Service provides new value – for industry and the entire economy

ETLA, the Research Institute of the Finnish Economy, published a book entitled “Uutta arvoa palveluista” – New Value from Services.

The central observations presented in the book are:

  • Developed countries, including Finland, specialise in services in the new global division of labour.
  • Digitalisation has revolutionised the concept of service. A major portion of services can be used independent of time or place. Digital services are the fastest growing sector in world trade.
  • Services or industry? - Neither by itself, services are an integral part of goods and vice versa.
  • Services are an important source of productivity growth – not a ball and chain
  • The digital service society represents a great opportunity for Finland.

“Services really contain a lot of potential, as many services can be consumed regardless of time or place. Services accrue intangible assets, especially in developed economies,” says Tiina Tanninen- Ahonen, who is director of the Service Innovations unit at Tekes.

“In Finland, we have good possibilities to increase the amount of high value added services as part of industrial production. Even now, a lot of industry employees already work in various service tasks and we are ahead of many European countries in this respect. Approximately 28 per cent of the people working in industry are in expert or advisor positions, while the corresponding figure in EU countries averages 21 per cent. It will become more and more difficult to draw the line between services and industry in the future,” continues Tanninen-Ahonen.

Services constitute the majority of the economy

Services account for some 70 per cent of Finland’s employment and overall production. However, nearly 90 per cent of working Finns are in service positions – meaning that their work is not directly associated with the actual manufacturing. For example, half of industrial tasks are service-related. A significant part of the service sector itself is competence intensive: more than half of employees work in demanding expert and management positions.

Services are the fastest growing part of world trade. Finland is also showing a surplus in terms of foreign trade related to services. The main reason for growth in service trade is digitalisation. Global division of labour is changing so that developed countries increasingly specialise in services. 

Statistics provide a misleading picture of the importance of services in world trade. They show that services account for approximately 20 per cent of trade, while in reality they constitute more than 50 per cent of world trade. The difference can be attributed to the fact that services are measured in a different way than goods trade. Statistics for service export are also inadequate, because 70 per cent of world trade is conducted internally between multinational corporations, mainly in the form of services. 

Services or industry?

The answer is both. The heart of the matter is that industry and services are strongly meshed with each other. For developed countries, services are an essential competitive edge in the global market.  The real prices of industrial products on the global market are falling as developed countries increase production and export. Making developed products part of the industrial product will improve competitiveness.
Research shows that an efficient and competitive service sector increases productivity in other sectors. As a result of globalisation, industry is becoming more similar around the world. Technology and production can be quickly transferred across borders. Differences in the welfare and income level of countries are decisive in services: affecting the kind of services and how efficiently they can be produced.

Is there a cure for Baumol’s disease?

Many services no longer represent a ball and chain but a source of productivity growth. The production and, in particular, use of digital services offers the opportunity for large benefits of scale. Baumol’s cost disease is being cured. However, some service production, such as personal welfare services, cannot be digitalised nor can the productivity benefits they provide be completely achieved.  Services are different; the disease is easing but will not completely disappear. Digital services can also indirectly benefit things like production of public welfare services if the health care processes and information systems eventually become functional.

Further information
Research Director Pekka Ylä-Anttila
Etlatieto Oy
tel. +358 50 525 3697

Managing Director Petri Rouvinen
Etlatieto Oy
tel. +358 50 367 3474

Mika Pajarinen, Petri Rouvinen and Pekka Ylä-Anttila (2012). Uutta arvoa palveluista. (New value from services) Taloustieto Oy (ETLA B256). ISBN 978-951-628-566-8 (nid.) ISBN 978-951-628-567-5.
In Finnish only

This book project received support from Service Sector Employees PALTA and Tekes, the Finnish Funding Agency for Technology and Innovation.

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