Services Industries and the Knowledge-Based Economy GENERAL EDITORS: RICHARD G. LIPSEY & ALICE O. NAKAMURA LIPSEY NAKAMURA SERVICES INDUSTRIES AND THE KNOWLEDGE-BASED ECONOMY UNIVERSITY OF CALGARY PRESS T H E I N D U S T RY C A N A D A R E S E A R C H S E R I E S The Industry Canada Research Series provides a forum for the analysis of key micro- economic issues facing the Canadian economy. The volumes contribute to the debate surrounding applied public policy research in this area, and ultimately aid in the development of public policy in a rapidly changing economic environment. SERVICES INDUSTRIES AND THE KNOWLEDGE-BASED ECONOMY Services industries account for almost three-quarters of both gross domestic product and employment in Canada. Furthermore, the services sector has been responsible for most of Canada’s employment creation and much of its productivity growth over the past decade, and the sector’s importance to the Canadian economy continues to increase. During the past 15 years, Canada’s services sector has become more outward- oriented, more innovative, more productive, and more skills-intensive. To better understand the dynamics of the service economy and to identify the types of policies most likely to sustain the development of a knowledge-based economy, Industry Canada embarked on a major research program on services. This research volume features the proceedings from a key component of this research exercise — Industry Canada’s Conference on Services Industries and Knowledge-Based Economy, held in Winnipeg on October 16-18, 2003. GENERAL EDITORS Richard G. Lipsey is currently Professor Emeritus of Economics at Simon Fraser University. He has authored several textbooks in economics that have been used worldwide. He has published over 150 articles in learned journals and books on various aspects of theoretical and applied economics. As senior economic advisor for the C.D. Howe Institute during 1983-89, he co-authored monographs on Canada’s trade options and the Canada-U.S. Free Trade Agreement and wrote over a dozen journal articles and pamphlets on various aspects of the free-trade debate. Since 1990, most of his research has been on economic growth. His latest book, Economic Transformations: General Purpose Technologies and Long Term Economic Growth (with Carlaw and Bekar) was published in 2005 by the Oxford University Press. Alice O. Nakamura is the Winspear Professor of Business at the University of Alberta. Her expertise lies in employment, productivity and performance measurement, and econometrics. She has served on numerous federal and provincial task forces and advisory committees and has been a frequent keynote speaker and presenter at government, business and academic conferences, and other events. She has published widely in the areas of labour economics, firm behaviour, econometric methodology, and price and productivity measurement. University of Calgary Press ISBN 1-55238-149-8 ISSN 1700-2001 Services Industries and the Knowledge-Based Economy GENERAL EDITORS: RICHARD G. LIPSEY & ALICE O. NAKAMURA LIPSEY NAKAMURA SERVICES INDUSTRIES AND THE KNOWLEDGE-BASED ECONOMY UNIVERSITY OF CALGARY PRESS T H E I N D U S T RY C A N A D A R E S E A R C H S E R I E S The Industry Canada Research Series provides a forum for the analysis of key micro- economic issues facing the Canadian economy. The volumes contribute to the debate surrounding applied public policy research in this area, and ultimately aid in the development of public policy in a rapidly changing economic environment. SERVICES INDUSTRIES AND THE KNOWLEDGE-BASED ECONOMY Services industries account for almost three-quarters of both gross domestic product and employment in Canada. Furthermore, the services sector has been responsible for most of Canada’s employment creation and much of its productivity growth over the past decade, and the sector’s importance to the Canadian economy continues to increase. During the past 15 years, Canada’s services sector has become more outward- oriented, more innovative, more productive, and more skills-intensive. To better understand the dynamics of the service economy and to identify the types of policies most likely to sustain the development of a knowledge-based economy, Industry Canada embarked on a major research program on services. This research volume features the proceedings from a key component of this research exercise — Industry Canada’s Conference on Services Industries and Knowledge-Based Economy, held in Winnipeg on October 16-18, 2003. GENERAL EDITORS Richard G. Lipsey is currently Professor Emeritus of Economics at Simon Fraser University. He has authored several textbooks in economics that have been used worldwide. He has published over 150 articles in learned journals and books on various aspects of theoretical and applied economics. As senior economic advisor for the C.D. Howe Institute during 1983-89, he co-authored monographs on Canada’s trade options and the Canada-U.S. Free Trade Agreement and wrote over a dozen journal articles and pamphlets on various aspects of the free-trade debate. Since 1990, most of his research has been on economic growth. His latest book, Economic Transformations: General Purpose Technologies and Long Term Economic Growth (with Carlaw and Bekar) was published in 2005 by the Oxford University Press. Alice O. Nakamura is the Winspear Professor of Business at the University of Alberta. Her expertise lies in employment, productivity and performance measurement, and econometrics. She has served on numerous federal and provincial task forces and advisory committees and has been a frequent keynote speaker and presenter at government, business and academic conferences, and other events. She has published widely in the areas of labour economics, firm behaviour, econometric methodology, and price and productivity measurement. University of Calgary Press ISBN 1-55238-149-8 ISSN 1700-2001 Services Industries and the Knowledge-Based Economy HE RESEARCH PAPERS ASSEMBLED IN THIS VOLUME are the product of work undertaken by academic researchers and a few researchers, with governmental and international organizations, writing in a personal capacity. In addition, several of the commentators on the research papers were employees of governmental or international organizations, writing in a personal capacity, at the time this volume was compiled. Industry Canada staff formulated and managed the project, and provided constructive feedback throughout the process. Nevertheless, the papers and comments ultimately remain the sole responsibility of the authors and do not necessarily reflect the policies and opinions of Industry Canada, the Government of Canada, or any other organization with which the authors or editors are affiliated. T GENERAL EDITORS: RICHARD G. LIPSEY & ALICE O. NAKAMURA Services Industries and the Knowledge-Based Economy The Industry Canada Research Series University of Calgary Press ISBN 1-55238-149-8 ISSN 1700-2001 IC 54407 University of Calgary Press 2500 University Dr. N.W. Calgary, Alberta, Canada T2N 1N4 Library and Archives Canada Cataloguing in Publication Services industries and the knowledge-based economy / general editors, Richard G. Lipsey & Alice O. Nakamura. (Industry Canada research series, ISSN 1700-2001 ; 13) Co-published by: Industry Canada. Includes bibliographical references. ISBN 1-55238-149-8 1. Services industries Canada. I. Lipsey, Richard G., 1928- II. Nakamura, Alice III. Canada. Industry Canada IV. Series. HD9985.C32S468 2006 338.4'7'000971 C2006-900731-4 We acknowledge the financial support of the Government of Canada through the Book Publishing Industry Development Program (BPIDP) for our publishing activities. We acknowledge the support of the Alberta Foundation for the Arts for this published work. Published by the University of Calgary Press in cooperation with Industry Canada and Public Works and Government Services Canada. All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system, without the prior written permission of the Minister of Public Works and Government Services, Ottawa, Ontario, Canada K1A 0S5. ©Her Majesty the Queen in Right of Canada, 2006 E DITORIAL AND TYPESETTING SERVICES: The Summit Group C OVER DESIGN: Paul Payer/ArtPlus Limited Printed and bound in Canada This book is printed on acid-free paper. Table of Contents ACKNOWLEDGMENTS xiii 1. INTRODUCTION 1 RICHARD G. LIPSEY & ALICE O. NAKAMURA Endnotes 15 Bibliography 16 2. CONCEPTS AND MEASURES OF PRODUCTIVITY: AN INTRODUCTION 19 W. ERWIN DIEWERT & ALICE O. NAKAMURA Introduction 19 Different Types of Productivity Measures 22 Productivity Measures for the One Input-One Output Case 23 The Two Input, One Output Case 27 The General N Input, M Output Case 29 Conclusions 32 Appendix 34 Endnotes 35 Acknowledgments 37 Bibliography 37 3. POLICY CHALLENGES IN THE NEW ECONOMY 39 RICHARD G. LIPSEY What is the “New Economy?” 39 General-Purpose Technologies 41 New Economies Throughout History 43 How Do We Know a New Economy When We See One? 44 Key Characteristics of the New Economy 49 Disbelievers in the Importance of the New Economy 54 Two Views of the Economy 55 Policy Challenges 59 Conclusion 69 Endnotes 70 Bibliography 73 4. THE SERVICES ECONOMY IN CANADA: AN OVERVIEW 77 RAM C. ACHARYA Introduction 77 The Services Sector in G-7 Countries 79 Real Growth in Services in Canada 82 Employment in Services 84 Productivity and Wages in Services 91 Interdependence between the Goods and Services Sectors 96 Capital Intensity in the Services Industries 101 International Trade and Foreign Direct Investment in Services 105 Innovation in Services 110 ICT and Services 117 Conclusions 118 Appendix A 122 Appendix B 125 Appendix C 126 Endnotes 127 Acknowledgments 129 Bibliography 129 5. RELATIVE WAGE PATTERNS AMONG THE HIGHLY EDUCATED IN A KNOWLEDGE-BASED ECONOMY 131 RENÉ MORISSETTE, YURI OSTROVSKY & GARNETT PICOT Introduction 131 Data and Concepts 134 Employment Trends: 1981-2001 137 Exploring Gender and Age Differences 140 Disaggregating the Data by Industry 144 The Evolution of the “Field”Premium 150 Conclusions 151 Appendix 153 Endnotes 157 Bibliography 158 PANEL: KNOWLEDGE-ECONOMY AND SERVICES: PERSPECTIVES AND ISSUES WILLIAM WATSON A Policy for Services? Don’t Tilt 159 6. LOCATION EFFECTS, LOCATIONAL SPILLOVERS AND THE PERFORMANCE OF CANADIAN INFORMATION TECHNOLOGY FIRMS 167 STEVEN GLOBERMAN, DANIEL SHAPIRO & AIDAN VINING Introduction 167 Review of the Literature 169 Sample and Data 176 Estimation Model 179 Estimation Results 182 Conclusions and Implications 192 Appendix 1 195 Appendix 2 197 Endnotes 199 Acknowledgments 200 Bibliography 200 COMMENT 205 AJAY AGRAWAL 7. LIBERALIZATION IN CHINA’S KEY SERVICES SECTORS FOLLOWING ACCESSION TO THE WORLD TRADE ORGANIZATION: SOME SCENARIOS AND ISSUES OF MEASUREMENT 211 JOHN WHALLEY Overview 211 Trade Liberalization in Key Services Categories 212 China’s Banking, Insurance and Telecoms Sectors and the Implications of China’s WTO Accession 216 Analytic Structures for Evaluating Chinese WTO Commitments in Services 222 Quantifying the Effects of Services Liberalization in China 226 Concluding Remarks 229 Endnotes 230 Acknowledgments 231 Bibliography 231 COMMENT 233 JOHN MCHALE 8. CANADA’S EXPERIENCE WITH FOREIGN DIRECT INVESTMENT: HOW DIFFERENT ARE SERVICES? 237 WALID HEJAZI Introduction 237 Canada’s FDI Position in a Global Perspective 241 Changes in Canada’s Industry Level FDI 247 The Estimating Equation 257 Empirical Estimates 259 Policy Implications and Conclusions 265 Endnotes 267 Bibliography 268 COMMENT 269 JOHN RIES 9. PRODUCTIVITY GROWTH IN THE SERVICES INDUSTRIES: PATTERNS, ISSUES AND THE ROLE OF MEASUREMENT 277 ANITA WÖLFL Introduction 277 The Role of the Services Sector in the Economy 278 Productivity Growth and the Specific Characteristics of Services Industries 294 The Role of Measurement 305 Conclusions 319 Endnotes 320 Acknowledgments 322 Bibliography 322 COMMENT 323 ALICE O. NAKAMURA 10. INNOVATION IN THE CANADIAN SERVICES SECTOR 329 PETR HANEL Introduction 329 Innovation in Services — Concepts, Measures and Statistics 330 Canada’s Innovation in Services — an Overview 337 Canadian R&D in Services 356 Concluding Remarks 361 Appendix 363 Endnotes 366 Acknowledgments 371 Bibliography 372 COMMENT 375 STEVEN GLOBERMAN 11. TECHNOLOGY AND THE FINANCIAL SERVICES INDUSTRY 379 EDWIN H. NEAVE Trends in Financial Services 379 E-finance in the Financial Services Industry 385 E-finance and Financial Markets 390 Implications for Public Policy 392 [...]... (Globerman, Shapiro and Vining, as well as Wernerheim and Sharpe, together with the discussions of these studies);4 (3) the FDI performance of services sector firms (Hejazi); (4) confronting the productivity paradox and the issue of whether or not Solow and Baumol got it wrong (Rao, Sharpe and Tang, as well as Wölfl); (5) innovation and R&D in services (Hanel); and (6) the data needs of the new economy (Diewert)... provided the English editing, page setting and the French translation; Véronique Dewez proofread the French version We would also like to thank Walter Hildebrandt and John King of the University of Calgary Press for their support in the publication of the volume Finally, we wish to thank the authors for participating in the project and the conference, as well as for their own excellent contributions and. .. Canada Acharya examines the size of the services sector over time as well as changes over time in real gross domestic product (GDP), shares of industry employment, and hourly wages for both the services and the goods sectors in Canada He also explores the interdependence among the services- producing and goods-producing industries, the capital intensities of these two sectors as well as their relationship... relative to other Canadian industries and their U.S counterparts Their main conclusion is that in the Canadian services sector, both labour and multi-factor productivity showed an impressive acceleration in growth between the 1981-1995 and 1995-2000 periods Retail trade and business services were the largest contributors to the acceleration in labour productivity growth However, the level of Canada services. .. remained the largest contributor to both business sector labour and multi-factor productivity in the United States in both the 1981-1995 and 1995-2000 periods The authors conclude that the performance of the Canadian services sector in terms of productivity growth is a success story both relative to other Canadian industries and relative to the U.S services sector They suggest, however, that if the Canadian... Canadians reap the full benefits of a knowledge-based economy He begins by examining some salient facts about services in Canada, noting the large size and central importance of services within the overall economy as well as the fact that services have become an important driver of growth in employment, exports and FDI He also observes that services hold the key to spreading and realizing the full benefits... Communication, Storage, Information and Entertainment Services 564 Finance and Insurance 567 Services 2: Leasing Services, Real Estate Services and Other Business Services 569 Education, Health and Social Assistance 571 Services 3: Live Entertainment, Sports, Cultural, Recreational, Travel, Restaurant and Personal Services 572 Summarizing Measurement Difficulties in the Services Sector 574 The General Structure... 2002, 2004); and Lipsey and Wills (1996) 15 LIPSEY & NAKAMURA 2 3 4 For example, Corak and Chen (2003) document the large magnitude of the diversion of resources away from some of the services sector industries that takes place through the Canadian Employment Insurance (EI) program: At the industry level, UI funds were transferred from the services and the public administration industries to the construction... of the economic importance of the services sector, innovation and technical change have been much less studied in services than in manufacturing He begins by discussing the concepts relevant to, and the measurement of, R&D and innovation in services industries He argues that much of the innovation in services is not well captured by the traditional indicators of innovation inputs (R&D activities) and. .. productivity performance for the economy as a whole Recognizing this, the United States has now committed significant resources to improving services sector measurement The study of productivity and the ‘ economy new also requires a proper theoretical framework The papers in this volume illustrate the evolutionary nature of services, and the pervasive importance of context In the large body of research . WÖLFL Introduction 277 The Role of the Services Sector in the Economy 278 Productivity Growth and the Specific Characteristics of Services Industries 294 The Role of. 1700-2001 Services Industries and the Knowledge-Based Economy GENERAL EDITORS: RICHARD G. LIPSEY & ALICE O. NAKAMURA LIPSEY NAKAMURA SERVICES INDUSTRIES AND