Productive linkages in a segmented economy: the role of services in the export performance of German manufacturing

Abstract

This article analyzes the causes that affect the export performance of the German manufacturing sector. By applying a subsystem approach to input–output analysis, we take into account the interlinkages between manufacturing and services. In particular, we consider two types of relationships that influence manufacturing competitiveness: the wage squeeze in services due to institutional factors and outsourcing; and the role played by knowledge-intensive business services (KIBS) as innovation drivers. Taking vertically integrated sectors as units of analysis, an export model is estimated. We find that labor costs play only a minor role for international competitiveness, while non-price factors are the main drivers of German exports. Therefore, although the wage squeeze in services is the centerpiece in the unit labor costs and export prices moderation, it is of minor importance for export growth. Conversely, the growing integration of KIBS provides a strong stimulus for non-price competitiveness and export growth.