Productive linkages in a segmented model: analyzing the role of services in the exporting performance of German manufacturing

Abstract

This article analyzes the causes of the exporting performance of the German manufacturing sector. By applying a subsystem approach to the input-output analysis, we take into account the interlinkages that exist between manufacturing and services. Particularly, two types of relationships that influence manufacturing competitiveness are considered: the wage squeeze in services due to institutional factors and outsourcing; and the role played by the knowledge-intensive business services (KIBS) as innovation drivers. With vertically integrated sectors as observations, an export model is estimated. Overall, our results point to the minor importance of labor costs for international competitiveness. We also capture a significant but small effect of service suppliers’labor cost on manufacturing exports. We find that KIBS have helped manufacturing gain international competitiveness. The paper concludes that non-price factors are the main drivers of German exports and that the relationship between manufacturing and services is not only a matter of cost reduction.