The contribution of business services to aggregate productivity growth

In most OECD countries, the business services industry has grown much faster than the market sector as a whole. The industry in most cases, however, has displayed stagnating productivity growth, in some periods even a fall in productivity. Does this fast-growing industry with a bad productivity record present a threat to aggregate productivity growth and, hence, to future economic growth? Reviewing existing empirical evidence, the paper argues that this concern need not be valid. The business services industry has an important role in the national innovation system and in knowledge spillovers to other industries. The innovation contribution of business services to the rest of the economy may countervail the effect of its own stagnating productivity growth. Moreover, the industry has not yet exhausted opportunities for tackling existing X-inefficiencies. The paper further sketches some policy options for improving the productivity record of business services, and for strengthening its role in knowledge spillovers to client industries.