1

University of Groningen

What do We Know about Services Productivity in Europe?

 Bart van Ark

University of Groningenand The Conference Board

CPB Workshop on "Productivity in services: Determinants, international comparison, bottlenecks, policy"

10 June 2004, The Hague

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Set Up of Presentation Evidence on services productivity as source of productivity

slowdown in EU-15: 56-industry level taxonomies (ICT using, skills, innovation type)

The suspects explaining the European productivity slowdown: measurement ICT and innovation in services the role of markets

Roads forward to support services productivity growth: innovation policies and improved framework conditions business strategies focused on intangible capital formation

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GGDC Studies Bart van Ark, Robert Inklaar and Robert H. McGuckin (2003), "Changing Gear:

Productivity, ICT and Service Industries in Europe and the United States", in J.F. Christensen and P. Maskell, eds., The Industrial Dynamics of the New Digital Economy, Edward Elgar, pp. 56-99 (with TCB, updated)

Mary O’Mahony and Bart van Ark, eds. (2003), EU Productivity and Competitiveness: An Industry Perspective. Can Europe Resume the Catching-up Process?, DG Enterprise, European Union, Luxembourg (downloadable from http://www.ggdc.net/) (with NIESR; updated)

Bart van Ark, Lourens Broersma and Pim den Hertog (2003), "Services Innovation, Performance and Policy: A Review", Research Series No. 6, Directorate-General for Innovation, Ministry of Economic Affairs, The Hague (with Dialogic).

Robert Inklaar, Mary O'Mahony and Marcel Timmer (2004), “ICT and Europe's Productivity Performance; Industry-level Growth Account Comparisons with the United States,” Research Memorandum GD-68, Groningen Growth and Development Centre

Robert McGuckin, Matthew Spiegelman and Bart van Ark (2004), “Retail Productivity in Europe and U.S.”, The Conference Board (forthcoming)

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Two GGDC data bases

Industry Labour Productivity Database: series on nominal and real value added, employment and hours, 56 industries for 15 EU countries and U.S., 1979-2002 (updated) applies U.S. hedonic deflators for ICT to ICT-producing

industries industry aggregation on the basis of Tornqvist weighting

Industry Growth Accounting Database: above + series for six asset types (of which three ICT), three skill levels, 26 industries for 4 EU countries (France, Germany, UK and Netherlands) and U.S., 1979-2001

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Labour Productivity (GDP per hour worked) in 1999 US$

28

30

32

34

36

38

40

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

European Union United States

Can the European Union Resume the Catching Up-Process?

-4%

-10%

-5%

-8%

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1979-90 1990-95 1995-02 1979-90 1990-95 1995-02Total Economy* 2.16 2.41 1.64 1.20 1.14 2.46

Agriculture, Forestry and Fishing 5.3 5.5 3.6 5.2 -0.2 4.2Mining and quarrying 2.8 12.8 2.1 4.2 4.8 1.7Manufacturing 3.4 4.0 2.9 3.2 3.7 4.4Electricity, gas and water supply 2.2 4.6 6.0 1.2 1.7 1.6Construction 1.7 0.6 0.8 -0.8 0.3 0.2Distributive trades 1.3 1.7 1.0 1.6 1.6 5.4Transport 2.8 3.5 1.8 1.4 1.1 2.2Communications 5.2 6.1 8.7 2.5 3.6 6.7Financial Services 1.9 1.1 2.3 1.2 1.9 5.6Real estate -0.7 0.1 -0.6 0.6 1.7 1.2Business Services 0.5 0.7 0.1 -1.0 -0.1 0.5Other community, Social and Personal Services -1.7 0.2 0.0 0.5 1.4 0.3Public Administration, Education and Health 0.3 1.2 0.8 -0.4 -0.8 -0.4

EU-15 US

Much variation across across industries

Labour Productivity Growth for 12 Main Sectors, EU and U.S., 1979-2002

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Most important results on labour productivity at level of 56 industries

U.S. productivity growth advantage over Europe is not ubiquitous: In just over 50% of industries, U.S. labour productivity growth is faster

than in EU (market services and high tech manufacturing) from 1995-2002 Only a limited number of service industries account for U.S. advantage in

productivity growth At the same time there is a lot more dynamism in U.S.:

Industries with above 2% productivity growth are much more present in U.S. than in EU

In two-thirds of industries, U.S. labour productivity growth accelerates in 1995-2002 over 1990-1995

Whereas in almost three quarters of industries, EU labour productivity growth slows down

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Contribution of largest contributors in U.S. is substantial strongly dominated by services

Contribution to aggregate labour productivity of 5 largest and 5 least contributing industries in U.S., U.S. and EU, 1995-2002

%-point %-contribution %-point %-contributioncontribution contribution

5 Largest contributors in USRetail trade, except of motor vehicles 0.36 15% 0.06 4%Wholesale trade and commission trade 0.35 14% 0.08 5%Electronic valves and tubes 0.31 13% 0.11 6%Financial intermediation, 0.23 9% 0.09 6%Activities auxiliary to financial intermediation 0.22 9% 0.02 1%

5 Least contributors in USFood, drink & tobacco -0.09 -4% -0.01 0%Mechanical engineering -0.05 -2% 0.00 0%Printing & publishing -0.03 -1% 0.00 0%Textiles -0.03 -1% -0.01 -1%Scientific instruments -0.02 -1% 0.00 0%

Aggregate Labour productivity growth 2.46 100% 1.64 100%

EU-15 1995-2002US 1995-2002

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%-point %-contribution %-point %-contributioncontribution contribution

5 Largest contributors in EUCommunications 0.18 7% 0.22 13%Computer and related activities 0.09 4% 0.14 9%Legal, technical and advertising 0.07 3% 0.13 8%Electronic valves and tubes 0.31 13% 0.11 6%Health and social work 0.08 3% 0.10 6%

5 Least contributors in EUMining and quarrying -0.01 0% -0.02 -1%Insurance and pension funding 0.02 1% -0.01 -1%Textiles -0.03 -1% -0.01 -1%Clothing -0.01 0% -0.01 -1%Food, drink & tobacco -0.09 -4% -0.01 0%

Aggregate Labour productivity growth 2.46 100% 1.64 100%

EU-15 1995-2002US 1995-2002

Contribution of largest contributors in Europe is smaller and mainly in high tech manufacturing

Contribution to aggregate labour productivity of 5 largest and 5 least contributing industries in EU., U.S. and EU, 1995-2002

Much variation by industry across countries: RetailLP growth in 1995-2002 and 1990-1995, Retail trade

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

(in %

) 1995-20021990-1995

Much variation by industry across countries: BanksLP growth in 1995-2002 and 1990-1995, Financial Intermediation except insurance

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Portuga

l

Germany

Finland UK US

Denmar

k

Greece

EU-15

Austria Ita

lySpa

in

Nether

lands

France

Ireland

Sweden

Luxe

mbourg

Belgium

(in %

)

1995-20021990-1995

Much variation by industry across countries: Telecommunication Services

LP growth in 1995-2002 and 1990-1995, Communications

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Germany

Finland Ita

ly UKEU-1

5

Nether

lands

Sweden

France US

Luxe

mbourg

Greece

Austria

Denmark

Spain

Portuga

l

Belgium

Ireland

(in %

)

1995-20021990-1995

Variation across industries seems to be related to aggregate productivity growth rate and somewhat

dependent on size of country: Total Economy LP growth rates and standard deviation (all industries except ICT producing industries) by country,

0

1

2

3

4

5

6

7

8

-1.000 0.000 1.000 2.000 3.000 4.000 5.000 6.000

(% growth rate)

Stan

dard

dev

iatio

n by

cou

ntry

IRE

PRT

DNK

GRC

FIN

AUT

SWE

UK

GERUS

BEL

FRA

EU-15

LUX

ITA

NLD

ESP

… although less so when looking at Market Services only

LP growth rates and standard deviation of Market Services by Country

0.00

2.00

4.00

6.00

8.00

10.00

12.00

-1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

(% growth rate)

Stan

dard

dev

iatio

n

US

IRE

GRCUK

FIN

GER

PRT

SWE

AUT

NLD

DNK

EU-15

FRA

BELIT

ESP

LUX

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Suspect 1: Measurement problems hamper adequate assessment of service productivity Few good studies on how big is the measurement problem

concerning services productivity: on U.S.: Triplett, J.E. and B. Bosworth (2002) ““Baumol's disease” has been

cured: IT and multifactor productivity in U.S. services industries,” Brookings Institution, Washington D.C.

International: Anita Wölfl (2003), “Productivity growth in service industries – an assessment of recent patterns and the role of measurement,” STI-Working Paper 2003-07, (Paris: OECD)

Some attempts to improve measurement of services output: Brookings workshops on “Measuring service sector output” and

methodological improvements by BEA and BLS, in particular in area of financial services

Eurostat, Handbook on price and volume measures in national accounts, Luxembourg, 2001

Source: Anita Woelfl (2003)

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We cannot be sure of the bias in service output measurement

Over time: Increased size of services has impact on aggregate (Griliches, 1992; 1994) Increased complexity of services --> multidimensionality and quality

improvement But methodological changes in e.g. financial services do not show bias in

only one direction Across countries:

Countries apply different methodologies (e.g., retail) Part of service output measures is still based on input measures, in

particular in non-market services, but there are differences in degree between countries

Measurement of PPPs in services is complicated, depending on share of intermediate inputs in gross output

Industry ServicesOutput

Input

Primarily computers and other ICT goods. Solvable by using hedonic price indices, which is possible provided data availability

Primarily "customised" services and public services (education, health, etc.). Should be tackled by detailed analysis of multiple dimensions of output by industry. Difficult both in methodological terms as well in terms of data

Primarily semiconductors. Can be solved with hedonic price indices, provided data availability and investment flow matrices.

Primarily ICT capital input. Can be solved by adjusting nominal input series with hedonic price indices. Feasible provided availability of investment flow matrices.

Measurement problems due to increased share of ICT

B. van Ark, Measuring the New Economy, Review of Income and Wealth, March 2002

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Growth Accounting at Industry Level, Selected Service Industries, Netherlands and United States, 1995-2001

Share of LabourEmployment Productivity Labour ICT Non-ICT TFP

in total Growth Quality Capital Capital GrowthEmployment Growth Deepening Deepening

2001 1995-2001

NETHERLANDSMarket Services: 51.7 1.7 0.2 1.1 0.3 0.1of which:

Wholesale trade 9.3 3.6 0.2 0.9 0.1 2.4Retail trade 7.2 1.2 0.0 0.5 0.3 0.4Financial intermediation 4.2 -0.6 0.4 2.8 0.3 -4.0Business services 15.8 1.0 0.3 1.0 0.6 -0.9

UNITED STATESMarket Services: 49.9 3.7 0.3 1.6 0.5 1.2of which:

Wholesale trade 6.1 6.5 0.1 1.8 0.5 4.1Retail trade 10.3 6.3 0.1 0.7 0.3 5.2Financial intermediation 4.5 5.4 0.1 2.9 0.9 1.5Business services 12.3 0.0 0.2 1.7 0.2 -2.1

Contribution of:

LP advantages in U.S. services are translated in TFP advantages, as U.S.

investment in ICT is only slightly higher

Source: Inklaar, O’Mahony and Timmer, 2003

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Suspect 2: Service Industries do Not Sufficiently Innovate

ICT investment is an important enabler of innovation and productivity growth

… and U.S. has been more successful in obtaining productivity effects from ICT investment than EU

But productive use of ICT investment is strongly dependent on various dimensions of non-technological innovations

Productivity effects are strongest in services with supplier dominated innovations or strong organizational innovations

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EU-15 U.S. EU-15 U.S.Total Economy 2.4 1.1 1.6 2.5

ICT Producing Industries 7.0 8.3 8.5 9.3ICT Producing Manufacturing 13.2 17.4 16.0 22.6ICT Producing Services 4.6 3.1 5.9 3.1

ICT Using Industries 2.2 1.3 1.7 4.8ICT Using Manufacturing 2.9 -0.2 2.1 1.7ICT Using Services 1.8 1.7 1.6 5.3

Non-ICT Industries 2.2 0.3 1.0 0.5Non-ICT Manufacturing 3.6 2.7 2.0 1.4Non-ICT Services 1.2 -0.3 0.3 0.4Non-ICT Other 3.4 0.8 2.2 0.6

1990-1995 1995-2002

ICT taxonomy points to main differentials in ICT-using services

Labour productivity by Industry Group on the basis of ICT taxonomy,EU and U.S., 1995-2002

Outside ICT-producing, EU manufacturing has productivity advantage but this advantage is

eroding

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Complementarity of technological (ICT) and non-technological innovations

Case studies: Company evidence (McKinsey) SIID studies on service innovation combined with firm micro firm level

studies (van Ark et al., 2003) Combined evidence from macro and sector studies (TCB Retail study)

Micro firm level studies Special organizational and work practice surveys on U.S (Brynjolffson and

others, Black & Lynch) Recent international work (OECD/Bartelsman, Hempell, van Leeuwen/vd.

Wiel) Macro approaches:

Analysis of TFP residuals with use of R&D, innovation measures (OECD) Cluster research with I/O and CIS tables (Broersma in van Ark et al., 2003) Intermediate input use of KIBS as proxy for organizational innovation

(Broersma and van Ark, 2004)

Innovators in services strongly combine technological and non-technological innovations

Source: CBS, Kennis en Economie

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NEW SERVICECONCEPT

(DIMENSION 1)

NEW CLIENTINTERFACE

(DIMENSION 2)

NEW SERVICEDELIVERY SYSTEM

(DIMENSION 3)

TECH-NOLOGICAL

OPTIONS(DIMENSION 4)

Organisation

development

Distrib

utio

n

Marketing

capabilities, skills & attitude of existingand competing service workers (Human Resource Management)

Kno

wle

dge

of th

e ch

arac

teris

tics

of e

xist

ing

and

com

petin

g se

rvic

es (b

usin

ess i

ntel

ligen

ce)

char

acte

ristic

s of a

ctua

l and

pot

entia

l clie

nts (

mar

ket i

ntel

ligen

ce)

© Dialogic

A four dimensional typology of service innovation used in SIID studies

Source: den Hertog and Bilderbeek (1999)

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New measures of innovation according to4-D innovation model look promising

Source: De Jong et al, EIM, 2004

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Characteristics of service innovation Multidimensionality is the rule Dimensions are often renewed in other sectors through new

combinations The weights of dimensions change over time ICT facilitates in many cases, but is not sufficient nor always

necessary Next to industry characteristics, firm strategies matter Service innovations take place along the whole value chain Co-operation (co-producing, co-innovating) takes place a lot De- and re-regulation is important but impact is diverse

The services sector is characterized by distinct innovation clusters

Towards a service innovation taxonomy (developed from Pavitt, 1984)

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EU-15 U.S. EU-15 U.S.Total Economy 2.4 1.1 1.6 2.5

Good producing industriesSupplier dominated manufacturing 2.6 0.0 1.9 1.2Scale intensive industry 3.8 2.7 1.8 1.2Specialised suppliers manufacturing 6.6 9.9 6.6 13.3Science based manufactuirng 5.5 2.8 4.2 3.4

Service industriesSupplier dominated services 2.9 2.3 4.0 6.4Specialised supplier services 0.5 0.0 0.5 -0.3Organizational innovative services 2.4 1.1 1.4 2.6Client led services 1.2 1.3 0.3 4.2Non-market services 1.2 -0.8 0.8 -0.4

1990-1995 1995-2002

US advantages are strongest in supplier dominated services, organizational

innovative services and client led servicesLabour productivity by Industry Group on the basis of combined Pavitt/SIID taxonomy, EU and U.S., 1995-2002

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Non-technological innovations mainly arise from investment in intangible inputs

Intangibles inputs are key in facilitating the innovation process and creating more productivity

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Intensive IT users have relatively high intermediate purchases from knowledge

intensive business services (KIBS), which can be used as proxy for organizational capital

Estimation results of model specification (5), 49 industries, The Netherlands

Dependent variable:

tj

tjKIBS

YZ

,

,,log 1987-2001† 1987-1994 1995-2001

Intercept 0.016(2.963)

0.020(2.937)

0.012(1.412)

tjtot

tjIT

rIrI

,,

,,

0.094(1.748)

0.014(0.328)

0.072(1.846)

Number of observations 685 342 343Between parentheses are the t-values.No data for services nec and personal services were included. Data No. 742 (maritime shipping 1993)caused a severe outlier and was omitted here.

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Productivity growth is enhanced by a combined effect of ICT-use and KIBS purchases

E s t i m a t i o n r e s u l t s o f l a b o u r p r o d u c t i v i t y r e g r e s s i o n s ( 8 ) a n d ( 9 ) f o r d i f f e r e n t t i m e p e r i o d s ,N e t h e r l a n d s

E x p l a n a t o r y v a r i a b l e s : *1 9 8 7 - 1 9 9 4

( 8 ) ( 9 )1 9 9 5 - 2 0 0 1

( 8 ) ( 9 )1 9 8 7 - 2 0 0 1

( 8 ) ( 9 )

I n t e r c e p t 2 . 3 7 9( 2 3 . 4 8 )

2 . 3 7 6( 2 2 . 8 2 )

2 . 5 4 0( 2 7 . 8 6 )

2 . 5 4 0( 2 8 . 1 7 )

2 . 4 6 6( 4 6 . 6 4 )

2 . 4 7 4( 4 6 . 8 9 )

ti

tITi

LK

,

,,log 0 . 0 5 1( 4 . 1 7 7 )

0 . 0 5 2( 4 . 0 5 6 )

0 . 0 6 1( 5 . 5 7 0 )

0 . 0 5 0( 4 . 3 6 4 )

0 . 0 3 2( 5 . 6 0 2 )

0 . 0 3 0( 5 . 0 7 9 )

ti

tITnoni

LK

,

,,log 0 . 1 5 7( 5 . 9 5 9 )

0 . 1 5 7( 5 . 9 3 9 )

0 . 1 9 7( 5 . 5 2 8 )

0 . 2 0 7( 5 . 8 4 4 )

0 . 1 4 8( 8 . 7 6 4 )

0 . 1 5 7( 9 . 1 2 5 )

ti

tiKIBSti

LZZ

,

,,,log 0 . 4 3 5( 9 . 8 6 8 )

0 . 4 3 7( 9 . 6 5 6 )

0 . 3 1 5( 8 . 8 8 0 )

0 . 3 1 1( 8 . 8 6 4 )

0 . 3 9 1( 1 6 . 1 4 )

0 . 3 8 0( 1 5 . 4 5 )

ti

tiKIBS

LZ

,

,,log 0 . 0 7 3( 2 . 6 5 8 )

0 . 0 7 2( 2 . 6 0 5 )

0 . 1 5 2( 8 . 1 2 2 )

0 . 1 0 9( 4 . 3 6 9 )

0 . 1 8 6( 1 2 . 3 8 )

0 . 1 7 0( 1 0 . 3 2 )

I n t e r a c t i o n t e r m :

ti

tiKIBS

ti

tITi

LZ

LK

,

,,

,

,, loglog - - 0 . 0 0 1( - 0 . 1 6 1 )

- 0 . 0 2 0( 2 . 6 4 6 )

- 0 . 0 1 1( 2 . 5 0 5 )

A d j u s t e d R 2 0 . 9 9 5 0 . 9 9 4 0 . 9 9 6 0 . 9 9 5 0 . 9 9 1 0 . 9 9 2N u m b e r o f o b s e r v a t i o n s 3 6 8 3 6 8 3 2 1 3 6 8 6 8 9 6 8 9

I T - c a p i t a l e l a s t i c i t y o f o u t p u t 5 % 5 % 6 % 7 % 3 % 4 %* T h e 4 8 i n d u s t r y f i x e d e f f e c t d u m m i e s a r e n o t r e p o r t e d f o r c o n v e n i e n c e .T h e t - v a l u e s a r e b e t w e e n p a r e n t h e s e s .D a t a o n m i n i n g ( N o 3 1 - 6 0 ) , N o . 1 5 0 ( o i l p r o c e s s i n g 2 0 0 1 ) a n d m a r i t i m e s h i p p i n g ( N o . 4 6 6 - 4 8 0 ) c a u s e ds e v e r e o u t l i e r s a n d w e r e o m i t t e d

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Suspect 3: Rigid Markets Hamper Services Productivity Improvements

Competition helps to increase entry and exit but the effects on productivity greatly vary across industries

Comprehensive reforms (in product and labour markets) seem to be crucial

Many (de-)regulations are very industry-specific Considerable time lags seem to be present before productivity

effects emerge Productivity may initially slow down after deregulations (e.g.

retail) A certain amount of experimentation with optimal level of

deregulation is necessary

Should policies focus on service innovation or more broadly on framework conditions?

“Deepening” “Broadening” “Horizontalization”1) Broaden R&D tax

credit schemes toincludeorganisationalinnovation.

2) Include servicefirms explicitly inpolicies aimed attraining andmobility ofresearchers andpersonnel at large.

3) Include servicesectors in foresightand roadmappingactivities.

4) Create and improvescience-industryrelationships inservices.

Extend awarenessactivities more explicitlyto non-technologicalinnovation and servicefirms.

Support serviceinnovation managementin service industries.

Facilitate encountersbetween manufacturingand service innovators.

Assess comparativeadvantages of services inthe Netherlands.

Invest in servicesinnovation research.

Develop policyexperiments on serviceinnovation.

Spur innovation by sensiblederegulation and competition

Work on non-tariff tradebarriers in international tradepolicies.

Use environmentalregulations to supportinnovation.

Use general education andscience policies to create aninnovative, flexible andservice oriented labour force.

Invest in innovativegovernment services.

Consider the effects of policyareas such as spatial andtransport planning on thescope for innovation.

Improve basic statistics onservices.

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For business, productivity is either not an explicit target or at best part of its overall

value creation model

ValueCreation

Productivity effect

Priceeffect

Activityeffect

Improvement inresource mix

Rise inproduct prices

Fallin

resourceprices

Improve-ment inproduct

mix

Improvement inoperating efficiency

Rise intechnical change

Costreductions

Quality

Innovation

Increaseeconomies of

scale

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Conclusions & questions U.S. productivity advantages are not ubiquitous but is strongly

based in market services Measurement issues are important but biases should not be

automatically assumed There is a lot more dynamics in U.S. services (faster growth and

investment, more innovation, more changes to markets) --> is more turbulence what Europe needs?

Some of U.S. productivity advantages in services cannot be easily adopted in Europe (e.g., scale effects)

How can Europe develop productivity advantages in services? Diversity and customization? Advance combination of manufacturing and service functions? Set industry standards more easily?