manufacturing; trademarks, which can be used for horizontal innovation
(diversification), are more widely used in the service sector rather than patents, which
require vertical innovation. Patents use remains low in services, though trademarks are
relatively widely used in service sectors such as retailing and hotels & catering, but also
increasingly of transport/communication, financial services and business services91.
Initiatives towards a European policy for services innovation

In 1998, the European Commission established the need to develop an innovation policy
that considers business-services needs (see Section 6.5.1). This idea was extended and
developed in the 2003 Communication on business-related services (see Section 6.5.2) as
detailed in the following statements: “Services companies show a high level of
innovation, and are often the leading edge users of advanced technological developments.
Furthermore, knowledge service activities (for in-stance, management consultancy,
computer services, R&D services) act as catalysers of innovation processes in the entire
economy. Some of Europe’s most innovative companies are to be found in the services
sector, but the overall level of R&D in this sector is generally low. Policy innovation
initiatives should promote both specific actions oriented towards services activities (for
instance, role of organisational service innovation), and more active participation of
services companies in R&D programmes. The involvement of services companies in the
national and European R&D Programmes should be improved to address their specific
problems and needs. The EU target of devoting 3 per cent of GDP to research and
development will be less difficult to achieve, if the business-related ser-vices sector plays
a larger role, reflecting their overall economic weight”.
In 2007, the Commission produced a working paper entitled ‘Towards a European

strategy in support of innovation in services: Challenges and key issues for future
actions’92, setting out elements of a policy framework aiming at better supporting
innovation in services. In view of the heterogeneity of services and the way that they are
closely intertwined with manufacturing, the working paper argues for a broad-based
approach that combines improved framework conditions for services in general with more
specific action in certain policy areas. In preparation of such a broad-based strategy, a
gradual approach is proposed based on four elements:
• Better understanding of the specificities of innovation in services: more efforts are
still needed to better measure innovation in services and to draw meaningful
comparison between services and manufacturing;
• Support for all forms of innovation, not only technological innovation: many
policies in support of innovation are currently mostly focused on technological
innovation. To adapt them to the needs of services innovation is a must, offering a
fast track to short-term improvements;
• Specific support mechanisms for innovative services with high growth potential:
framework or horizontal policies may not always be sufficient to address the
specificities of service innovation and existing innovation support schemes favour
more often industrial over service sector SMEs. Better suited instruments need to be
developed, tested and widely implemented that facilitate the creation and growth of
innovative services companies;
91
See Greenhalgh and Rogers (2006).
92
SEC(2007)1059

• Foster trans-national cooperation on “better policies” in support of innovation
in services in Europe: although services are increasingly recognised as a driver for
growth and innovation, and addressed by national innovation policies, only a few
innovation policy measures exist so far that explicitly target innovation in services.
There is scope for trans-national cooperation to promote the service innovation
agenda and to develop new ideas for a long-term strategy and new tools and
instruments in support of innovation in services.
In assessing the future challenges and key issues to be addressed in defining a European
strategy in support of innovation in services, the Commission working paper also
identifies a number of specific elements that can be summarised in the following points:
• Better understand the specific innovation patterns of services and their relevance
for innovation policy strategies. Work to improve indicators which better capture the
specificities of service innovation needs to continue;
• Completion of the internal market for services. The full implementation of the
Services Directive will lower barriers for market entrance and stimulate new forms
of service innovations;
• Specific support actions and awareness-raising may be called for to helping service
companies to protect their IPR in an optimal manner, including informal forms of
protection;
• Services would particularly benefit from more innovation-friendly public
procurement. Further actions need to be taken to promote the use of the Guide on
dealing with innovative solutions in public procurement, for both products and
services;
• Innovation in services depends critically on the right skills and innovation
management capabilities, which need to be better identified and promoted at all
levels;
• R&D and innovation programmes need to be better aligned with the specific
requirements of service innovation. This should be better reflected in research
priorities, as well as by developing new forms of knowledge transfer from research to
the business community;
• More emphasis should be given to the specific needs of fast growing innovative
firms in the service sector. This requires new forms of support services, bringing
together different business support services (knowledge transfer, incubation, finance)
in a more consistent and less bureaucratic manner;
• Commission support for the development and testing of new tools and instruments
in support of innovation in services that follow a more integrated approach and are
less bureaucratic than existing support mechanisms, with a view that ultimately they
will be used and implemented on a large scale by regional, national and European
service providers;
• In defining and implementing new ways of supporting innovation in services,
Member States should work closely together and learn from each other. Scope for
transnational cooperation in this field exists, particularly in sharing information
about future trends and developing new tools and instruments in support of
innovation in services;
• Innovation in services is an important pillar of the Lisbon strategy, which aims at
supporting all forms of innovation in the best possible manner. The Commission’s

services will improve the collection of information on relevant policy initiatives and
facilitate the identification and further dissemination of good practice in this field.
One concrete step taken towards recognising that R&D and innovation in services differs
from that in manufacturing was taken in the revision of the Community Framework for
state aid for R&D and innovation93. In 2006, the Commission expanded the existing
possibilities of aid to R&D to new activities supporting innovation and specifically
highlighted activities associated with process and organisational innovation in services.
6.4.3 Regional policy
Business services locate together in certain areas, cities, regions or countries that offer
relative advantages, creating a higher concentration than that observed in other economic
sectors. Some manufacturing or traditional service sectors are usually highly adapted to
the economic bases and structures, but business services location shows impressive
concentration of activity in some places while in others the opposite applies. The
phenomenon is rather complex and a great many factors interact together. A recent work
(Merino and Rubalcaba, 2005), shows that knowledge intensive services concentration is
important when considering top EU international regions and cities. However, when these
regions are excluded, concentration is relatively poor and less important than in other
economic sectors. The remarkable role of capital cities, as shown for the EU in another
previous work (Rubalcaba and Gago, 2003), reinforces the role of producer services to
the establishment of new economic hierarchies and new central places in the global
economy (Daniels, 1993). In any case, the limited supply and use of business services (in
particular, advanced or knowledge intensive services) in less developed regions and
candidate countries may hamper SMEs as well as convergence processes. In this context,
regional policy can act to improve the delivery of business services in those regions in
order to facilitate innovation in SMEs, promote a more competitive regional environment
and thus attract inward investment.
6.4.4 Employment and qualification policies
One of the features characterising business services is the high weighting in its growth
that is held by the human factor. Hence, those initiatives aimed at labour market and
employment exercise a direct impact on them. In this context, there are three broad fields
of action for a European employment policy in favour of business services dynamics.
Firstly, a European action framework for the reinforcement of business services
employment can be useful to exploit the synergies and complementarities between all
policy areas previously mentioned (regulations, trade, innovation, etc.) that affect
employment in one way or another. Secondly, the improvement in operations and in the
flexibility of labour markets can act in favour of business services. Many business
services require flexible work, such as part-time jobs and tele-working, in order to reach
their maximum expansion, which redounds on the welfare of those people accessing these
93
Community Framework for State Aid for Research and Development and Innovation, (2006/C 323/01). The Framework
notes that innovation in services is typically less systematic and stems frequently from customer interaction, market
demand, adoption of business and organisational models and practices from more innovative sectors or from other similar
sources.

types of jobs. The flexicurity model may be a way to enhance, at the same time, flexibility
and security in the labour market. The mobility of the labour force within Europe should
be another key focus of political attention in order to achieve the real integration of
markets. Thirdly, actions regarding skills and expertise are important to improve training
systems and their adaptation to specific business services needs. Continuous upgrading of
the specific skills of employees and the acquisition of new ones are useful means of
overcoming skills shortages, promoting services innovation and increasing the motivation
of workers, their loyalty to the company, and their disposition to undertake new
challenges. Additionally, the services internal market requires major transparency in the
EU education and training systems, permitting comparisons of merits and competencies
of employees.
6.4.5 Entrepreneurship policies
Entrepreneurship is one of the main engines of the services economy, behind innovation,
competitiveness and growth. Beyond the macroeconomic factors explaining the structural
change, specialisation changes in services are produced because some entrepreneurs are
willing to take the risk of creating new companies or moving to new activity areas. In
particular, the sector of business services is that with the highest rate of creation and also
of destruction of new companies. All issues mentioned so far have been important in the
encouragement of entrepreneurship, providing a favourable framework for its
development and fulfilment. More specifically, the internal market offers an even broader
field for entrepreneurship. Innovation, which is connected to the entrepreneurs and the
administration support, could be decisive on many occasions. The reduction and
improvement of regulations are necessary to simplify the game rules and eliminate the
obstacles to the entrepreneur’s work. Competition policy guarantees fair play between
entrepreneurs and the administration, achieving a defence for the born entrepreneur. The
improvement of qualifications and the education system have a direct effect on
entrepreneurial capabilities. In summary, the group of policies previously indicated is
essential for promoting entrepreneurship, especially in SMEs, but also in large
enterprises.
6.4.6 Knowledge and statistics for services
Business services economy still needs more research and better statistics. Given its size,
its dynamism, its links with manufacturing and its function in economic growth, business
services industry is still ‘under-researched’. Several aspects, such as the market
organisation and competition in business services and the complex relation between in-
house service production, outsourcing and off-shoring, certainly require more research.
The lack of research in these fields is partly caused by the deficient quality and quantity
of statistical data on business services, even though recently the situation is improving.
Further research should be based on better statistics. Some categories of business services
are still too aggregate and further research would require more breakdowns by kind of
activity, even secondary activities. The development of the service science emerges a key
issue in deepening business services knowledge. Service science (or Service Science,
Management and Engineering, SSME) is a new discipline covering the diverse and
fragmented approaches towards services (service economics, service management,

service marketing and service engineering, among others). Fundamental research into
new business models, methods and tools will give service science a valuable boost.
6.5 EU business services policy background and recent development
As suggested in Section 6.3, specific attention to services in EU industrial policy

development still remains relatively limited. This section provides an overview of
background and development of business services-related policies, which provides the
underlying foundations for further policy actions in this area to be established.
6.5.1 “The contribution of business services to industrial performance” COM(1998)534
The increasing importance of business services in the European economy was the main
factor that prompted policy makers to seek ways to improve the framework conditions for
their operation. The “Report to the Industry Council: Industrial Competitiveness and
Business Services”94 of April 1998 was the first attempt to analyse the situation in
business services activities. It is an integral part of the “Communication from the
Commission concerning the contribution of business services to industrial performance: a
common policy framework” of September 199895. This Communication built on the
overall EU policy framework in business services with the following objectives:
facilitating decision making and applying community policies (enterprise policy, SMEs,
information society, electronic commerce, RTD, training, Internal Market, public
procurement, GATS, competition policy, structural policy, quality assurance) in order to
improve the background in which business services function. In this context, the
Communication established as key priority the systematic collection of statistical data on
business services and the analysis and research of business activities and their
contribution to competitiveness and employment creation. The following six major
objectives were identified:
• Improving productivity;
• Promotion of employment possibilities;
• Improving competition;
• Encouragement of industrial cooperation between business services suppliers;
• Promotion of business services;
• Modernisation of public administration.
The Communication proposed several actions and measures to achieve these objectives
thorough community policies. It was stressed that the EC proposed the implementation of
existing policies already affecting business services in a coherent framework, not a new
specific policy on business services. Later, in November 1998, a platform for the
implementation of these initiatives was established by the Industry Council in “The
Council Conclusions on business services and their Contribution to the Competitiveness
of European Industry”96. It provided concrete actions and guidance for future initiatives in
this field.
94
Commission Staff Working Paper SEC(1998)735 of 29.04.1998
95
COM (1998)534 FINAL of 21.09.1998
96
European Commission (1998) DOC 12654/98 of 16.11.1998

The work of Rubalcaba (1999)97 was used as background information for the EC
Communication. It provided an in-depth analysis of business services sector as well as
outlined the path towards a business services policy in Europe. Rubalcaba identifies the
main factors that justify the need for a business services policy as follows:
• the role of business services in the servindustrial and information society;
• their strong growth in the last decades and future growth prospects;
• the capacity of business services for employment creation, and the flexible
employment associated with business services jobs;
• the key functions business services develop in the economy, and their dynamic links
with other industries;
• the importance of quality in the development of competitive services;
• the limitations present in business services market internationalisation and integration
process;
• the presence of obstacles and barriers to a single European business services market;
• existing differences in the location of business services;
• the situation of SMEs that are outside of the reach of certain advanced services;
• the need for the creation of a framework to coordinate, complement and reinforce the
Commission actions and the intervention where market failures exist.
6.5.2 “The competitiveness of business-related services and their contribution to the

performance of EU industry” COM(2003)747
In 2003, the EC published the Communication “The competitiveness of business-related

services and their contribution to the performance of European enterprises”98. This
Communication widened the analysis and dealt with “business-related services” (BRS),
which includes not only business services but also distributive trades, network services
and financial services. However, the Communication had a special focus on the
knowledge intensive part of business services (such as computer and professional
services) due to their role as drivers of the knowledge based economy. This
Communication also had a larger scope than the previous one: it addressed all parties
concerned with BRS (the Commission, other Community institutions, national
governments, other enterprise-related stakeholders). The Communication developed an
economic analysis of the importance and competitiveness of BRS sector based on
existing official statistics. From the challenges identified the following main political
issues emerged:
• Market integration and competition in BRS markets needs to be reinforced;
• Inputs such as labour qualifications, integration of ICT and capital are deficient in
quantity and quality;
• Outputs from the BRS enterprises are not sufficiently transparent (standards), valued
(reporting on intangible assets) or documented (quality);
• BRS agglomeration in developed regions affects the less developed ones, SMEs and
convergence processes;
• Lack of knowledge about the sector and the markets.
97
Rubalcaba, L. (1999), “Towards a Business service policy in Europe”, in Business services in European Industry – Growth,
employment and competitiveness, European Commission.
98
COM (2003) 747, 4.12.2003

The Communication also set out a strategy for long-term services statistics which is now
being developed partly by Eurostat, and at times in collaboration with the OECD.
A European Forum on business-related services was also proposed to deepen policy

recommendations and elaborate more targeted measures and non-legislative actions of a
services specific character, to fill a gap not already covered by other Community policies,
or to complement them where they have not yet been applied to a sufficient degree. This
Forum was created by the Commission in April 2004 (DG Enterprise) and relied on the
experience of experts, associations and services companies advising on the business
services policies to be implemented. It brought together Commission staff, Member State
officials, professional organisations, workers representations, research institutions and
other enterprise-related stakeholders. The priority in the proposals of the Forum was
improving transparency of BRS markets. In this context, the Forum recommended giving
priority to 3 main areas:
• Measurement issues, including a strategy for development of services statistics,
economical and statistical analysis, research related to the Internal Market Strategy
for Services and reporting on intangible assets;
• Voluntary standardisation of BRS;
• Promotion of information on BRS.
Concerning other policy areas, the Forum noted that existing activities at a horizontal
level to a large extent already addressed the needs of BRS. These issues covered:
competition (the Services Directive, the GATS negotiations and competition policy),
public procurement, public/private partnerships, skills improvement, entrepreneurship,
regional policy and innovation. In these fields, the Forum considered that the needs of
BRS were best tackled by a constant monitoring of these policies to ensure that they
apply to the specific conditions of BRS.
6.5.3 EESC Opinion on services and European manufacturing industries (2006)
Regarding the dynamic links between services and manufacturing, the European
Economic and Social Committee expressed its opinion on “Services and European
manufacturing industries: Interactions and impacts on employment, competitiveness and
productivity”99 in 2006. This opinion considered the recognition of business services as
an integral part of EU industrial policy as critical. Besides promoting actions on the
internal market for business services, improving knowledge and employment and
encourage voluntary standardisation of business services, it calls for:
• The reinforcement of social dialogue regarding labour market and job opportunities
in the new business services economy;
• Boosting of R&D, innovation and digital delivery in business services thorough the
development of service science as a new emerging discipline covering the diverse and
fragmented approaches towards services 100, the strengthening of intellectual property
rights (IPR) and other protection mechanism, and the role of ICT, particularly in
SMEs;
99
Opinion of the European Economic and Social Committee (2006/C 318/04).
100
For example: service economics, service management, service marketing, service engineering, among others

• Encouragement of service engineering as a new discipline useful as a basis for
improving business services output quality through improved systematic planning.
This innovative approach deserves to be developed as a speciality for research and
education at universities, business schools and other training organisations.
6.5.4 EESC Opinion on developments in the business services sector in Europe (2008)
In response to a request from the Commission to draw up an exploratory opinion on

business services by undertaking a follow-up and further analysis on the earlier opinion,
in the recently adopted opinion on “Developments in the business service sector in
Europe”101 the European Economic and Social Committee established the priority of
actions in this order:
• Setting up of a High Level Group that would undertake deeper analysis of the sector,
screen existing policies in order to identify and assess the more effective and
successful of these affecting business services and design concrete policy actions
regarding major gaps and needs;
• Promotion of social dialogue in order to analyse changes in labour conditions and job
opportunities in the business services economy;
• R&D and innovation programmes and actions for service innovation should be
strongly promoted. Areas such as organisational innovation, Knowledge Intensive
Business Services (KIBS) and innovation management deserve more attention;
• Development of standards in business services;
• Further improvements in business services statistics. More collaboration is
recommended from Member States to have better statistics;
• Promoting service science;
• The Internal Market and Regulation affecting business services. An impact
assessment of the Services Directive on business services is needed.
The EESC feels that there is an urgent need for a genuine change and broadening of focus
towards services which should no longer be considered as a mere appendix to the
manufacturing industry. Society is undergoing great changes and services lie at the centre
of these changes.
101
Opinion of the European Economic and Social Committee INT/412 (2008).

7 Towards an EU business services policy
7.1 Introduction
In the 2007 mid-term review of industrial policy102, under the ‘industry/services

initiative’, the Commission set itself the task to undertake an in-depth screening and
sectoral competitiveness analysis of service sectors in order to identify all obstacles to
improve competitiveness, and possible market failures, which might justify actions to
address specific problems in individual industrial and/or service sectors. Through this
present study, the first steps have been taken towards fulfilling this task.
In this chapter we outline the main economic arguments for policy intervention, many of
which have already been discussed in greater detail in the previous chapter. Further, a
general framework for screening and sectoral competitiveness analysis is set-out that
takes into account the heterogeneity of business services. This approach is illustrated by
drawing on the findings from this report and, specifically, the sector reviews contained in
Part II of this report. The chapter concludes with a number of recommendations and
suggested priorities for policy development.
7.2 Economic rationale for a business services policy
On economic grounds, three main types of market failures103 can be identified that may
be used to justify public policy intervention in the area of services: social externalities,
market power, and information asymmetry. Beyond these is the presence of system
(systemic) failures that might also form the basis for policy intervention. These failures
are described in the following sub-sections.
7.2.1 Market power and market imperfections (structure, access, competition and trade)
This type of market failure applies when there exists an abuse of market power by some
market players that negatively affect competition among economic agents and adequate
market pricing. This may be the result of high sunk costs, entry barriers, natural
102
“Mid-term review of industrial policy - A contribution to the EU’s Growth and Jobs Strategy” COM(2007)374
103
See for example:
• Kox and Rubalcaba ‘Policy Implications’ (Chapter 15) in ‘Business Services in European Economic Growth’, Luis
Rubalcaba and Henk Kox (ed.), 2007, Palgrave Macmillan;
• Rubalcaba, Luis (2007) ‘Services in European Policies’ Bruges European Economic Policy Briefings (BEEP Briefing)
No. 16.
• Van Cruysen, Adriana and Hugo Hollanders (2008) ‘Are specific policies needed to stimulate innovation in services?’,
paper presented at the Workshop “Towards a European Strategy in Support of Innovation in Services” DG Enterprise
and Industry (4 February 2008) available at: http://www.proinno-
europe.eu/extranet/admin/uploaded_documents/eis_2007_Services_innovation_market_failures.pdf ‘

monopoly, low transparency or high switching costs, which mainly refer to industry
market structure. As indicated by van Cruyssen and Hollanders (2008), many services
markets have seen a wave of mergers and acquisitions, resulting in an increasing number
of larger firms in many industries and firms with market power may use their market
position to hamper competition, restricting production, manipulating offers (which may
lead to shortages) and setting higher prices.
Absence of competition weakens the incentive for business services firms to operate in an
efficient and cost-effective way and the degree of market segmentation has been found to
have a negative impact on productivity performance of firms. Furthermore, the existence
of weak competition allows a majority of firms to operate at a less-than-efficient firm
size. Since business services have become a major source of intermediary inputs for all
sectors in the EU economy, a lack of competition and cost efficiency in these services has
economy-wide repercussions. Accordingly, public intervention may be required to
remove or control for market barriers (e.g. through mergers regulations, competitive
tendering, and actions to counter monopolistic of strategic oligopolistic behaviour).
In broad terms, if we permit ourselves to make a distinction between ‘standardised

services’ and client-specific services, the markets for these services exhibit different
characteristics:
• Markets for standardised service products tend to be relatively transparent, with
limited product differentiation, and product price is an important contributing factor
to competitiveness. Nonetheless, when economies of scale and scope are of particular
importance then there may be scope for players to achieve a dominant market
position or for leading (oligopolists) market companies to engage in collusive
behaviour. In fact, many markets for standardised products are associated with the
presence of large national and international firms that together account for a sizeable
combined market share;
• Markets for client-specific (customised) service products tend to be non-
transparent and segmented, with price playing a smaller role in competition. For such
services, distinct knowledge-based inputs have come to be the key element in the
reputations and competitiveness of firms. Although such markets appear to be
associated by prima facie low market concentration, they may nonetheless be highly
segmented (e.g. by region, by reputation of the service provider, or by firm class size)
with a proliferation of different product varieties offered to different market
segments. Consequently, the markets may in reality exhibit characteristics of
monopolistic competition, sometimes approaching localised monopolies. This
situation is facilitated by lack of transparency in tariff structures and limited ability
on the part of service clients to evaluate the quality of service to be provided.
According to Kox and Rubalcaba (2007), in most branches for standardised service
products, a small number of large and often international firms together account for a
sizable market share, often in the range of 20 to 50 per cent of the market. By contrast,
many service markets that provide client-specific activities (mostly business services) are
segmented and characterised by firms – primarily SMEs – that exert market pressure
through control over specific knowledge-based inputs.

There are also a range of issues relating to barriers to trade in services (mainly of non-
tariff barriers) that are of relevance. These include, for example, differences in quality
standards, recognition of professional qualification, FDI constraints and tax treatment of
service firms. In general, when compared to goods markets and despite improvements
over recent years – notably in the context of the Single Market104 - the business service
market is still characterised by a strong presence of government intervention and market
regulations. Although there may be strong arguments in favour of intervention,
government policies affect competition between business services firms and may have
negative impacts by suppressing potential market entry. Moreover, policy heterogeneity
between EU countries creates market-entry costs that lower the business services imports
from other EU Member States, with a negative impact on competition intensity in
domestic markets105.
There is some, albeit limited, evidence on the relative importance of barriers to

international trade and international competition in business services. Kox and Rubalcaba
(2007), for example, find that IT consultancy, equipment renting and personnel
recruitment are most exposed to foreign competition, while accountancy and tax
consultancy are most sheltered from foreign competition. This supports the notion that
non-tariff trade barriers tend to be more significant in professional services than in more
operational service categories106. Concerns over security and privacy, particularly in the
context of digital delivery (see Section 2.4.5), is another issue that has received attention
with regard to the tradability of services. Kshetri (2007)107, for example, finds that the
strictness of privacy laws in the originating country is negatively related to the
outsourcing outflow of a country; suggesting that strict privacy laws can create barriers
that inhibit outsourcing to foreign providers which may reduce possibilities for optimal
selection of partner companies.
104
In the EU context, such discussion needs to take into account the efforts towards the creation of the Single Market for
Service, such as the Service Directive. It is not the purpose, however, of this report to provide a review of the Single Market
for Services and we restrict ourselves therefore to more general observations.
105
A number of studies have examined the impact of non-tariff barriers to trade in services (e.g. Kox and Nordas (2007), Kox,
Lejour and Montizaan (2004), Kox and Lejour (2005)) Kox and Nordas (2007), for example, examine differences in
regulation affect fixed costs for companies that want to export (e.g. license/authorisation requirements, obligatory
membership of professional organisation, impediments for material inputs, suppliers and staff from origin country, etc.).
They find that aggregate measures of product market regulation are negatively related to both market entry and subsequent
trade values, with the effect being larger for ‘other’ business services than for services on average; this probably reflecting
that these services are more information-intensive and less standardised than services on average and therefore more
sensitive to regulation. Another finding is that excessive domestic regulation not only restricts foreign suppliers from
entering the market, but can even be more effective in restricting domestic suppliers from entering foreign markets.
106
At the same time, from earlier evidence on types of services outsourced (see Section 2.2.5) and the geographical aspects
of outsourcing (see Section 2.2.4) it is perhaps important to recall that international outsourcing of business service
activities tends to be the exception rather that the rule (though with marked differences across client sectors), with proximity
apparently remaining an important determinant of choice of provider. What is not clear is what factors drive this pattern of
behaviour, and whether it reflects client preferences or constraints on their access to geographically more distant
(international) service providers. Nonetheless, the fact that proximity is still a dominant factor indicates the importance of
being able to secure local presence (e.g. FDI) for international trade/supply of services and, therefore, for (international)
competition within business services markets.
107
See Section 2.2.2

7.2.2 Information asymmetries
Information asymmetry occurs when buyers and sellers are not well informed or when
information is not equally distributed among participants. Without proper and timely
information, uneducated decisions are made. Lack of transparency, moreover, raises the
cost to potential business service clients of utilising external service providers, thus
influencing choice over whether to internalise or externalise service functions.
Many service products, especially knowledge-intensive business services, are categorised

as ‘credence goods’, in the sense that clients are unable to judge the quality of the service
before – or even after – purchase. Under such conditions, ‘reputation-effects’ become
particularly important, since service providers with a proven reputation are able to earn a
price premium. Reputation effects can, however, create an implicit barrier to market entry
(see Section 7.2.1) that, for example, restricts access to ‘premium’ market segments held
by incumbent/larger firms, and forces new firm entry into ‘lower’ market segments even
though the quality of service may be as good as that provided by high reputation
(incumbent) providers. This implies that market entry will have little effect on the
competitive pressure faced by incumbents and that service clients may pay too high price.
Overall, such barriers may mean the markets for services become highly price inelastic
with demand for services being little influenced by relative prices of competing service
providers. This point is made by Hay (2007), who notes that many professional service
markets (e.g. corporate services, legal services, etc.) are not especially price sensitive, and
that convenience, proximity and reputation are typically more important for determining
demand108.
The presence of information asymmetries also points to the potential importance of

learning process between service providers and clients through which mutual
understanding can be developed both with regard to the nature of services to be provided
and for providers, themselves, to understand client organisations and their requirements.
At the same time, however, the presence of high costs associated with initial search and
selection of a service provider combined with the importance of mutual learning process
have the potential to significantly raise switching costs for service clients. This may be
the case both for choices to switch between external service providers and where a client
may decide to (re-)internalise an outsourced service activity.
As discussed in more detail in Section 6.4.1, in the face of information asymmetries, the
uncertainty that service users face in the ex ante evaluation of business service providers
may be reduced by signals of quality such as certification (e.g. qualifications,
membership of professional associations, membership of quality-label and quality
assurance schemes etc.). These may be complemented by ex post systems that address
uncertainty over responsibilities and liability issues in the event of problems arising
during or after service delivery (e.g. professional liability insurance, ombudsman
schemes, etc.) These suggest the need for public policy initiatives in the areas of quality
108
Hay (2007) also points out that many service markets are highly price inelastic and that reducing the price for which the
service is provided is likely to have little or no consequence for the volume of demand for services, which is essentially
fixed. Furthermore, for services that are highly labour intensive the price of the service is related closely to the cost of
labour, so that price competition inevitably leads to a squeeze on wages. This is reflected in findings of the present study
with respect to labour intensive sectors such as industrial cleaning and private security services.

and standardisation that enhance market transparency. At the same time, however, such
signalling mechanisms may in themselves act to limit competition within service markets,
for example where membership of professional associations – a prima facie mechanism
for assuring standards of professional service - is used to restrict market entry. More
broadly, where information asymmetries limit demand (or supply) of business services,
there may be grounds for public intervention aimed at boosting demand and/or reducing
risks associated with business service use and supply.
7.2.3 Social externalities
The main negative externalities associated with business services are primarily related to
low productivity growth performance of some business service activities (see Section
6.2.4) that may result in high prices for service inputs and, in turn, lead to a reduction of
the competitiveness of other economic activities (i.e. manufacturing).
Among the positive externalities associated with the business services sector, many are
related to the public nature of knowledge and knowledge spill-overs generated by
business services. Business services – both through their own technological and non-
technological innovations and through their role in the diffusion of innovation –
contribute to innovation and productivity improvements in client sectors. However, as the
business services sector often cannot appropriate all the associated benefits for client
industries (e.g. because of underdeveloped intellectual property rights for service
products) then these non-appropriated benefits represent positive externalities to client
industries. As discussed in Section 6.4.2, the lack of ‘appropriability’ may result in under-
provision of knowledge production and which may justify intellectual property protection
policies (intellectual property rights) aimed at business services.
A further consideration relates to the external effects that arise when transactions between
suppliers and buyers of BS have welfare effects on other producers or consumers that
may not necessarily be taken into account by the transaction partners. These types of
external effects may justify policy intervention in the form of professional standards in
service sectors such as accountancy, legal services, engineering services or architectural
activities (see Section 6.4.1).

Table 26 Market failure issues in business services development and their effects
Type Causing factor Effects
Higher BS prices
Slow productivity
Negative
growth of the Less competitiveness of manufacturing using them as inputs
externalities
sector
Potential reduction of BS transactions
Social
(Under- Less contribution to technological innovations
Externalities
provision of) Lack of Less contribution to non-technological innovations
innovation- appropriability of
related external effects Less diffusion of production frontier knowledge
positive
externalities
Fragmented and Non-transparent tariffs
non-transparent
High switching costs
client-specific BS
Market power & market markets
imperfections Monopolistic Higher BS prices
marginalisation
by key Less competitiveness of manufacturing using them as inputs
employees Potential reduction of BS transactions
Reputation acts a barrier to entry

Client-specific
BS are Higher segmentation of markets
Information asymmetry
"credence
Less competition between segments
goods"
High switching costs
Source: Based on Kox and Rubalcaba (2007)
7.2.4 Systemic failures
A further consideration is the presence of system (systemic) failures (i.e. structural,

institutional and regulatory deficiencies). Examples are provided by the lack of service
friendly innovative systems (e.g. lack of R&D programmes that address service sector
needs, see Section 6.4.2); financial shortages (e.g. due to underassessment of intangible
assets by the financial system, see Section 6.4.2); or institutional asymmetries at regional
level (e.g. due to lack of advanced services in less-developed regions, see Section 6.4.3).
An underlying theme is that actors perform not only at an individual level but also
through their interactions with other actors. If these interactions are poor then they can
have a negative impact on overall performance (for example in the pace and diffusion of
knowledge/innovation). Based on previous academic background, four types of systemic
failures can be identified that warrant consideration and, by implication, should be taken
into account for future policy implications:
• Capability failures:
Although capability failures are commonly related to firms’ own strategies developed
in the past, most authors refer to these as a lack of resources and competences for
firms to adapt to changes in markets and to new organizational concepts and
technological capacities. In the case of BS firms, these capability failures may be
mainly linked to a limitation of the right knowledge, skills and information to achieve
an adjustment to new market or industry developments, so that support for structural
adaptation of innovation systems from public authorities may be required. Taking
into account the predominant position of SMEs within the BS domain (that tends to

result in reduced company development potential) public intervention might be
particularly significant in comparison with the manufacturing industry.
• Network failures:
Network failures relate to a lack of inter-organisation cooperation in the development
and design of goods, services, organizational concepts, market solutions, best-
practices, etc. These limit the transfer of knowledge among firms, research centres,
public institutions and specialized knowledge-based organizations. Productive
systems might not have adapted well enough to the increased role played by service
firms in European economic performance and their proactive functions in innovation
developments. This might be particularly relevant in the case of BS firms since
knowledge advances are increasingly more experience-based, and a lack of
collaborative-networks may lead to increasing obstacles and to a reduction in the
formation of successful interactive actions.
• Institutional failures:
Institutional failures mostly refer to deficiencies in labour laws, regulatory
framework, health and management rules, legal contractual system, and intellectual
property rights, among others, that lead to a reduction of the economic performance
of the productive sector. Some other potential constraint factors, such as those more
related to social and cultural values or implicit business interaction non-written
patterns or conducts, are also to be taken into consideration. In respect to BS sector,
one can include strict policy regulations for trade and firms start-ups or
establishment, that hamper economic development of determined activities, on the
one hand, or government purchasing policies that do not challenge service firms’
outcomes, on the other hand.
• Infrastructural failures:
The successful economic performance of an industry also relies on infrastructural
resources that facilitate the development of specific activities or functions. In this
respect, infrastructural failures mainly refer to a deficiency of: (i) means of energy
and knowledge communication, such as broadband or ICT resources (particularly
relevant in the BS case), and transport aspects such as adequate railways, roads and
air facilities (Physical infrastructures); and (ii) attributes to the generation and
diffusion of knowledge by universities, publicly-supported technical institutes,
regulatory agencies, libraries and databanks, or even government ministries (i.e.
statistics that do not record BS in a proper way). Since most of these infrastructures
include very large scale, indivisibilities and very long time horizons of operation,
business services firms (particularly those SMEs that are predominant in the sector)
are not able to undertake these kinds of investments and public intervention is
required to support such developments.
7.3 Heterogeneity of business services: a general framework for industrial

policy screening
Although business services are defined by some common traits it is also apparent that for
several other elements (groups of) business services significantly differ from each other
(e.g. the need for proximity, importance of innovation). From the previous sections of this
report, two major classifications of business services were identified:

• The first classification distinguished services on the basis of knowledge versus
manual skills, and network related economies of scale, leading to three main
categories:
o Knowledge intensive business services (KIBS);
o Operational business services (OBS);
o Network services.
• The second classification distinguished services on the basis of the degree to which
services are customised to the requirements of individual clients, leading to two main
categories:
o Standardised business services;
o Client specific business services.
To the above, we may also add an intermediate category of partly customised of
modularised services.
These two classifications are not independent from each other. For example, providers of
OBS mainly deliver standardised, labour-intensive business services that often require
close proximity to the client (e.g. cleaning, catering). Providers of KIBS typically
produce non-standardised, customised services for which very specific knowledge and
innovation is the key to remaining competitive in the market (e.g. consulting, technical
engineering). It can be expected that due to the specific nature of both groups the relative
importance of framework conditions such as regulatory measures, professional standards,
knowledge and innovation and labour skills differs and thus, that also the policy
initiatives in different areas have a different impact/relevance for different business
services.
At the same time, using traditional sector classifications often implies that both KIBS-
type and OBS-type activities and both standardised and customised activities can be
included within the same service sector heading. This suggests that a multi-dimensional
approach to defining service activities may be necessary in order to adequately reflect
sectoral characteristics that are relevant for policy analysis and screening. This was the
main theme of the analysis presented in Section 4.2 of this report, and although we do not
suggest that this analysis provided a definitive approach and policy-relevant typology, it
hopefully is indicative of the type of approaches that may be relevant.
Leaving aside the issue of the appropriate classification of services from a policy
perspective, there are two key components of analysis are necessary in order to provide
the foundation for policy analysis, policy screening, and policy formulation:
• From Section 7.2, and also from much of the discussion contained in Chapter 6, we
have seen that on economic grounds, policy intervention may be justified on the basis
of market and systemic failures, which implies a systematic screening for such
failures should be integrated within the policy development process;
• A second component is to combine the identification of market and systemic failures
and with an assessment of their relative importance of existing and potential policy
measures for each sector.
From the above, we can illustrate the screening and assessment in terms of two matrices –
or multiple matrices depending on the sophistication of the typology or classifications of
service sectors/activities utilised – one describing the relative importance of market and
systemic failures by (business) service sector, and a second of the relative importance of

policy areas by (business) service sector. See, for example, Table 27 and Table 28, which
assume a classification based on distinguishing KIBS, OBS and Network services.
Table 27 Relative importance of market and systematic failures by sector: a working hypothesis
Service Typology: KIBS OBS Network related
Sectors or activities: Computer Engineering ….. Industrial Private ….. Logistics ….. …..
related & technical cleaning security
services services
Market power
Information
Market
asymmetries
Failures
Social
externalities
Capability
failures
Network
Systemic failures
failures Institutional
failures
Infrastructural
failures
Table 28 Relative importance of policy areas by sector: a working hypothesis
Service Typology: KIBS OBS Network related
Sectors or activities: Computer Engineering ….. Industrial Private ….. Logistics ….. …..
related & technical cleaning security
services services
Trade
Framework
Competition
aspects
…..
Employment
and skills
Horizontal
Innovation
aspects
policy
…..
Security
R&D,
innovation
Sectoral
Recognition
aspects
of intangible
assets
…..

7.4 Heterogeneity of business services: findings from sector reviews
To illustrate the approach described above and, also, to highlight the heterogeneity within
the group of business services, in Part II of this study a number of business services
sectors – both KIBS and OBS – have been analysed in more detail (see Table 29). Also
analysed are logistics services which are closely related to network services, but contain
elements that are closely related to KIBS and OBS. For each of these sectors, market
structure and competitiveness issues have been analysed as well as the relative
importance of regulatory and other framework conditions and potential areas for policy
development.
The sector analyses – primarily based on interviews with representatives of the different
sectors and analysis of secondary data and information sources – was directed towards an
assessment of the current situation of the respective services markets in Europe and
factors driving sector developments and performance. From this, an assessment has been
made of the importance of a range of framework conditions (see Table 30) and, in turn, of
market and systemic failures for each sector (see Table 31), and the importance of current
(or potential) EU industrial policy initiatives (see Table 32). In this respect, it is important
to stress that these are only preliminary assessments based on initial investigations, the
scope and depth of which is relatively limited. Accordingly, further research and more
detailed analysis – notably in terms of country by country analysis – is called for is
needed to refine and validate the results reported here. Nonetheless, the results of this
analysis are indicative of the heterogeneity found in business services.
Table 29 Sectors covered by the sector reviews
Category Sector
Industrial Cleaning Services
Operational Business Services Private Security Services
Private Employment Services
Engineering and Technical Services

Knowledge Intensive Business Services
Computer Related Services
Network-related Services Logistics Services
7.4.1 Screening of framework conditions
The main findings from the screening of framework conditions can be summarised as
follows:
• National versus EU (sector specific) regulations
In general national regulatory measures have far more impact than do EU regulatory
measures on conditions in service markets. This is evident in national policies and
regulations that affect the costs and conditions of labour; for example income
taxation, social security systems, minimum wage legislation and rules on
employment conditions which are of particular importance for labour intensive

business services. Next to these types of provisions, several business service sectors
are strongly affected by sector specific national regulations that can differ
considerably across Member States. Examples in our study are found in relation to
the private employment agencies industry (PrEA), private security services (PSS) and
the engineering and technical service industry (ETS). In the PrEA industry, for
example, some countries (e.g. France, Belgium, Spain) maintain restrictions on the
use of temporary employment workers in the public service sectors, whereas no such
restrictions exist in other countries (e.g. the UK). Also in the PSS sector and the ETS
sector, large differences exist in the level of regulation concerning who may (or may
not) engage in certain activities within the sectors.
Our six sector analyses have clearly indicated that these national sector-specific
regulatory measures have a significant impact on the market structure in different
countries. Overall, we can say that a high degree of regulation mostly goes hand in
hand with a high level of market concentration. For example, in the PSS industry the
Belgian market is characterized by heavy regulation. Only a limited number of
companies (170) are active in the sector and the top 5 companies dominate the
market. In Germany on the other hand, regulation is far less strict. Around 4,000
companies are active in the German PSS industry and the large global companies
such as Securitas and Group 4 Securicor have a much lower market share. The same
scenario can be seen in the PrEA industry, where in the heavily regulated French
market the top 5 companies account for over 80% of the market. In the much more
liberalised UK market, the top companies 5 only account for about 20% of the
market.
• Professional standards and regulations
Both in OBS and KIBS professional standards are being used as a quality signal to
clients. However, the role that standards play in both categories of business services
does differ.
In OBS sectors where services are fairly standardised and markets are relatively
transparent market, standards act as a guarantee to clients that the service provider
delivers a service that meets some (minimally) specified requirements. Often
standards are used as a means of promoting more ‘professionalism’ in the industry.
Especially in less regulated markets, OBS sectors use standards to self-regulate the
industry through the development of own codes of conduct, accreditations,… These
instruments help clients in comparing and evaluating different service providers and
in distinguishing reliable from less reliable companies. For example in the industrial
cleaning sector (ICS), PSS sector, and PrEA sector, European associations have been
active in developing codes of conduct for the industry.
In KIBS sectors standards play a different role in the competitive positioning of
firms. KIBS companies deliver specialized, customized services and operate in a
much less transparent market. Technical standards are mostly in place, but as it is
very difficult to develop standards for customized services, reputation of firms is
being used as a much stronger “quality” signal towards clients.
• R&D and innovation
The importance of R&D and innovation clearly differs between OBS and KIBS.
Whereas innovation in OBS sectors is not a critical element in being able to deliver
the service to the client, in KIBS the development of knowledge and innovation are
core to the business.

In OBS technical innovation is mainly used to improve the quality of the service
provided or to improve the working conditions of workers in the sector. For example,
in the cleaning industry the availability of new products such as cordless and silent
vacuum cleaners allows cleaners to do more daytime work. Also in the PSS industry
technological developments such as remote control systems have improved working
conditions in the sector.
In KIBS new knowledge creation and innovation are inherent to the business. But
despite the central role of innovation, lack of finance for investment in R&D is often
identified as a problem for KIBS, particularly for smaller companies. For this reason,
policy initiatives promoting innovative activities in KIBS and facilitating access to
finance for R&D can have an important impact on the sector.
• Labour Force
The availability of sufficient and adequately skilled labour force is critical for the
successful development of all labour intensive business services. Therefore,
demographic change within Europe poses a real challenge to all business service
sectors. Yet, the challenges are of a different nature in OBS industries than they are in
KIBS.
In OBS the more general phenomenon of a tightening labour market plays the most
important role. As many OBS industries are characterized by less favourable working
conditions such as irregular working hours or lower pay (e.g. in the cleaning industry,
PSS industry), they will be in a difficult position to attract the scarce labour force. On
the other hand, the need for proximity to the client means off-shoring of these
services is not an option. Active use of immigrant workers will become an important
issue in this context.
Companies in KIBS industries predominantly face challenges caused by difficulty of
finding enough candidates with the right skills, especially technological skills (many
predict a “war for talent” over the next decade) and this puts a real threat to the
development of the KIBS industries in Europe. Unlike the OBS where proximity to
the client mostly remains essential, many KIBS do not require this close proximity to
client companies (for example accounting, management consulting) and therefore
off-shoring of those services to regions where the right skills are indeed available is a
viable option in many cases.
• Market Access
In each of the five sectors studied, the largest entry barriers appear to be related to
national regulations. In each of the five sectors, firms are confronted with very
different regulatory requirements effectively hampering entry of foreign companies.
The importance of guaranteeing proper market access and a well functioning internal
market is, however, different for OBS than for KIBS.
In OBS international trade is limited and a main element is indeed regulatory
differences across Member States. However, close proximity to the client is often a
virtual prerequisite for the provision of many OBS, while it may be less important for
KIBS. Moreover, as a large proportion of OBS workers have to work at the client’s
premises, the limited mobility and cultural/language barriers also play an important
role in explaining the limited international trade of these services.
In KIBS the “tradability” of some services/activities is much higher and therefore
guaranteeing proper market access plays a more important role in the development of
the industries. But even for these sectors EU-level harmonisation of regulations and
standards affecting the industry is still far from being realised. Often market access

barriers relate to qualification and licensing requirements, local presence
requirements or limitations on the scope of activities. For example, in engineering
and technical services civil engineers cannot offer specific PPP services in Austria,
whereas they can do so in other Member States.
• Competition issues
In none of the five sectors analysed was there any clear indication of problems related
to the competitive behaviour of firms within the sector; although ‘unfair’ competition
for illegal/undeclared working was a recognised problem for the ICS and PrEA
sectors. Nevertheless, especially in the OBS sectors where strict sector-specific
regulation is in place, a high concentration of market power can be observed (see for
example in the PrEA industry or PSS industry). This might suggest that regulatory
conditions are restricting market entry and may warrant more detailed assessment and
monitoring to assess if they may give rise to competition concerns. We do remark
that in some sectors the market does appear to be moving towards greater
segmentation. For example, the private security market is clearly evolving towards a
dichotomous market, with large consolidated (and international) players delivering
services to large clients such as public authorities and specialized institutions such as
banks, and smaller local players mainly focused on smaller clients and the private
(individual) market.
Market segmentation and fragmentation can also be observed in KIBS industries,
often on the basis of the development of specialised services targeted towards
specific client groups. It may well be the case that in these segments, the market is
characterised by oligopolistic competition, or even near monopoly situations. Overall,
any detailed evaluation of competition issues in many business services sectors needs
to take place at the level of these different market segments or niches.
• Structural adjustment
Business services industries play a central role in the structural change that is taking
place in the economy. As already pointed out in section 6.2, service providers make a
positive contribution by improving the adaptability of client companies to structural
change. For example, the PrEA industry provides client companies with a flexible
solution to better cope with (unexpected) capacity problems. Moreover, KIBS often
play a critical role in the diffusion of new technologies and innovation in client
companies, making them better equipped to compete.
Not only do business services companies facilitate the adaptability of client
companies to structural change, they themselves are influenced by the structural
move towards the “knowledge economy”. In OBS industries like the industrial
cleaning industry or the PSS industry, companies try to move up the value chain and
try to offer clients “solutions” rather than standardised services. The developments in
facilities management is another illustration of structural change within the business
services sector itself. This trend towards offering integrated solution-packages to
clients can also be seen in KIBS sectors such as the ICT industry, where clients as
well look for a “one-stop-shop” for all their problems.

Table 30 Sector screening of framework conditions: relevance for conditions and development of service sectors
Regulatory & ‘other’ Sector

framework conditions
Heading Item Industrial Security Employment Engineering Logistics Computer

Cleaning Services Services & technical services related
Services Services services
National
regulatory
measures
EU regulatory
-
measures
Regulatory Completion of
conditions internal market -
legislation
Industry and
professional
regulations and
standards
Knowledge:
R&D, innovation
and
product/service
development
Labour force,
‘Other’ knowledge and
framework skills
conditions Market access
(trade and -
investment)
Structural
change
Competition
policy issues
Technological
- -
change
Social and
Exogenous
demographic
conditions
change
Global
competition
Relevant
Important
Very important

7.4.2 Screening of market and systemic failures
Drawing on the findings outlined in the previous sub-section, the main conclusions in
terms of the screening of market and systemic failures can be summarised as follows:
• Market power and market imperfections
The study did not analyse in any detail market concentration and possible competition
issues in the six sectors. Such an assessment should be undertaken as part of a more
systematic market monitoring exercise with specific attention to variation across
specific markets (i.e. national or otherwise segmented). In general terms, markets for
more standardised services where economies of scale (or scope) are more relevant
tend to be more concentrated. At the same time, national regulatory differences can
be especially important for influencing levels of market concentration. This means
that it is not only ‘competition policy issues’ but also the whole range of regulatory
conditions that are important both in terms of responses to, but also possible causes of
‘market power’ failures.
• Information asymmetries
Information asymmetries are an important issue across all of the six sectors covered
by the study. In terms of information deficiencies on the buyer-side (client), these are
most recognisable in relation to more knowledge intensive and specialised services
such as CRS and engineering and technical services. However, as noted in the
Section 7.4.1, OBS sectors are also very active in the development of sector standards
and best practice guides as means to help clients in comparing and evaluating
different service providers.
• Social externalities
The main positive social externalities typically associated with business services tend
to relate to the role of services in the creation and diffusion of knowledge and
knowledge spill-over effects (see Section 7.4.1 ‘R&D and innovation’). However,
from the six sectors covered the study a much broad range of externalities can be
identified. Some of these relate specifically to the type of services provided; for
example the broader ‘amenity value’ of industrial cleaning activities, the increasing
contribution of private security services to overall level of ‘public’ security, or the
contribution of PrEA to labour market flexibility and flexicurity. Another form of
externality relates to the ‘social role’ played by some OBS in supporting integration
into the workforce of workers from ‘outsider’ groups.
• Systemic failures
The six sector reviews did not specifically examine systemic failures is the sectors
covered. Nonetheless some initial points may be made.
- Capability failures in terms of accessing knowledge, skill and information to
adjust to new markets and industry developments were noted as problems for all
six sectors. This was evident in the repeated cases of concerns over labour
availability and skills and, also, among more knowledge intensive activities in
relation to innovation and R&D capacity and needs.
- Network failures are related to inter-organisational co-operation and tend to be
more relevant of KIBS.
- Institutional failures are important for all six sectors but differ between OBS
and KIBS in terms of emphasis. For OBS sectors, institutional failures relate
more to the general legal and regulatory framework (see Section 7.4.1),

particularly PSS and PrEA. While for KIBS, more specific areas such as legal
contractual systems and IPR are identified as areas of concern.
- Infrastructure failures are of greatest relevance to those sectors (logistics and
computer related services) that rely on physical or other (non-physical)
networked infrastructures. Other forms of knowledge-related infrastructures are
also of great importance for the development of KIBS in general.
Table 31 Sector screening of market and systemic failures: actual or potential relevance for the sector
Failure Type Sector
Heading Item Industrial Security Employment Engineering Logistics Computer

Cleaning Services Services & technical services related
Services Services services
Market power
Information
Market
asymmetries
Failures
Social
externalities
Capability
failures
Network failures
Systemic
Failures Institutional
failures
Infrastructural
failures
Relevant
Important
Very important
7.4.3 Screening of policy initiatives
Following the differences in relative importance and impact of framework conditions

across business services sectors, it is possible to start to draw out some conclusions with
respect to the relevance and impact of policy initiatives in different areas (e.g. trade
policy, innovation policy,…) for different business services sectors. Table 32 gives a
comparative overview for the six sectors that have been analysed.
Based on this limited comparative exercise, a number of elements can be highlighted:

• As cross-border (global) competition and international trade of services is more
common in KIBS, it is clear that trade policy initiatives and initiatives influencing the
Internal Market functioning have a larger impact on KIBS than they have on OBS.
The need for proximity to the client, often combined with regulatory barriers, limits
international trade of OBS at the moment;
• Due to the central role taken by (tacit) knowledge, innovation and intangible assets in
the development KIBS sectors, initiatives in areas such as innovation policy, IPR, and
measurement and recognition of intangible assets have a great and direct impact on
the (level of) R&D and innovation activities of KIBS providers. This is far less the

case for OBS, where the impact of – especially technological – innovation is often
limited and tends to be of a supportive nature rather than core to their business
development;
• As producers of largely ‘standardised’ services, policy initiatives related to the
development of professional standards are an important area for OBS. This is less so
in KIBS. For this latter group, technical standards are of greater relevance;
• A policy area of major importance for both OBS and KIBS is labour policy, skills
development and flexicurity. Given the labour-intensive nature of many business
services, a well functioning labour market is key to supporting the development of the
business services sectors. Nevertheless, as pointed out above, OBS and KIBS are
confronted with different challenges in terms of labour force developments.
Therefore, also the relevance of policy initiatives in specific sub-domains of labour
policy might differ across both groups. For example, policy initiatives to promote the
mobility of researchers are clearly of more relevance to KIBS than they are to OBS.
• Finally, regulation in Europe remains complex and therefore policy initiatives to
simplify regulation are seen as a very important element for the further development
of all business services sectors. As the business services industry has a pronounced
SME character and several studies have shown that high administrative burden and
complex regulation act as an entry barrier to SMEs, better and simpler regulation
directly affects the development of the industry.

Table 32 Sector screening of policy initiatives: actual or potential relevance of initiatives for the sector
Heading Initiative Relevance
Industrial Security Employment Engineering & Logistics Computer

Cleaning Services Services technical services related services
Services Services
Trade policy - - -
Trade
Proper functioning
-
of the IM
Public procurement -
Competition policy - - -
Better
Better regulation
regulation
and simplification
Technical standards - - -
Other standards
Health and safety - - - - -
Research and
- -
development
Intellectual property
- - - -
rights
Innovation policy - - -
Knowledge
and skills
Employment,
qualifications, skills /
Flexicurity
Access to finance /
- - -
risk capital
Waste, water, air - - -

Energy and
environment Intensive energy
- - - - - -
use
Organisational and
services innovation
Support for
knowledge intensive - - -
business services
Services Measurement and
recognition of - - - -
intangible assets
Regional actions
(demand and supply - - -
matching)
Relevant
Important
Very important

7.5 Recommendations and priorities for policy development
7.5.1 The case for EU policy towards business services
First and foremost, the need for EU policy towards business services stems from the
overall context of the European economy and the role played by services therein. Even
where specific policies are not called for on the basis of purely economic grounds (i.e. in
response to market failures or systemic failures – see below) then the overall importance
of services, both as a share of economic activity and in terms of economic growth and
employment underpin the need for a coherent policy towards their development. This is
emphasised when considering the current ‘context’ of European and global development
and the main challenges facing European industry (see Section 6.2), many of which are
clearly and deeply linked to services.
Secondly, the dichotomy between industry and services is ever increasingly artificial as
the boundaries between manufacturing and services become more and more blurred.
Many ‘outputs’ consist of combined services and manufactured products, that may be
supplied by companies coming (nominally) from either from the services sector or
manufacturing. For many industries, the “additional” services element surrounding the
core product are a major focus of competition in industrial and consumer markets alike,
and manufacturers increasingly derive competitive advantage from the contributed by
services process associated with their core activities. Further, the trends towards
fragmentation of value chains and externalisation of service functions, raises the
interdependence between manufacturing and the services sector, such that overall
competitiveness of manufacturing is increasingly bound-up in the performance of
services.
As has been shown in this report, there is a strong economic rationale for an EU policy on
business services based on the need to address market failures. There exists significant
need and scope for policy actions that boost and encourage the contribution of business
services to industrial competitiveness and to overall economic growth. Policies are need
to deal with market failures in business services at both the national and the EU level.
This will require not only EU policies but also that EU policies will sometimes need to be
formulated in cooperation with Member States’ national policies (e.g. in the case of
quality standards). Other policy issues, such as employment policies for the business
services industry, might perhaps more efficiently be left to the governments of EU
Member States, although some Commission activities and policies could help to promote
employment-related actions at regional and national level.
7.5.2 Main recommendations
Following from the results of this study, a number of recommendations may be put
forward for consideration:
1. Screening of EU policies related to, or potentially related to, service-industry
interactions. A general recommendation is that further screening of EU policies
should be undertaken. The present study has provided an initial screening of some
business services sectors and EU policy initiatives. This has demonstrated the wide
diversity and heterogeneity of policy issues across only a limited number of business

service sectors. This in itself suggests the need for a wider reaching and more detailed
screening of the EU policies that either affect or are affected by the new business
services-related challenges and industry-service interaction-related challenges. For
example, in the services innovation domain there are already a range of policy actions
that should be studied and screened in order to assess the possible need for additional
actions and initiatives.
2. High Level Group on business services. In its Opinion on developments in the
business services sector in Europe109 (see Section 6.5.4), the European Economic and
Social Committee (EESC) recommended that a High Level Group on Business
Services be set up to undertake deeper analysis of the sector. Without specifying what
form such a grouping should take, our own findings from the present report support
the need for setting up a forum to undertake deeper analysis of the business services
sector, to screen existing policies in order to identify and assess the more effective
and successful of these in regard to business services, and to design concrete policy
actions to address major gaps and needs.
3. Specific recommendations. Reflecting the analysis of the study team and inputs
received from business service sector representatives during the course of the study,
Table 33 contains a wide range of recommendations that could serve to improve the
competitiveness of the business services sector, its impact on the competitiveness of
industry, and the ability of manufacturing companies to more easily provide added-
value services to their customers. Many of these recommendations are not “new” but,
rather, simply imply an intensification of work that is already under way110. In order
to prioritise these possible actions, and to implement those that are considered
necessary, an extensive consultation with all relevant stakeholders is required.
109
EESC INT/412 of 9 July 2008
110
It should also be acknowledged that many of the recommendations draw on an informal report in 2005 by the European
Forum on Business Related Services. The 2005 Report is available at
http://ec.europa.eu/internal_market/services/brs/forum_en.htm

Table 33 Recommendations
Heading Possible actions
Deepening analysis on the conditions in which BS are favourable to industrial performance

Industrial
policy Improved dialogue with the EU Business Service Industry
development Set up of an Observatory on BS to monitor results of actions implemented by EU and to
publicise best practices
Deepening analysis on new employment opportunities generated by BS-manufacturing
interactions.
Developing training and life-long learning programmes, particularly directed at SMEs
Deepening analysis on employment conditions of workers involved in
outsourcing/offshoring.
Employment
Actions in favour of part-time and tele-working
and skills
Actions on flexicurity in BS
Facilitate mobility of workers in BS (specially KIBS) within EU
Social Dialogue
Analysing the role of immigration in helping to overcome skills imbalances.
Promoting R&D, innovation programmes and actions in BS
Actions focused on SMEs and non-technological innovations
Innovation and
Promote intellectual property rights in BS producers
R&D
Provide innovation incentives (e.g. tax-based) for BS enterprises
Promote BS involvement in national and European collaborative R&D projects
Entrepreneur-
Promotion of entrepreneurship
ship
Establishment of quality and technical standards
Standards
Harmonisation of standards across Europe
Simplification, clarification and reduction of the regulatory burdens on BS
Reduce costs of setting-up and transferring BS enterprises
Boost foreign competition in BS markets
Reduce barriers to exports of BS
Encourage competition in professional services
Regulation,
market Reduce restrictions on multi-disciplinary collaboration
integration Actions on mutual recognition of qualifications
and
competition Facilitate posting of highly skilled workers form other MS
Clarify, simplify and modernize procedures of public procurement
Include BS strategic objectives in bilateral and multilateral negotiations (e.g. WTO
negotiations on GATS)
Elaborate an impact assessment of the Services Directive on BS
Harmonisation of national transposition of EU legislation
Improvement on statistical coverage of BS
Strengthen collaboration between Eurostat and national governments
Information
and statistics Deepening analysis and availability of input-output tables with sufficient country and sectoral
coverage
Improve measurement and reporting of intangibe BS assets
Regional Actions promoting and stimulating regional demand and supply of BS.
development
Exploiting the existent networks that increase synergies among different local actors

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Annex 1: Supplementary tables and figures

Table 34 Market Services classification under NACE Rev. 1.1
Section Division Group Class

Wholesale & Retail 50 Sale, maintenance and repair of motor
Trade (G) vehicles and motorcycles; retail sale of
automotive fuel
51 Wholesale trade and commission trade,
except of motor vehicles and motorcycles
52 Retail trade, except of motor vehicles and
motorcycles; repair of personal and
household goods
Transport, storage and 60 Land transport; transport via pipelines 60.1 Transport via railways
communication (I) 60.2 Other land transport
60.3 Transport via pipelines
61 Water transport 61.1 Sea and coastal water transport
61.2 Inland water transport
62 Air transport 62.1 Scheduled air transport
62.2 Non-scheduled air transport
62.3 Space transport
63 Supporting and auxiliary transport 63.1 Cargo handling and storage
activities; activities of travel agencies 63.2 Other supporting transport activities
63.3 Activities of travel agencies and tour operators; tourist
assistance activities n.e.c.
63.4 Activities of other transport agencies
64 Post and telecommunications 64.1 Post and courier activities
64.2 Telecommunications
170
Financial intermediation 65 Financial intermediation, except

(J) insurance and pension funding
66 Insurance and pension funding, except
compulsory social security
67 Activities auxiliary to financial
intermediation
Real estate, renting and 70 Real estate activities 70.1 Real estate activities with own property 70.11 Development and selling of
business activities (K) real estate
70.12 Buying and selling of own
real estate
70.2 Letting of own property
70.3 Real estate activities on a fee or contract basis 70.31 Real estate agencies
70.32 Management of real estate
on a fee or contract basis
71 Renting of machinery and equipment 71.1 Renting of automobiles
without operator and of personal and 71.2 Renting of other transport equipment
household goods 71.3 Renting of other machinery and equipment
71.4 Renting of personal and household goods n.e.c.
72 Computer and related activities 72.1 Hardware consultancy
72.2 Software consultancy and supply 72.21 Publishing of software
72.22 Other software consultancy
and supply
72.3 Data processing
171
72.4 Database activities
72.5 Maintenance and repair of office, accounting and computing
machinery
72.6 Other computer related activities
73 Research and development 73.1 Research and experimental development on natural sciences
and engineering
73.2 Research and experimental development on social sciences
and humanities
74 Other business activities 74.1 Legal, accounting, book-keeping and auditing activities; tax 74.11 Legal activities
consultancy; market research and public opinion polling; 74.12 Accounting, book-keeping
business and management consultancy; holdings and auditing activities; tax
consultancy
74.13 Market research and public
opinion polling
74.14 Business and management
consultancy activities
74.15 Management activities of
holding companies
74.2 Architectural and engineering activities and related technical
consultancy
74.4 Advertising
74.5 Labour recruitment and provision of personnel
74.6 Investigation and security activities
74.7 Industrial cleaning
172
74.8 Miscellaneous business activities n.e.c. 74.81 Photographic activities
74.82 Packaging activities
74.85 Secretarial and translation
activities
74.86 Call centre activities
74.87 Other business activities
n.e.c.
173
Table 35 Market Services classification under NACE Rev. 2 (Wholesale and Transport)
Section Division Group Correspondence

with
NACE Rev 1.1
Wholesale and retail trade; repair of motor 45 Wholesale and retail trade and repair of motor
vehicles and motorcycles (G) vehicles and motorcycles
46 Wholesale trade, except of motor vehicles and
motorcycles
47 Retail trade, except of motor vehicles and
motorcycles
Transportation and storage (H) 49 Land transport and transport via pipelines 49.1 Passenger rail transport, interurban
49.2 Freight rail transport
49.3 Other passenger land transport
49.4 Freight transport by road and
removal services
49.5 Transport via pipeline
50 Water transport 50.1 Sea and coastal passenger water
transport
50.2 Sea and coastal freight water
transport
50.3 Inland passenger water transport
50.4 Inland freight water transport
51 Air transport 51.1 Passenger air transport
51.2 Freight air transport and space
transport
174
Section Division Group Correspondence
with
NACE Rev 1.1
52 Warehousing and support activities for 52.1 Warehousing and storage
transportation 52.2 Support activities for transportation
53 Postal and courier activities 53.1 Postal activities under universal
service obligation
53.2 Other postal and courier activities
175
Table 36 Market Services classification under NACE Rev. 2 (Information and communication)
Section Div. Group Class Correspondence with

NACE Rev 1.1
Information and 58 Publishing activities 58.1 Publishing of 58.11 Book publishing Includes online publishing (part of 72.4)
Communication books, periodicals 58.12 Publishing of directories and mailing lists Includes online publishing (part of 72.4)
(J) and other 58.13 Publishing of newspapers Includes online publishing (part of 72.4)
publishing 58.14 Publishing of journals and periodicals Includes online publishing (part of 72.4)
activities
58.19 Other publishing activities Includes online publishing (part of 72.4)
58.2 Software 58.21 Publishing of computer games Includes software publishing (part of 72.21) and online
publishing publishing (part of 72.4)
58.29 Other software publishing Includes software publishing (part of 72.21) and online
publishing (part of 72.4)
59 Motion picture, video 59.1 Motion picture, video and television programme activities
and television 59.2 Sound recording and music publishing activities
programme
Includes music downloads (part of 72.4) and music
production, sound
copyright service (part of 74.87)
recording and music
publishing activities
60 Programming and 60.1 Radio broadcasting Includes internet broadcasts (part of 72.4)
broadcasting 60.2 Television programming and broadcasting activities
Includes internet broadcasts (part of 72.4)
activities
61 Telecommunications 61.1 Wired telecommunications activities
61.2 Wireless telecommunications activities
61.3 Satellite telecommunications activities
61.9 Other telecommunications activities
176
NACE Rev 1.1
62 Computer 62.01 Computer programming activities Includes software programming (part of 72.21), made
programming, to order / customized software / web-page design (part
consultancy and of 72.22) and design of structure and content of
related activities databases (part of 72.4)
62.02 Computer consultancy activities Covers hardware consultancy (72.1) and analysis of
customer needs/requirements and ‘solutions’ (part of
72.22)
62.03 Computer facilities management activities Includes management of data processing facilities
(part of 72.3)
62.09 Other information technology and computer service activities Includes software installation (part of 72.4) and 'other'
(72.6 - empty class)
63 Information service 63.1 Data processing, 63.11 Data processing, hosting and related Includes data processing (part of 72.3) and database
activities hosting and related activities activities (part of 72.4)
activities; web 63.12 Web portals
(part of 72.4)
portals
63.9 Other information 63.91 News agency activities (part of 92.4)
service activities 63.99 Other information service activities n.e.c (part of 74.87)
177
Table 37 Market Services classification under NACE Rev. 2 (Finance, real estate)

NACE Rev 1.1
Finance and 64 Financial service 64.1 Monetary intermediation
insurance activities, except 64.2 Activities of holding companies Includes activities of holding companies not engaged
activities (K) insurance and in management (part of 74.15)
pension funding 64.3 Trusts, funds and similar financial entities
64.9 Other financial service activities, except insurance and pension funding
65 Insurance, reinsurance and pension funding, except compulsory social security
66 Activities auxiliary to financial services and insurance activities
Real estate 68 Real estate activities 68.1 Buying and selling of own real estate = 70.12
activities (L) 68.2 Renting and operating of own or leased real estate = 70.20
68.3 Real estate 68.31 Real estate agencies = 70.31

activities on a fee 68.32 Management of real estate on a fee or Corresponds to 70.32 but excludes (?) rent collection
or contract basis contract basis agencies, facility management and janitorial activities
178
Table 38 Market Services classification under NACE Rev. 2 (Professional, technical and administrative)

NACE Rev 1.1
Professional, 69 Legal and 69.1 Legal activities = 74.11
scientific and accounting activities 69.2 Accounting, bookkeeping and auditing activities; tax consultancy
= 74.12
technical
activities (M) 70 Activities of head 70.1 Activities of head offices Activities of holding companies engaged in
offices; management; head office and administrative functions
management with oversight / strategic role etc. (part of 74.15)
consultancy 70.2 Management 70.21 Public relations and communication
(part of 74.14)
activities consultancy activities
activities 70.22 Business and other management (part of 74.14) also includes fish stock management
consultancy activities (part of 05.01)
71 Architectural and 71.1 Architectural and 71.11 Architectural activities (part of 74.2)
engineering engineering 71.12 Engineering activities and related technical
activities; technical activities and consultancy
(part of 74.2)
testing and analysis related technical
consultancy
71.2 Technical testing and analysis = 74.3
72 Scientific research 72.1 Research and 72.11 Research and experimental development
(part of 73.1)
and development experimental on biotechnology
development on 72.19 Other research and experimental
natural sciences development on natural sciences and (part of 73.1)
and engineering engineering
72.2 Research and experimental development on social sciences and
(part of 73.1 plus 73.2)
humanities
179
NACE Rev 1.1
73 Advertising and 73.1 Advertising 73.11 Advertising agencies (part of 74.4)
market research 73.12 Media representation (part of 74.4)
73.2 Market research and public opinion polling = 74.13
74 Other professional, 74.1 Specialised design activities (part of 74.87)

scientific and 74.2 Photographic activities = 74.81 plus press photographers (part of 92.4)
technical activities 74.3 Translation and interpretation activities (part of 74.85)
74.9 Other professional, scientific and technical activities n.e.c. Includes: agronomy consultants (part of 74.14),
weather forecasting, quantity surveyors (part of

74.20), security consultants (part of 74.60), other
business activities n.e.c. (part of 74.87), bill auditing
and freight rate service (part of 63.40)
Administrative 77 Rental and leasing 77.1 Renting and 77.11 Renting and leasing of cars and light motor
= 71.1
and Support activities leasing of motor vehicles
Services (N) vehicles 77.12 Renting and leasing of trucks (part of 71.21)
77.2 Renting and 77.21 Renting and leasing of recreational and

(part of 71.4)
leasing of sports goods
personal and 77.22 Renting of video tapes and disks (part of 71.4)
household goods 77.29 Renting and leasing of other personal and
(part of 71.4)
household goods
77.3 Renting and 77.31 Renting and leasing of agricultural
= 71.31
leasing of other machinery and equipment
machinery, 77.32 Renting and leasing of construction and
equipment and civil engineering machinery and equipment (part of 71.32)
tangible goods
180
NACE Rev 1.1
77.33 Renting and leasing of office machinery
= 71.33
and equipment (including computers)
77.34 Renting and leasing of water transport
= 71.22
equipment
77.35 Renting and leasing of air transport
= 71.23
equipment
77.37 Renting and leasing of other machinery, Corresponds to 71.34 plus ‘accommodation or office
equipment and tangible goods n.e.c. containers’ (part of 71.32) and containers and pallets,
and land transport equipment, other than automobiles
(part of 71.21)
77.4 Leasing of intellectual property and similar products, except copyrighted

(part of 74.87)
works
78 Employment 78.1 Activities of employment placement agencies (part of 74.5)
activities 78.2 Temporary employment agency activities (part of 74.5) plus casting agencies and bureaus (part
of 92.72)
78.3 Other human resources provision (part of 74.5)
79 Travel agency, tour 79.1 Travel agency 79.11 Travel agency activities (part of 63.3)
operator and other and tour operator 79.12 Tour operator activities
(part of 63.3)
reservation service activities
and related activities 79.2 Other reservation service and related activities (part of 63.3) plus the activities of ticket agencies (part
of 92.32, 92.34, 92.62, 92.72)
80 Security and 80.1 Private security activities (part of 74.6)

investigation 80.2 Security systems service activities (part of 74.6) plus installation of alarm systems (part of
activities 45.31)
80.3 Investigation activities (part of 74.6)
181
NACE Rev 1.1
81 Services to buildings 81.1 Combined facilities support activities Covers cleaning and maintaining premises, including
and landscape facilities management etc (part of 70.32) and for
activities government owned/occupied buildings (part of 75.14)
81.2 Cleaning activities 81.21 General cleaning of buildings (part of 74.7)
81.22 Other building and industrial cleaning

(part of 74.7)
activities
81.29 Other cleaning activities (part of 74.7) plus outdoor cleaning and some
specialized dleaning(part of 90.03)
81.3 Landscape service activities (part of 01.41)
82 Office 82.1 Office 82.11 Combined office administrative service

(part of 74.85)
administrative, office administrative and activities
support and other support activities 82.19 Photocopying, document preparation and
(part of 74.85) plus mailbox rental (part of 64.11)
business support other specialised office support activities
activities 82.2 Activities of call centres = 74.86
82.3 Organisation of conventions and trade shows (part of 74.87)
82.9 Business support 82.91 Activities of collection agencies and credit

(part of 74.87)
service activities bureaus
n.e.c. 82.92 Packaging activities = 74.82
82.99 Other business support service activities Includes stenograph services (part of 74.85), other
n.e.c. business support services (part of 74.87) and vehicle
licensing on fee/contract basis (part of 75.13)
182
Table 39 Market Services classification under NACE Rev. 2 (Miscellaneous)

NACE Rev 1.1
Agriculture, Forestry 02 Forestry and logging 02.4 Support services to forestry Includes forest management consulting services (part of
and Fishing (A) 74.14)
Manufacturing (C) 33 Repair and installation of 33.1 Repair of fabricated metal 33.12 Repair of machinery Includes repair and maintenance of office machinery and
machinery and equipment products, machinery and equipment, including photocopying and calculating machines
equipment (part of 72.5)
Construction (F) 41 Construction of buildings 41.1 Development of building projects Includes project development (part of 70.11) except where
related to civil engineering
42 Civil engineering 42.1 Construction of roads and railways

42.2 Construction of utility projects Includes project development components (part of 70.11)
42.3 Construction of other civil engineering projects
Education (P) 85 Education 85.6 Educational support activities Advice and help to businesses and public services (part of
74.14)
Other Service 95 Repair of computers and 95.1 Repair of computers and 95.11 Repair of computers Includes repair and maintenance of office machinery and
Activities (S) personal and household communication equipment and peripheral equipment, excluding photocopying and calculating
goods equipment machines (Part of 72.5)
183
Table 40 Breakdown of market service inputs (sector share of total market service inputs)
Share of total market service inputs (%)
(% of
Ratio Market Services /
Computer Service
production value)
Post & Telecoms

Market services
Finance & Ins.

R&D Services
Real Estate
Transport
Other BS
Renting
Labour
Trade
Office machinery and computers 14.5 1.10 39 23 6 5 6 6 3 3 9
Other transport equipment 10.8 0.49 46 10 15 9 3 5 3 3 7
Radio, television and communication

19.1 0.99 48 7 18 6 5 4 2 4 5
equipment
Chemicals and chemical products 17.6 0.97 47 5 14 8 5 4 3 5 11
Scientific and other instruments 15.4 0.50 54 6 10 6 5 6 4 3 8
Textiles 10.5 0.44 44 4 2 15 5 6 3 5 17
Construction 12.7 0.52 42 7 3 13 7 8 13 2 4
Wearing apparel 9.5 0.41 52 5 1 10 6 7 2 5 10
Wood and wood products 10.5 0.50 34 2 0 10 5 9 6 6 30
Pulp, paper and paper products 11.8 0.64 34 3 2 8 5 7 5 5 30
Basic metals 9.4 0.54 36 4 3 7 6 5 6 6 24
Non-metallic mineral products 14.8 0.59 39 3 2 6 4 5 7 6 26
Publishing and printing 16.7 0.63 42 7 1 5 13 8 6 3 16
Tobacco products 19.2 1.33 70 3 2 5 2 6 3 3 6
Leather 7.4 0.32 55 3 1 8 5 7 3 7 11
Electrical machinery and apparatus n.e.c. 13.4 0.51 53 4 5 7 5 8 4 4 9
Food products and beverages 13.2 0.85 51 4 1 9 4 5 5 5 17
Furniture; manufacturing n.e.c. 12.4 0.45 51 4 2 8 5 10 4 4 13
Fabricated metal products 10.0 0.33 41 6 2 7 8 10 6 6 15
Machinery and equipment n.e.c. 13.7 0.48 48 7 4 7 6 7 5 5 12
Rubber and plastic products 12.9 0.48 46 6 6 9 5 6 6 4 13
Motor vehicles 9.9 0.60 48 5 8 7 3 7 3 2 16
Source: Author’s estimates based on European Commission calculations using Eurostat’s Input-Output Tables

Table 41 United Kingdom: breakdown of market service inputs (sector share of total market service inputs), 2004
management consultancy
Research & development
Transport, post & courier

Architectural activities &
Market services (% of
Legal & Accountancy

Telecommunications
Finance & insurance
Computer services
production value)
Market research,
Real estate
Advertising
Renting
Labour
Trade
Other mining & quarrying 26.4 1.17 66.0 1.0 10.5 1.6 15.7 1.3 1.4 1.1 0.2 0.2 0.2 0.3 0.7
Meat processing 8.5 0.42 31.3 4.0 6.4 3.1 20.7 1.2 2.2 2.2 1.1 1.4 2.9 4.6 18.9
Fish & fruit processing 11.3 0.46 34.0 3.4 4.3 1.8 14.4 1.2 2.2 3.0 1.0 1.3 8.5 13.4 11.5
Oils & fats processing 5.0 0.33 64.5 5.0 2.2 0.9 17.2 1.5 1.9 2.2 0.0 0.0 1.7 2.6 0.2
Dairy products 9.2 0.54 47.2 3.4 6.4 0.9 12.8 1.2 2.7 2.4 1.1 1.8 4.2 6.7 9.1
Grain milling & starch 16.4 0.67 23.1 2.2 2.0 1.3 9.4 1.0 1.7 2.3 1.0 1.3 41.7 9.8 3.5
Animal feed 8.1 0.48 32.7 3.2 7.2 0.9 17.6 2.3 5.6 4.7 2.0 3.4 6.8 10.7 2.8
Bread, biscuits etc. 11.8 0.34 23.9 3.3 7.1 4.6 17.7 1.5 3.0 4.4 2.1 3.2 6.7 10.6 11.9
Sugar 7.1 0.53 53.9 5.6 7.0 2.1 11.7 1.4 4.8 2.0 0.6 1.2 2.6 4.1 3.2
Confectionery 13.6 0.44 18.8 2.3 3.5 2.0 9.8 1.8 5.7 2.1 0.9 1.5 29.7 15.3 6.4
Other food products 20.1 0.74 27.2 1.7 2.9 4.2 15.4 1.3 10.6 2.5 0.9 1.7 17.3 9.7 4.5
Alcoholic beverages 20.6 1.17 22.4 1.6 2.8 2.1 11.4 1.3 5.8 2.4 1.3 2.0 36.3 7.8 2.9
Soft drinks & mineral waters 14.7 1.50 32.8 2.2 8.8 1.4 9.7 2.6 3.0 3.1 0.7 1.2 23.1 4.9 6.4
Tobacco products 15.6 0.83 13.6 1.9 0.3 1.1 15.9 1.6 5.2 5.7 3.4 5.3 16.4 25.9 3.7
Textile fibres 9.6 0.33 37.9 2.9 2.4 5.1 27.4 3.4 2.5 7.3 3.3 0.6 2.4 3.8 1.0
Textile weaving 11.1 0.35 23.9 2.6 6.3 4.3 28.3 3.3 5.0 8.3 2.4 2.5 4.5 7.2 1.4
Textile finishing 12.0 0.32 20.5 2.8 6.0 2.1 36.9 3.3 4.4 5.9 2.4 4.2 4.2 6.6 0.8
Made-up textiles 15.4 0.53 29.6 2.4 4.1 2.3 16.1 3.6 3.9 4.4 1.0 2.0 10.2 16.2 4.2
Carpets & rugs 17.5 0.67 26.0 2.1 4.3 3.1 20.5 2.6 4.1 4.7 2.0 2.7 9.2 14.5 4.2
Other textiles 14.4 0.44 27.5 2.5 3.4 5.9 23.9 3.3 5.5 4.3 2.5 2.8 5.7 9.1 3.6
Knitted goods 18.5 0.50 23.9 2.0 1.5 9.1 28.2 3.5 6.5 9.1 3.5 4.9 2.7 4.2 1.1
Wearing apparel & fur products 14.4 0.52 29.4 2.4 6.2 8.1 23.0 3.6 4.5 7.3 2.8 4.1 2.4 3.8 2.4
Leather goods 6.5 0.22 18.5 4.2 6.6 3.5 26.1 3.5 4.3 6.0 2.8 4.0 4.3 6.9 9.3
Footwear 16.7 0.82 18.1 1.8 1.5 21.8 14.2 2.3 4.3 4.5 1.9 2.9 10.2 16.1 0.3
Wood & wood products 11.0 0.43 31.6 2.4 8.0 11.2 24.7 3.0 3.1 3.3 0.9 1.4 2.3 3.6 4.3
Pulp, paper & aperboard 12.0 0.58 51.4 2.7 3.5 3.2 19.5 1.8 4.5 2.6 1.0 1.7 2.0 3.1 3.1
Paper & paperboard products 12.2 0.54 39.1 2.6 6.9 4.3 19.3 2.4 4.2 4.0 1.7 2.5 3.4 5.4 3.9
Printing & publishing 12.8 0.40 24.5 2.3 5.1 11.8 6.5 4.7 6.8 5.0 0.8 1.7 10.0 15.8 5.0
Coke ovens, refined petroleum &
nuclear fuel 4.1 0.33 25.6 8.0 4.7 2.3 19.0 1.9 5.8 5.1 2.0 2.8 2.4 3.8 16.5
Industrial gases & dyes 11.9 0.51 36.6 2.8 7.0 4.6 20.1 5.0 1.9 5.9 3.3 4.4 0.9 1.4 6.3
Inorganic chemicals 20.8 1.16 47.3 1.3 3.1 5.2 26.3 1.0 1.5 5.8 3.0 3.1 0.1 0.1 2.2
Organic chemicals 8.3 0.56 37.2 3.0 4.0 3.7 31.0 1.3 5.1 4.4 1.6 2.3 0.7 1.1 4.7
Fertilisers 15.7 1.41 66.4 1.5 4.7 1.4 14.2 1.0 3.8 2.3 0.9 1.0 0.9 1.4 0.7
Plastics & synthetic resins etc. 8.6 0.55 37.3 3.6 5.1 2.0 22.5 2.0 3.9 6.0 2.2 3.1 0.8 1.3 10.3
Pesticides 15.8 0.61 31.5 1.7 5.2 1.6 15.4 2.7 11.9 4.5 2.1 3.4 5.5 8.6 5.8
Paints, varnishes, printing ink etc. 15.4 0.61 31.4 2.1 4.5 3.6 16.7 2.6 5.6 5.1 2.8 4.2 6.5 10.3 4.5
Pharmaceuticals 17.7 0.72 14.7 3.0 2.2 2.4 22.1 2.8 7.8 8.5 4.4 6.4 5.9 9.4 10.5
Soap & toilet preparations 22.5 0.98 17.3 1.7 2.2 0.7 7.3 1.0 3.0 1.7 1.0 1.3 22.8 36.1 4.1
Other chemical products 14.8 0.53 30.1 2.1 7.3 3.6 19.5 3.1 3.8 4.4 2.4 3.6 5.7 9.0 5.3
Man-made fibres 5.9 0.23 36.0 3.3 6.4 0.6 26.6 1.5 8.0 6.8 3.0 3.8 1.2 1.9 0.8
Rubber products 12.3 0.38 23.9 2.6 4.5 8.1 27.0 2.1 3.9 4.0 2.0 3.1 5.3 8.4 5.0
Plastic products 11.6 0.39 32.6 3.0 5.7 6.3 20.7 3.2 3.3 5.7 2.4 3.5 3.1 4.9 5.5
Glass & glass products 12.4 0.38 43.0 2.4 7.9 5.4 16.5 2.0 2.6 3.5 1.8 1.8 1.4 2.2 9.6
Ceramic goods 13.8 0.33 43.3 2.0 6.0 1.4 21.0 2.9 2.8 4.4 1.7 2.1 3.1 4.9 4.4
Structural clay products 14.3 0.46 60.3 1.8 8.0 0.8 13.5 2.4 2.4 1.9 0.8 0.8 2.0 3.1 2.1
Cement, lime & plaster 17.4 0.67 70.6 1.6 6.8 0.9 12.8 1.6 2.1 0.9 0.0 0.0 0.7 1.0 1.1


Legal & Accountancy

Telecommunications
Finance & insurance
Computer services
production value)
Market research,
Real estate
Advertising
Renting
Labour
Trade
Articles of concrete, stone etc. 18.7 0.69 62.5 1.4 8.2 1.6 14.1 1.6 2.3 2.0 0.4 0.5 1.3 2.0 2.0
Iron & steel 10.9 0.80 39.0 3.6 7.8 1.9 31.6 1.0 6.6 3.4 1.0 1.4 0.4 0.7 1.4
Non-ferrous metals 5.6 0.35 34.0 5.5 6.0 3.7 25.5 2.6 5.3 4.0 1.7 2.1 1.8 2.8 5.0
Metal castings 9.0 0.23 28.2 3.7 7.4 3.4 34.7 2.8 3.6 2.9 0.8 0.7 0.4 0.7 10.7
Structural metal products 10.8 0.36 22.3 3.2 15.8 8.7 29.9 3.9 3.1 3.7 0.3 0.6 2.0 3.1 3.4
Metal boilers & radiators 10.6 0.28 19.2 3.8 13.6 3.6 21.3 3.6 5.7 5.3 1.2 1.7 4.0 6.3 10.9
Metal forging, pressing etc. 9.4 0.21 21.8 3.1 9.1 6.6 28.8 4.1 4.4 8.1 2.3 3.4 1.5 2.4 4.4
Cutlery, tools etc. 10.6 0.25 27.0 2.7 9.0 5.1 22.5 3.9 5.1 5.8 2.9 3.7 3.1 4.9 4.2
Other metal products 10.6 0.30 37.2 2.8 6.3 5.9 24.5 3.2 3.5 4.5 1.8 2.5 1.1 1.7 5.1
Mechanical power equipment 10.5 0.35 19.1 3.2 6.4 6.4 22.8 4.0 9.5 7.0 2.8 3.8 2.2 3.4 9.2
General purpose machinery 10.4 0.34 17.5 2.9 8.5 7.5 25.1 5.0 4.3 7.6 2.8 4.0 2.2 3.5 9.0
Agricultural machinery 6.8 0.36 25.3 4.7 4.5 1.8 18.7 10.5 3.9 4.1 2.2 3.7 6.6 10.5 3.4
Machine tools 10.3 0.26 17.4 2.7 5.6 2.9 27.4 5.4 5.5 8.8 3.7 5.5 3.7 5.9 5.6
Special purpose machinery 9.8 0.33 19.1 3.0 5.9 6.2 25.2 4.3 5.0 6.7 3.3 4.9 4.2 6.7 5.5
Weapons & ammunition 9.4 0.42 12.4 3.8 2.7 1.6 19.4 2.7 27.0 7.4 3.2 5.0 2.1 3.3 9.4
Domestic appliances nec 13.3 0.50 24.0 2.5 5.8 4.7 19.1 2.4 2.8 5.0 2.6 3.5 7.5 11.8 8.5
Office machinery & computers 7.5 0.45 16.8 4.4 3.7 4.8 16.4 10.9 6.0 5.7 3.2 4.6 2.8 4.5 16.2
Electric motors & generators etc. 9.8 0.37 24.1 3.4 7.1 6.5 22.3 4.2 6.1 7.0 2.6 4.0 1.6 2.6 8.5
Insulated wire & cable 10.1 0.42 32.4 3.4 5.3 2.3 23.1 3.6 6.5 6.3 3.1 4.2 1.3 2.1 6.3
Electrical equipment nec 12.1 0.42 21.4 3.0 7.3 8.0 21.4 3.8 5.1 6.7 2.8 4.1 2.8 4.4 9.1
Electronic components 6.4 0.23 22.9 4.3 5.5 3.0 23.2 3.5 7.7 7.6 3.5 5.0 2.0 3.2 8.7
Transmitters for TV, radio & phone 12.5 0.48 14.4 3.0 11.0 4.7 20.0 6.4 9.7 8.0 4.4 6.6 1.9 3.0 6.9
Receivers for TV & radio 8.4 0.42 19.3 3.7 3.5 4.6 20.7 3.3 5.8 7.4 3.6 5.4 5.9 9.4 7.4
Medical & precision instruments 11.3 0.33 16.9 2.9 4.7 7.6 20.7 3.9 10.9 7.7 3.2 4.6 3.6 5.7 7.7
Motor vehicles 8.3 0.44 23.4 4.2 4.8 2.6 20.0 1.6 5.7 4.4 2.0 2.9 16.7 3.5 8.3
Shipbuilding & repair 9.4 0.25 6.3 3.4 10.1 5.8 27.1 2.1 12.1 6.8 1.2 1.9 3.0 4.7 15.3
Other transport equipment 14.6 0.62 31.2 3.0 6.9 2.4 13.5 1.5 6.0 17.4 1.7 2.1 1.3 2.0 11.0
Aircraft & spacecraft 12.3 0.42 12.2 2.7 2.8 4.5 21.1 2.0 16.9 23.6 2.8 3.7 1.0 1.6 5.1
Furniture 11.2 0.37 23.9 3.0 5.7 9.7 21.0 2.9 3.6 5.4 2.0 3.0 4.6 7.3 7.9
Jewellery & related products 14.5 0.58 21.8 2.4 4.0 8.1 23.6 3.3 5.4 4.7 2.5 5.2 5.3 8.4 5.3
Sports goods & toys 15.3 0.74 22.9 2.5 3.3 18.9 22.6 3.3 5.1 1.8 0.5 1.1 5.9 9.3 2.7
Miscellaneous manufacturing nec,
recycling 8.8 0.50 40.3 3.2 6.0 6.0 21.9 3.3 2.3 2.6 1.1 1.4 2.3 3.6 6.0
Construction 13.4 0.73 4.2 5.4 24.6 24.4 3.6 1.0 3.8 11.6 0.6 4.6 4.2 2.3 9.5
Source: Author’s estimates based on UK Input-Output (‘use’) Tables for 2004

Table 42 Spain: breakdown of market service inputs (sector share of total market service inputs), 2001
Investigation and security


Legal & Accountancy
Telecommunications
Finance & insurance
Computer services
Industrial cleaning
production value)
Market research,
Real estate
Advertising
Renting
Labour
Trade
Mining - metal ores 19.4 0.80 28.7 8.1 10.4 0.9 9.6 8.4 0.0 0.9 3.5 1.4 0.6 1.4 4.9 21.2
Mining - non metallic ores 26.7 1.42 49.2 14.8 5.3 2.5 3.8 4.7 0.2 3.1 2.6 0.6 0.4 1.3 1.2 10.1
Coke, refineries and nuclear 11.7 5.12 42.6 5.3 2.2 2.8 13.1 2.7 1.9 7.5 4.9 2.6 3.2 0.8 1.7 8.7
Meat processing 13.5 1.32 24.3 34.0 0.4 3.4 8.1 2.0 1.7 1.9 1.3 0.6 7.8 0.9 4.9 8.8
Dairy processing 19.5 1.84 33.3 10.4 1.1 6.8 7.4 5.4 0.9 1.3 4.4 1.0 13.4 1.0 3.6 10.0
Other food industries 22.3 1.73 24.4 29.0 1.9 11.8 5.0 1.9 0.6 1.5 3.4 0.6 10.5 0.2 2.8 6.4
Beverages 22.8 1.88 33.1 16.5 2.4 4.4 6.0 5.4 2.0 0.9 3.5 0.2 19.7 0.4 0.2 5.3
Tobacco 22.6 1.19 23.9 4.6 4.6 8.4 5.9 4.7 0.2 1.9 0.9 4.1 28.7 1.4 1.6 9.3
Textiles 18.8 0.85 27.7 25.0 2.3 5.2 8.5 6.9 0.1 2.5 5.8 0.9 3.0 0.1 3.4 8.4
Clothing 16.4 0.70 20.2 35.6 1.0 3.9 8.1 2.7 1.7 1.1 7.6 1.2 6.3 0.1 3.0 7.6
Leather and footwear 20.0 1.20 15.3 46.6 0.7 2.4 6.5 2.1 1.0 1.2 10.0 0.4 3.1 0.0 2.2 8.5
Wood and cork 16.3 0.89 31.8 41.1 1.0 3.3 6.3 2.1 1.0 1.5 5.0 0.1 1.4 0.3 0.7 4.7
Paper 18.1 1.22 31.7 27.1 1.3 1.7 6.6 2.1 0.8 3.5 5.8 0.6 5.3 0.4 1.8 11.2
Printing and publishing 18.6 0.77 22.6 20.4 0.7 4.5 6.7 4.4 1.5 0.8 3.5 0.3 20.3 0.6 3.1 10.5
Chemicals 21.7 1.38 25.5 14.0 1.9 5.4 6.0 6.7 0.7 2.5 2.6 4.6 11.6 0.9 2.3 15.3
Rubber and plastics 18.7 0.89 26.2 24.2 2.0 4.6 7.2 1.8 0.0 2.0 7.8 2.0 2.0 1.1 2.1 17.1
Cement, lime and plaster 25.7 1.74 46.9 8.3 8.7 1.5 5.2 3.9 2.3 2.5 5.4 0.1 1.5 1.8 2.1 9.9
Glass and glass products 20.3 1.09 39.3 14.3 0.8 3.3 6.6 2.0 2.2 5.5 6.7 1.7 3.6 0.3 1.9 11.9
Ceramics 26.9 0.98 36.1 16.5 0.8 2.8 4.3 4.2 0.8 4.5 13.0 0.9 6.8 1.5 1.7 6.0
Other mineral products 29.0 1.73 51.1 17.4 7.7 2.0 3.4 2.0 0.5 2.4 7.2 0.2 1.0 0.2 1.2 3.7
Basic metals 17.3 1.25 36.2 28.8 0.9 1.5 8.1 1.8 1.0 2.8 7.3 0.9 2.8 1.6 1.6 4.7
Metal products 14.5 0.58 29.0 20.3 1.6 6.2 7.9 2.0 0.5 4.9 8.3 0.9 2.7 0.9 1.5 13.2
Machinery and equipment 14.7 0.59 18.4 26.3 2.2 3.1 8.8 2.6 1.8 6.1 10.8 4.4 3.9 1.0 2.4 8.1
Office and computer equipment 17.7 1.62 7.1 13.0 1.4 12.6 7.7 5.2 6.5 0.7 10.8 4.3 5.4 0.8 6.4 17.9
Electrical machinery and equip. 12.2 0.62 22.4 17.7 2.3 2.7 8.5 3.2 1.1 4.6 11.4 4.5 3.6 0.7 2.1 15.1
Radio, television and

communication equip. 14.9 0.83 12.7 15.8 0.9 2.1 6.1 4.2 1.6 7.0 9.8 18.8 4.4 1.5 3.9 11.3
Medical, precision and optical

instruments, watches and clocks 16.8 0.73 11.9 31.1 0.6 4.5 6.1 4.4 2.0 4.9 13.5 7.0 3.7 0.4 2.8 7.0
Motor vehicles 10.9 0.89 28.8 18.2 1.4 1.8 9.7 2.1 1.3 6.5 2.1 6.8 9.4 2.0 2.7 7.1
Other transport equipment 15.5 0.63 15.6 19.7 2.4 3.4 7.7 1.3 1.3 2.1 4.4 19.6 3.8 4.6 3.6 10.7
Furniture and other manufacturing 16.7 0.67 22.4 32.4 1.0 5.8 6.4 1.9 0.5 0.2 11.1 0.9 5.0 0.5 1.6 10.3
Recycling 9.6 1.08 28.4 30.4 1.3 13.5 9.7 2.2 1.9 0.5 5.2 0.4 1.5 0.1 4.3 0.6
Construction 12.2 0.51 12.4 33.4 12.5 9.0 9.4 2.8 0.6 10.6 6.0 0.2 1.2 0.6 0.5 0.8
Source: Author’s estimates based on Spain Input-Output (‘use’) Tables for 2001

Table 43 Relative importance of market service inputs by industry sector (United Kingdom)
Ancillary transport services
Insurance & pension funds
Renting of machinery etc.
Postal & courier services

Owning & dealing in real
Accountancy services
Telecommunications
Other land transport
Computer services
Banking & finance
Market research,
Legal activities
Air transport
Advertising
estate
Meat processing
Dairy products
Animal feed
Sugar
Confectionery
Other food products
Alcoholic beverages
Tobacco products
Textile fibres
Textile weaving
188
products
products
Footwear
Other textiles
Knitted goods
Leather goods
Carpets & rugs
Textile finishing
Made-up textiles
Coke ovens, refined

Paper & paperboard

Wearing apparel & fur

Wood & wood products
petroleum & nuclear fuel

Pulp, paper & paperboard

Air transport
Telecommunications
Banking & finance

estate
Computer services

Market research,
Advertising
Legal activities
189
190
etc.
ink etc.
Fertilisers
Pesticides
Ceramic goods
Plastic products
Rubber products
Pharmaceuticals
Man-made fibres
Organic chemicals
Inorganic chemicals

Paints, varnishes, printing

Plastics & synthetic resins

Air transport
Telecommunications
Banking & finance

estate
Computer services

Market research,
Advertising
Legal activities
etc.
equipment
Iron & steel
Machine tools
Metal castings
Cutlery, tools etc.
Mechanical power
Non-ferrous metals

Articles of concrete, stone


Air transport
Telecommunications
Banking & finance

estate
Computer services

Market research,
Advertising
Legal activities
191
192
phone
computers
instruments
Motor vehicles
generators etc.
Electric motors &
Office machinery &
Medical & precision
Shipbuilding& repair



Transmitters for TV, radio &

Air transport
Telecommunications
Banking & finance

estate
Computer services

Market research,
Advertising
Legal activities

Telecommunications
Computer services
Banking & finance
Market research,
Legal activities
Air transport
Advertising
estate
Furniture
Jewellery & related
products
Sports goods & toys
Miscellaneous
manufacturing nec,
recycling
Construction
Notes
The weighting assigned for each sector is based on two principal indicators:
(i) intermediate consumption of each market service as a share of the total value of sector’s output (at basic prices)
(ii) share of intermediate consumption of each market service in the sectors total intermediate consumption of market services
The weighting takes into account both the absolute level of intermediate consumption of the service for the sector, and relative level in comparison to other sectors. This is of particular relevance for the interpretation of
the category ‘other land transport’ which is the largest input for many sectors. The table, therefore, identifies those sectors for which inputs of this service are of particular importance relative to other sectors.
For the service categories of ‘R&D’, legal services and ‘accountancy services’, these account for only a small proportion of total intermediate consumption for all sectors. The table, therefore, identifies those sectors for
which these inputs are relatively important compared to other sectors. This is indicated by the use of the symbol (rather than used for other service categories)
Authors estimate based on UK I-O Table 2004
193
194
Table 44
Paper
Textiles
Clothing
Tobacco
Chemicals
Beverages
Wood and cork

Meat processing
Dairy processing
Mining - metal ores
Rubber and plastics



Air transport
Wholesale, retail, hotels &

restaurants
Relative importance of market service inputs by industry sector (Spain)
Telecommunications
Banking & finance

estate
Computer services

Advertising
Market research,
consultancy
Industrial cleaning





Telecommunications
Computer services
Industrial cleaning
Banking & finance
Market research,
Air transport
consultancy
Advertising
restaurants
estate
Ceramics
Basic metals
Metal products
Machinery and equipment
Radio, television and communication
equipment and apparatus
Medical, precision and optical
instruments, watches and clocks
Motor vehicles
Recycling
195




Telecommunications
Computer services
Industrial cleaning
Banking & finance
Market research,
Air transport
consultancy
Advertising
restaurants
estate
Construction
Notes
The weighting assigned for each sector is based on two principal indicators:
(iii) intermediate consumption of each market service as a share of the total value of sector’s output (at basic prices)
(iv) share of intermediate consumption of each market service in the sectors total intermediate consumption of market services
The weighting takes into account both the absolute level of intermediate consumption of the service for the sector, and relative level in comparison to other sectors. This is of particular relevance for the
interpretation of the category ‘other land transport’ which is the largest input for many sectors. The table, therefore, identifies those sectors for which inputs of this service are of particular importance relative to
other sectors.
For the service categories of ‘investigation and security services’, these account for only a small proportion of total intermediate consumption for all sectors. The table, therefore, identifies those sectors for which
these inputs are relatively important compared to other sectors. This is indicated by the use of the symbol (rather than used for other service categories)
Authors estimate based on Spain I-O Table 2001
196

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Study on Industrial Policy and

Final Report – Part I

Client: European Commission Directorate-General Enterprise & Industry

Paul Baker – Project Team Leader

Rotterdam, 5 November 2008

T +31 (0)10 453 88 00

ECORYS Macro & Sector Policies

Study on Industrial Policy and Services

Study on Industrial Policy and Services

Scope of the study

Key findings and recommendations

Service inputs into manufacturing – as a proportion of total production costs – appear to

Study on Industrial Policy and Services I

Study on Industrial Policy and Services

Regulatory fragmentation Differences in national regulatory measures play a very

The positions of industry associations concerning current regulatory environments differ,

Voluntary and professional standards Industry and professional standards – including

Study on Industrial Policy and Services III

Study on Industrial Policy and Services

Study on Industrial Policy and Services V

Study on Industrial Policy and Services

Heading Initiative Relevance

Industrial Security Employment Engineering & Logistics Computer

Waste, water, air - - -

Study on Industrial Policy and Services VII

1 Introduction and extended overview 1

2 Industry-service interactions: externalisation and internalisation 19

Study on Industrial Policy and Services

3 Industry-service interactions: supplier-client relationships and the role of

4 Classification of service sectors 75

5 Industry use of market service: evidence from input-output data 93

6 Industrial policy development and business services 113

Study on Industrial Policy and Services

7 Towards an EU business services policy 139

Annex 1: Supplementary tables and figures 168

Study on Industrial Policy and Services

Study on Industrial Policy and Services 1

2 Study on Industrial Policy and Services

1.3 Study objectives and scope

Study on Industrial Policy and Services 3

1.4 General EU policy context

1.5 Overview of industry-services interactions

Much of the current discussion of service sector developments and industry-service

4 Study on Industrial Policy and Services

1.5.1 Outsourcing of service activities

A range of potential advantages and disadvantages of outsourcing service activities can

Study on Industrial Policy and Services 5

1.5.3 Supplier-client relationships

The economic literature on supplier-client relationships for services pays particular

6 Study on Industrial Policy and Services

Notwithstanding the above comments, some reasonably consistent patterns emerge.

1.6 Service characteristics and implications for productivity

1.6.1 The productivity and employment challenge for business services

Study on Industrial Policy and Services 7

As a starting point, it is increasingly recognised that more sophisticated approaches to

Building on the above typology of service activities, a number of characteristics can be

8 Study on Industrial Policy and Services

Typically, the more a service combines the characteristics of being standardised,

1.7 Services-related policy issues

From a broad, service-wide perspective, there is a growing body of analysis on the

1.7.1 Information asymmetries and transactions costs

Study on Industrial Policy and Services 9

1.7.2 Professional, quality and technical standards

1.7.3 Client-provider relationships

10 Study on Industrial Policy and Services