The Relationship between Producer Service and Local Manufacturing Industry: Empirical Evidence from Shanghai

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1 J. Service Science & Managemen, 2009, 3: doi: /jssm Published Online Sepember 2009 ( The Relaionship beween Producer Service and Local Manufacuring Indusry: Empirical Evidence from Shanghai Shouming CHEN, Jie LI, Meijuan JIA School of Economics and Managemen, Tongji Universiy, Shanghai, China. Received March 11 h, 2009; revised May 13 h, 2009; acceped July 17 h, ABSTRACT Previous sudies suggesed ha he developmen of producer service resuled from manufacuring ousourcing. On he oher hand, compeiive producer service can promoe he progress of manufacuring indusry. Theoreically, correlaion may exis beween hem. According o co-inegraion heory, his paper empirically ess he ime series daa colleced from boh producer service and manufacuring indusry in Shanghai, indicaing ha co-inegraion does exis beween producer service and local manufacuring indusry. Empirical resuls of his paper parially suppor he conclusions of prior sudies addressed above. Keywords: producer service, manufacuring indusry, co-inegraion esing, empirical analysis, shanghai 1. Inroducion Producer service is one of he modern service indusries ha have been he forces promoing economic developmen in developed counries. Progress in producer service indusry no only benefis iself bu also significanly faciliaes advanced manufacuring indusry. A generally acceped view is ha advanced manufacuring indusry could no exis in China wihou he presence of advanced producer service. Subsequenly, i is much more difficul for manufacuring indusry o mainain comparable and compeiive advanages. Therefore, i seems reasonable o suppose ha core ciies such as Shanghai should promoe modern services mainly composed of producer service o serve manufacuring indusry beer in adjacen provinces and oher pars of China. Is his assumpion raional? Addiionally, wheher producer service in Shanghai really serves manufacuring indusry in adjacen provinces and oher pars of China need furher and deeper invesigaion. This paper conducs empirical analysis and ries o briefly answer hese quesions. 2. Theories and Hypohesis Previous lieraures define producer service from wo perspecives. One definiion focuses on objeced acceped services. Greenfield menions ha producer service mainly serves enerprises, non-profi organizaions, and governmens, raher han offering producs and services o end users [1]. Harringon and Lombard sae ha producer server offer inermediae services o enerprises. [2] Sull and Madden sugges ha producer service assiss enerprises or organizaions o offer oher producs or services, raher han providing services o privae secors or family secors [3]. The oher definiion focuses on services ha producer service can offer. This definiion is an exension of original concep. According o Browning and Singleman, producer service is mainly composed of knowledge-inensive indusries, for insance, finance, insurance, legal indusry, and so forh [4]. Howells and Green sae ha producer service funcions as inermediae agency promoing operaional efficiency and bringing value o producion and oher services [5]. Daniels concludes several exising classificaions of producer service and suggess ha producer service could be classified o hree caegories. The firs caegory is informaion processing service involved of banking, insurance, markeing, accouning, asse managemen, adverising, and informaion ediing skill. The second is services relaed o business, such as sales, raffic managemen, insallaion and mainenance of basic equip- Copyrigh 2009 SciRes

2 210 SHOUMING CHEN, JIE LI, MEIJUAN JIA mens, and mainenance and servicing for communicaion equipmen. The hird caegory refers o personal suppor services, for example, welfare, food supply, individual ravel, and residence [6]. Basically, producer service can be characerized by following rais. The firs rai is inermediae inpu, indicaing producer service does no serve o end users bu promoes inermediae consumpion in order o creae more value. The second is relaively sronger indusrial correlaion in agriculure, manufacuring, and oher indusries. Third, mos services producer service provides are echnology-inensive or knowledge-inensive and conain more sock of human resource. Forh, producer service rends exernal, suggesing ha inernal programs coninually depar from original enerprises and become professional services providers ha are independen o original enerprises. Thus, kinds of producer service increase quickly. Many researches conduced before explain he reason why producer service progresses so fas. Using inpu-oupu mehodology, Tscheer invesigaes poswar producer service and ries o find why i progresses so quickly. Among many reasons, ha ways of enerprises doing business changed is an imporan explanaion. Unbundling of producion has a more significan impac [7]. Coffey and Bailly analyze exemalizaion of producer service, suggesing ha six facor including inernal echnological limis and risk aversion lead manufacuring and services providers buy producer services from ouside [8]. According o ransacion cos heory, some scholars of New Insiuional Economics analyze producer services ousourcing [9,10], and subsequenly sae ha enerprise prefers ousourcing due o cos reducion resuled from ousourcing and ha exernal ransacion coss are less han inernal coss due o impacs of economy of scale. Meanwhile, ousourcing can effecively reduce risk. Some researchers analyze producer services from sraegic perspecive, suggesing ha risk and uncerainy could be reduced by ousourcing and ha hrough ousourcing enerprises can concenrae available resources on he mos compeiive phases in value chain and hen gain advanages [11]. Correlaion beween producer service and manufacuring indusry is anoher focus o which researchers pay much aenion. Though no consensus on his opic has reached, mos researchers agree ha producer service promoe manufacuring indusry. Addiionally, some researchers sae ha essences for he developmen of manufacuring indusry are exernal o iself [12] and ha furher achievemens of Chinese manufacuring indusry could no reached wihou advanced producer service. Therefore, we can conclude: producer service is resuled from ousourcing of manufacuring enerprises. Subsequenly, scale of manufacuring indusry deermines he scale of producer service o a cerain exen. Thus, we ge he hypohesis of his analysis. Hypohesis: Scale of producer service in Shanghai posiively relaes o scale of local manufacuring indusry in Shanghai. 3. Mehod and Daa 3.1 Daa Collecion I is difficul o collec appropriae daa from producer service o conduc empirical analysis for a long ime. In early sudies, researchers jus simply combine he oupu of sub-secors in service indusry and hen use he combinaion as he oupu of producer service; however, here is no agreemen on which subsecor is appropriae o be classified ino producer service. A normal used classificaion is composed of finance, insurance, business services, and real propery indusry. Imperinency of his classificaion can be found easily. Firs, i does no include services of oher services indusries offered o enerprises. Second, mos services offered by hese indusries addressed above are consumed by end users, for example, houses of real propery indusry and personal financial services. We esimae producer services oupu by subracing consumer and governmen services oupu from oal service secor oupu, using a echnique firs developed by Grubel and Walker [13]. Tao and Wong used he echnique o esimae producer service in Hong Kong [14]. Seps of using his mehod will address below. All sors of services indusries can be classified ino hree caegories. The firs offering service o enerprise belongs o producer service. The second offers service o governmen and he hird o end users. The amoun of service offered o end users can be esimaed by he oal amoun end users pay annually. We suppose ha he amoun ha end users ouside Shanghai pay for service offered by local providers is equal o he amoun ha end users in Shanghai pay for service offered by ecdemic providers. We combine service offered o governmen ino producer service because he amoun of services offered o governmens is relaive fewer. In oher words, we esimae he annual is value added or GDP of producer service by deducing payou ha Shanghai end users pay for service hey receive from he annual GDP ha all services indusries creae. Daa colleced and used in his sudy are lised in Table 1. Copyrigh 2009 SciRes

3 SHOUMING CHEN, JIE LI, MEIJUAN JIA 211 Table 1. Value added of producer service and gross oupu value of manufacuring indusry ( ) (Calculaed a curren prices) Year Nominal value added of producer service Nominal gross oupu value of manufacuring indusry Source: Auhor colleced and rearranged from Shanghai Saisical Yearbook, Daa of manufacuring indusry in Table 1 are based on he gross oupu value and hose of producer service are based on value added (GDP) due o he availabiliy of daa colleced from saisical yearbook. All he daa are calculaed a curren prices. Daa of manufacuring indusry changed from 1995 relaively significanly because saisical mehod changed in ha year. Value added ax is excluded from Thus we found wo ypes of daa in 1996 s Shanghai Saisical Yearbook, one including value added ax and he oher excluding value added ax. We compared hese daa and made some modificaions o he daa afer A naional economic survey was conduced in 2004, leading o significan change in he daa of services indusry. In he same way, we modified he daa of producer service before Table 1 liss he daa afer modificaion. 3.2 Daa Rearrangemen Based on daa in Table 1, Figure 1 illusraes how value added of producer service and gross oupu value of manufacuring indusry changed annually. We can see clearly ha rend of producer service resembles ha of manufacuring indusry. In oher words, boh of he daa are non-saionary ime series, respecively. To conrol for he impac of price index on nominal value, each value added of producer service of hese 25 years was ransformed o he value a 1980 consan prices, so was he gross oupu value of manufacuring indusry. These ransformaions were compleed by using Consumer Price Index (CPI). Table 2 shows he resuls of hese ransformaions. Figure 1. Producer service and manufacuring indusry in Shanghai ( ) Copyrigh 2009 SciRes

4 212 SHOUMING CHEN, JIE LI, MEIJUAN JIA Table 2. Value added of producer service and gross oupu value of manufacuring indusry ( ) (Calculaed a 1980 consan prices) Year Acual value added of producer service (PS ) Acual gross oupu value of manufacuring indusry (M ) PS refers o value added of producer service and M o gross oupu value of manufacuring indusry. We found ha each logarihm of he wo ime series is linear. Subsequenly, we used uni roo es o figure ou wheher he ime series is saionary and he order of inegraion of non-saionary series. Among commonly used uni roo es such as DF es, ADF es, and Philips non-parameer es (PP es), ADF es based on residual analysis and inroduced by Engle and Granger was adaped in his sudy. We used Eviews4.0 o conduc his es and found ha ln(ps ) and ln(m ) are non-saionary. However, ln(ps ) and ln(m ) became saionary afer firs order differencing, which means ha ln(ps ) and ln(m ) are series of inegraion of Order 1, respecively. 3.3 Co-inegraion Tesing For wo series of inegraion of order 1, we used he Engle-Granger wo-sep approach o es he co-inegraion relaionship. Firs, we used ln(ps ) as he dependen variable and esablished he regression equaion below, ln( PS ) ln( M ) u (1) 0 1 afer esimaion we go Equaion (2), ln( PS ) ln( M ) uˆ (2) (-10.5) (20.06) R 2 =0.95, Adjused R 2 =0.94, D.W. =0.35 Figures in parenheses under Equaion (2) are corresponding values. Coefficien in Equaion (2) shows ha when gross oupu value of manufacuring indusry increases 1%, value added of producer service increases 1.58%. Second, we used uni roo es o evaluae residuals of Equaion (2) and go, uˆ ln( PS ) 1.58ln( M ) 5.67 (3) Table 3. Resuls of uni roo es o ADF es saisic % Criical value* 5% Criical value 10% Criical value *MacKinnon criical values for rejecion of hypohesis of a uni roo. û Copyrigh 2009 SciRes

5 SHOUMING CHEN, JIE LI, MEIJUAN JIA 213 We also used uni roo es o es. According o AIC and SC principle, he bes lag order is 9. Tes resuls are showed in Table 3. Tes resuls in Table 3 sugges ha û rejecs H 0 a he 5% significance, showing ha no uni roo exiss. Thus, û is a saionary series, which means uˆ ~ I(0). Co-inegraion exiss beween ln(ps ) and ln(m ), and Co-inegraed vecor is (1, -1.58). 3.4 Resul and Analysis The empirical resul shows a long-erm relaionship beween producer service and local manufacuring indusry in Shanghai. Namely, i is possible ha Shanghai s producer service inerrelaes wih he developmen of local manufacuring indusry. Such empirical resul is inconsisen wih Shanghai s fuure indusry direcion ha Shanghai as an imporan meropolis in China should focus on he developmen of modern producer service, no on he developmen of manufacuring indusry. The poenial premise behind producer service oriened sraegy of Shanghai relies on he fooloose rai of advanced producer service. In he oher word, he advanced producer service is no limi o he condiion of facor of producion and o he adjacency of marke and raw maerial. However, he empirical resul from Wernerheim and Sharpe who sudy he foolooseness of producer service in meropolian Canada does no suppor he premise [15]. They found ha he advanced producer service, such as Informaion, Communicaion and Technology (ICT) secor, is no as fooloose as expeced [15]. Furher, he resul of his paper is consisen wih he resul from Wernerheim and Sharpe and shows ha he producer service is insignificanly fooloose and ha he producer service has a long-erm relaionship wih local manufacuring indusry. Local manufacuring indusry in Shanghai promoes he developmen of producer service in Shanghai. 4. Conclusions Based on daa colleced from Shanghai, his empirical sudy wih ime series analysis shows ha co-inegraion do exis beween producer service and local manufacuring indusry, parially supporing he hypohesis ha producer service inerrelaes wih manufacuring indusry. The conclusion is also meaningful for oher ciies or provinces in china o formulae he sraegy of producer service developmen. Meanwhile, we recognize he limiaions in he applicaion of our conclusion. Firs of all, he conclusion of his sudy based on daa colleced from Shanghai only represen he siuaion in a specific pas period no he fuure siuaion. For example, he relaionship beween producer service and manufacuring indusry may vary afer he eliminaion of regional collaboraion barrier. Second, we did no consider a relaionship beween he producer service in shanghai and he manufacuring indusry in Yangze dela. If he relaionship is posiive, he developmen of producer service in shanghai could also be explained by he growing scale of manufacuring indusry in Yangze dela. This is our fuure research issue. The domain ha producer service in Shanghai serviced may cover a much larger area, from Yangze dela o he whole counry, even he whole world. However, we could no have a blind faih in he fooloose rai of advanced producer service. In he regional developmen, he sraegy ha coordinaes boh developmens of local producer service and local manufacuring indusry should be persised consanly. REFERENCES [1] H. L. Greenfield, Manpower and he growh of producer services, Columbia Universiy Press, New York, [2] J. W. Harringon and J. R. Lombard, Producer-service firms in a declining manufacuring region, Environmen and Planning A, No. 21, pp , [3] W. Sull and J. Madden, Pos-indusrial Philadelphia: Srucural changes in he meropolian economy Philadelphia, Universiy of Pennsylvania, [4] H. C. Browning and J. Singelmann, The emergence of a service sociey, Naional Technical Informaion Services, Springfield, [5] J. Howells and A. Green, Locaion, echnology and indusrial organizaion in UK services, Progress in Planning, Vol. 26, No. 2, pp , [6] P. W. Daniels, Service indusries in he world economy, Blackwell Publishers, [7] J. Tscheer, Producer services indusries: Why are hey growing so rapidly? Monhly Labor Review, Vol. 110, No. 12, pp , [8] C W. J. offey and A. S. Bailly, Producer services and flexible producion: An exploraory analysis, Growh and Change, Vol. 22, No. 4, pp , [9] P. W. Daniels, The geography of services, Progress in Human Geography 9, pp , [10] W. R. Goe, Producer services, rade and he social division of labor [J], Regional Sudies, No. 24, pp , [11] W. J. Coffey and J. J. McRae, Services indusries in Copyrigh 2009 SciRes

6 214 SHOUMING CHEN, JIE LI, MEIJUAN JIA regional developmen, Insiue for Research on Public Policy, Monreal, [12] C. Q. Guo, Evoluion of manufacuring model and endency of manufacuring developmen, docorae forum of Anhui manufacuring developmen, Hefei Universiy of Technology Publishing House (in Chinese), [13] H. G. Grubel and M. A. Walker, The Canadian service indusries [M], The Fraser Insiue, Vancouver, [14] Z. G. Tao and Y. C. R. Wong, Hong Kong: From an indusrialized ciy o a cenre of manufacuring-relaed service [J], Urban Sudies, Vol. 39, No. 12, pp , [15] C. M. Wernerheim and C. A. Sharpe, High order producer services in meropolian Canada: How fooloose arehey? Regional Sudies, No. 37, pp , Copyrigh 2009 SciRes