Services contribution to manufacturing exports and value-added: evidence from India and China

Abstract

The importance of services inputs in enhancing manufacturing productivity and competitiveness has been well documented in the literature on global value chains and economic development. In this context, we investigate the nature and strength of the interlinkage between the services and manufacturing sectors in India and China, using valueadded and exports data from the OECD Trade-in-Value-Added Database over 2005-15. Three principal observations emerge from our analysis. First, manufacturing value-added in exports is significantly overstated in conventional BOP statistics for both countries; it is much lower when we use the value-added approach. Second, China’s services value-added contribution is concentrated in traditional services such as trade and distribution and transport services, reflecting the high demand from its competitive manufacturing sector. In contrast, services exports and value-added in India display a higher utilization of modern services, notably, information technology (IT). Third, in both the countries, services show potential for raising their value-added contribution to manufacturing exports, particularly in high-value sectors like IT services. The analysis suggests a need for further deregulation, liberalization, and diversification of the service sector along with greater policy recognition of the importance of services for spurring manufacturing as well as overall competitiveness.