Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions - The competitiveness of business-related services and their contribution to the performance of European enterprises
Date: 2003-12-04
Institutions: European Commission
Subjects: European undertaking, competitiveness, provision of services, service

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 4.12.2003
COM(2003) 747 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL,
THE EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

The competitiveness of business-related services
and their contribution to the performance of European enterprises

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL,
THE EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

The competitiveness of business-related services
and their contribution to the performance of European enterprises

Executive summary .................................................................................................................... 4

I.

I.1.

I.2.

I.3.

I.4.

II.

II.1.

II.2.

II.3.

II.4.

II.5.

II.6.

III.

Introduction.................................................................................................................. 7

Background and objective............................................................................................ 7

Scope............................................................................................................................ 8

Context and rationale ................................................................................................... 9

Structure of the Communication ................................................................................ 10

The importance of business-related services in Europe............................................. 10

What are business-related services?........................................................................... 10

The importance of business-related services in the market economy........................ 11

The growth of the business-related services sector.................................................... 12

Enterprise dynamics in business-related services ...................................................... 14

The interaction between business-related services and other sectors of the economy15

The importance and impact of outsourcing of services ............................................. 17

The competitiveness of European business-related services ..................................... 18

III.1.

Key factors contributing to competitiveness.............................................................. 18

III.2.

Labour productivity growth in business-related services........................................... 18

III.3. Measurement problems .............................................................................................. 19

III.4.

Use of ICT by the enterprises in business-related services........................................ 19

III.5.

R&D and innovation by enterprises in business-related services .............................. 21

III.6.

Human skills .............................................................................................................. 21

III.7.

International trade and foreign direct investment ...................................................... 22

IV.

The way forward ........................................................................................................ 23

IV.1.

Key policy issues ....................................................................................................... 23

IV.2.

Establishment of a coherent policy framework.......................................................... 28

IV.3.

Implementation .......................................................................................................... 29

2

ANNEX I Classifications of services and additional figures ................................................... 30

ANNEX II Scope of Communication ...................................................................................... 34

ANNEX III Statistics on the services sector - Outline of user needs in a long-term strategy . 35

3

EXECUTIVE SUMMARY

This  Communication,  which  contains  an  economic  analysis  of  the  role  of  services  in  the
European  economy  and  examines  their  competitiveness,  seeks  to  reflect  their  importance  in
the  overall  EU  economy  and  to  signal  the  Commission’s  commitment  to  improve  their
framework  conditions,  in  line  with  the  2002  Communication  on  “Industrial  Policy  in  an
Enlarged Europe”.

The role of services in the economy and their potential for growth and employment creation
was highlighted at the Lisbon European Council in March 2000. A key part of the economic
reform program adopted by the Council is to make the Internal Market work for services. The
Commission Communication on an Internal Market Strategy for Services of December 2000
set  out  a  strategy  in  response  to  the  European  Council’s  request.  The  Communication
included  an  action  to  launch  “flanking”  measures  (better  statistics,  reporting  on  intangibles,
training and ICT skills, innovation and R&D etc.) in support of the competitiveness of the EU
service  industry.  This  action  was  specified  in  the  Council  Conclusions  of  November  2002,
calling  on  the  Commission  to  “complement  measures  to  remove  barriers  to  cross-border
trade in services with other measures, aimed at improving the competitiveness of services and
their contribution to the performance of enterprises in all economic sectors”.

This  Communication  is  the  response  to  that  request  from  the  Council,  closely  linking  and
complementing the legislative and non-legislative measures in the Directive on Services in the
Internal Market to other measures improving the competitiveness of European enterprises.

This  Communication  deals  with  the  wide  range  of  market  services  directly  affecting  the
competitiveness  of  enterprises,  both  manufacturers  and  other  services  providers.  These  are
collectively  referred  to  as  “business-related  services”,  and  consist  of  4 major  groups  of
activities,  namely  business  services,  distributive  trades,  network  services  and  financial
services.  As  these  services  are  very  heterogeneous  and  performing  at  different  market
conditions,  the  Communication  has  a  special  focus  on  the  knowledge  intensive  part  of
business services, such as computer and professional services, due to their role as drivers of
the knowledge based economy.

The economic analysis is based on existing official statistics, even though these do not fully
reflect the scale of the sector and its economic importance. This economic analysis then forms
the  basis  for  policy  conclusions  to  be  implemented  through  a  number  of  specific  actions
within a coherent EU policy framework in close co-operation with all stakeholders. The main
findings of the economic analysis are:

Business-related  services  constitute  the  largest  sector  of  the  economy  employing  around
55 million persons in 2001 – or nearly 55 % of total employment in the EU market economy.

Business-related services have been, by far, the main source of job creation in the EU. Growth
in employment in business-related services  in  several Member States exceeds the  growth in
the  US.  Further  growth  can  be  expected  from  the  Candidate  Countries,  which  are
characterised by economies with relatively smaller shares of employment in business-related
services and especially within knowledge-intensive business services.

The  business-related  services  sector  is  also  the  most  dynamic  sector  in  the  EU  in  terms  of
establishment of new enterprises, as entry barriers in many business-related services markets
are low. More than two-thirds of all new enterprises start up within business-related services.

4

Since  business-related  services  are  the  dominant  part  of  the  European  market  economy,  the
sector  is  important  in  its  own  right  for  the  European  economy.  However,  of  even  greater
importance  is  the  fact  that  business-related  services  are  an  indispensable  contributor  to  the
performance  of  the  rest  of  the  economy.  They  are  inextricably  linked  to  manufacturing
industry. All goods contain elements of services and their contribution to the value added of
any manufactured product often determines its attractiveness to the market. Furthermore, the
public  sector  and  the  services  sector  itself  are  becoming  more  and  more  dependent  on
providers of business-related services.

Services can be produced either internally by the enterprise itself – independent of its activity
– or they can be purchased. Many enterprises have outsourced some of their services activities
previously produced in-house in order to procure these services in a competitive market or to
obtain  greater  flexibility.  Growth  of  business-related  services  is  usually  explained  by  the
migration of employment from manufacturing industry to services due to the outsourcing of
the services functions previously produced in-house. But the reasons for the growth are much
more complex.

Changes  in  production  systems,  more  flexibility,  stronger  competition  on  international
markets,  the  increasing  role  of  ICT  and  knowledge  and  the  emergence  of  new  types  of
services are other important factors. To fully understand the role of business-related services
in the European economy, their penetration into the value  chain of all enterprises, including
other  service  enterprises,  must  be  kept  in  mind.  The  analysis  shows  that  the  services  sector
consumes more  than  half  of  the  output  going  to  intermediate  demand  from  business-related
services, compared to a share of less than one-third consumed by manufacturing.

The  recent  development  in  overall  productivity  growth  in  the  EU  has  caused  concern  and
threatens  the  possibility  of  achieving  the  goals  of  the  Lisbon  strategy.  Without  competitive
business-related  services,  it  will  not  be  possible  to  fulfil  the  Lisbon  objective  of  the  EU
becoming the most competitive knowledge based economy in the world.

In  the  first  half  of  the  1990s,  the  EU  experienced  an  annual  average  growth  in  labour
productivity  (1.9 %)  considerably  exceeding  the  US  (1.2 %),  but  the  pattern  changed
dramatically  in  the  following  period  1995-2001.  The  annual  growth  rate  declined  to  1.2 %,
while the growth in the US expanded to 1.9 %. The development was mainly caused by the
very strong  growth performance of the US distributive trades sector – both compared to the
corresponding sector in the EU and to other sectors of the economy.

ICT  is  enabling  rapid  productivity  growth  in  sectors  having  invested  heavily  in  ICT,  as  the
use  of  ICT  can  help  companies  increase  their  overall  efficiency  in  combining  labour  and
capital.  This  is  assumed  to  be  the  explanatory  factor  behind  the  recent  productivity  growth
achieved by distributive trades in the USA.

Some of Europe’s most innovative companies are to be found in business-related services, but
the overall level of R&D in these sectors  is  generally  low  and  lags  substantially  behind  the
US.  Whilst  the  EU  economy  has  developed  into  a  services  economy  in  the  last  decades,
market  services  still  account  for  a  relatively  small  amount  of  total  business  expenditure  on
R&D (13 %).

Without the growth  generated by  business-related services  in  the second half of the  1990’s,
unemployment in  the  EU  would have been even  higher  than  at  present.  Although  there  is  a
plentiful labour  supply,  a  breakdown  by  educational  attainment  of  the  jobs  created  shows  a

5

mismatch between supply and demand. The observed skills shortages is a problem especially
for the knowledge-intensive business services, but also for the other sectors of the economy.

A skilled labour force contributes to productivity growth by enabling the companies to utilise
and  take  advantage  of  their  investments  in  ICT  and  other  innovative  features.  The  labour-
intensive  nature  of  many  business-related  services,  the  high  degree  of  interaction  with
customers, the knowledge intensity of many services and the importance of tacit knowledge
are all factors implying the importance of sufficient supply of skilled human capital for future
productivity gains.

Based  on  the  above-mentioned  findings  of  the  economic  analysis,  a  number  of  policy
conclusions are drawn and an integrated policy framework is established. The main political
issues identified are:

1.  Market  integration  and  competition  in  business-related  services  markets  is  not  vigorous
enough to ensure and strengthen their competitiveness;

2.  The  inputs  necessary  for  the  production  (labour  qualifications,  integration  of  ICT  and
capital) are lacking in quality and quantity;

3. The outputs from the business-related services enterprises are not sufficiently transparent
(standards), valued (reporting on intangible assets) or documented (quality);

4. The provision and use of business-related services is limited in less developed regions and
candidate countries, mainly affecting SMEs and convergence processes;

5. Knowledge about the sector and the markets is scarce, hampering the decision making of
enterprises and policy makers.

The policy  challenges  derived  from  this  Communication  not  only  concern  the  Commission,
but  equally  the  other  Community  institutions,  the  national  governments  as  well  as  other
enterprise-related  stakeholders  with  vested  interests  in  a  well  functioning  business-related
services sector. The proposed Directive on Services in the Internal Market brings to a close a
long process of consultation  on barriers, but implementation of the  accompanying measures
will  necessitate  an  ongoing  consultation  of  all  involved  parties  concerned,  based  on  more
detailed  policy  proposals  which  the  Commission  will  draft  on  the  basis  of  the  key  policy
issues identified in this Communication.

This  consultation  will  be  organised  through  a  European  Forum  on  business-related  services
which the Commission will establish in the forthcoming months: it will be composed of the
Community  institutions,  Member  State  representatives,  professional  organisations,  workers
representations,  research  institutions  and  other  enterprise-related  stakeholders.  The  work
foreseen to be carried out by this Forum, will complement in a more focussed and expert way
that of other bodies, such as the Enterprise Policy Group(s).

This discussion will lead to an Action Plan to be proposed by the Commission in the first half
of 2005. This Action Plan will be complementary to and reinforce the measures undertaken in
the Directive on Services in the Internal Market and due account and synergy will be sought
with progress in the implementation of the Directive1.

1

It  should  be  noted  that  whereas  the  present  Communication  covers  business-related  services,  the
Directive also covers business-to-consumers aspects of trade in services.

6

                                                
I.

INTRODUCTION

I.1.

Background and objective

The role of services in the economy and their potential for growth and employment creation
was  highlighted  at  the  Lisbon  European  Council  in  March  2000.  The  importance  of  the
services sector is justified by its sheer weight in the economy (around 70% of EU GDP) and
the  increasing  consumption  of  services  by  manufacturing  industry,  affecting  the  cost,  price
and quality of manufactured goods.

A key part of the economic reform program  adopted by  the  Council  is  to make the  Internal
Market  work  for  services.  Consequently,  the  Lisbon  Council  invited  the  Commission  to
propose  a  comprehensive  Internal  Market  Strategy  to  remove  barriers  to  services  with  the
objective of  allowing  services  to  move  across  national  borders  as  easy  as  within  a  Member
State.

The  Commission  Communication  on  an  Internal  Market  Strategy  for  Services  of  December
20002  set  out  a  two-stage  strategy  in  response  to  the  European  Council’s  request:  the  first
stage involved the identification and analysis of existing barriers3, the second stage, based on
that analysis, was to bring forward appropriate solutions to the problems identified4.

The  Communication  included  an  action  to  launch  “flanking”  measures  (better  statistics,
reporting on intangibles, training and ICT skills, innovation and R&D etc.) in support of the
competitiveness  of  the  EU  service  industry.  This  action  was  specified  in  the  Council
Conclusions of November 20025, endorsing the Report from July 2002, by the Council calling
on  the  Commission  to  “complement  measures  to  remove  barriers  to  cross-border  trade  in
services  with  other  measures,  aimed  at  improving  the  competitiveness  of  services  and  their
contribution to the performance of enterprises in all economic sectors”.

This  Communication  is  the  response  to  that  request  from  the  Council,  closely  linking  and
complementing the legislative and non-legislative measures in the Directive on Services in the
Internal  Market  to  other  measures  improving  the  competitiveness  of  European  enterprises.
Thus, the Communication supports and accompanies the Directive on Services in the Internal
Market,  for  the  aspects  covering  business-related  services.  The  two  initiatives  mutually
reinforce  the  competitiveness  of  European  services  providers  and  their  business  clients  in
accordance with the Commission Communication on an Internal Market Strategy for Services
and the Council Conclusions from November 2002.

Consequently, the objective of this Communication is to deal with the enterprise perspective,
i.e. treating the market services having a direct impact on the performance of all enterprises.
The measures proposed in this Communication are directed towards the improvement of the
input to the production of services (for instance, skills, ICT, R&D and innovation) and their
output to their clients (for instance, quality and standardisation of services products), together
with measures generally improving the market conditions for services enterprises. Under this
last aspect, the Directive on Services in the Internal Market is a necessary, but not sufficient
condition to improve the competitiveness of European enterprises.

2

3

4

5

Doc COM (2000) 888 of 29.12.2000.
Report on the State of the Internal Market for services. Doc. COM (2002) 441 of 31.07.2002.
Directive on Services in the Internal Market. Doc. COM (2003)…
14.11.2002, 13839/02 (Presse 344).

7

                                                
I.2.

Scope

Due to the magnitude and heterogenity of the services sector, a horizontal approach covering
all services is neither feasible, nor constructive. The proposed measures need to take sectoral
market  conditions  into  consideration.  Consequently,  the  scope  of  this  Communication  is
limited to the  range  of  market services  directly  affecting  the  competitiveness  of  enterprises,
both  manufacturers  and  other  services  providers.  These  are  collectively  referred  to  as
“business-related  services”,  and  consist  of  4 major  groups  of  activities,  namely  business
services6, distributive trades, network services7 and financial services, see box 1.

The term “business-related services” is used to illustrate that the Communication focuses on
those  services  having  a  direct  impact  on  the  competitiveness  of  enterprises.  Some  of  these
services  have  dual  functions,  also  covering  business-to-consumers  relations.  Thus  their
competitiveness also depends on their availability to consumers, consumer confidence in the
market and its operation as well as consumer satisfaction. However, due to the focus on the
impact  of  business-related  services  on  enterprises,  the  Communication  does  not  address  the
situation  in  the  business  to  consumer  market  nor  does  it  cover  in  great  detail  the  role
consumer policy and protection rules have to play in a competitive functioning of the market.
Furthermore,  the  Communication  does  not  address  the  wider  issues  relating  to  services  of
general interest, which are treated in the recent Green Paper on this subject8.

The Communication has a special focus on the knowledge intensive part of business services,
such  as  computer  and  professional  services,  due  to  their  role  as  drivers  of  the  knowledge
based economy.

Box 1. Definition of Business-related services in accordance with the EU statistical
activity nomenclature, NACE.

Business Services (NACE 70–74) This group can be divided into two groups: 1) Knowledge-
Intensive  Business  Services,  which  are  professional  services,  such  as  IT-consulting,
management consulting, R&D services, advertising and professional training. 2) Operational
services  consisting  of  services  such  as  industrial  cleaning,  security  services  and  secretarial
services.

Distributive  Trade  (NACE  50–52)  This  group  consists  of  enterprises  facilitating  the
distribution of goods and services to other sectors of the economy and to final consumers.

Network  Services  (NACE  40–41,  60–64)  This  composite  group  consists  of  electricity,  gas
and water supply, transport and communication services.

Financial  Services  (NACE  65–67)  This  group  consists  of  enterprises  offering  inter-
mediation of financial services such as banks and insurance companies.

Business-related  services  constitute  the  largest  part  of  the  market  economy  (around  55%  of
total  employment)  and  are  as  such  important  in  their  own  right  for  the  European  economy.
However,  of  even  greater  importance  is  the  fact  that  business-related  services  are  an
indispensable contributor to the performance of the rest of the economy. They are inextricably
linked  to  manufacturing  industry.  All  goods  contain  elements  of  services  and  their

6

7

8

Commission Communication on Business Services. COM (1998) 534.
This Communication deals  with  network services  as  provided  to  businesses,  and  does  not  cover  their
consumer aspects.
COM (2003) 270 of 20.05.2003.

8

                                                
contribution  to  the  value  added  of  any  manufactured  product  often  determines  its
attractiveness  to  the  market.  For  example,  the  automobile  industry  uses  pre-production
services such as design services and Research and Development, production-related services
(such  as  engineering  and  IT  services),  after-production  services  (transport  and  distribution
services) and financial services and finally other business services such as accounting or legal
services.

I.3.

Context and rationale

Without competitive business-related services, it will be difficult to fulfil the Lisbon objective
of making Europe by 2010 the most competitive and dynamic knowledge-based economy in
the world capable of sustainable economic growth and more and better jobs and greater social
cohesion. This is evident from the fact that the business-related services sector is the largest
creator of employment. It produces more value added to the economy than any other macro
economic sector. It has the highest growth potential, more new enterprises are created than in
any other sector and business-related services provide the foundation for the knowledge-based
economy.

The  Commission  Communication  on  an  Industrial  Policy  in  an  Enlarged  Europe9
demonstrated  the  need  for  specific  sectoral  applications  of  the  horizontal  enterprise  policy.
This  also  applies  to  the  services  segment  of  the  EU  economy,  which  was  not  addressed  in
detail  in  that  Communication.  The  policy  actions  proposed  in  this  Communication  address
specific  issues  of  business-related  services  and  are  a  response  to  the  need  for  an  additional
sectoral layer of measures for services, without detracting from the importance of the current
policy framework applicable to manufacturing industry.

The Commission finds that the time has  come to make  a serious  effort to put the economic
importance  and  potential  of  services  on  the  EU  policy  agenda  as  a  key  component  of  its
revisited  competitiveness  strategy.  There  is  a  need  for  the  Commission  to  enter  into  a
dialogue  with  business  operators,  professional  organisations,  unions,  policy  makers,
economists,  researchers  and  the  media.  They  are,  in  the  opinion  of  the  Commission,  not
sufficiently aware of the role of, the functioning and the potential impact that services possess
for the development of the EU economy.

There are several reasons for this lack of awareness. Firstly, the services sector comprises a
large  number  of  different  activities,  which  are  difficult  to  classify  and  to  treat  under  one
heading.  Secondly,  official  statistics  at  national  and  EU  level  do  not  properly  reflect  the
importance of services  and  their  interaction  with  the  rest  of  the  economy.  Thirdly,  and  as  a
consequence  of  the  lack  of  data,  economic  research  on  services  is  weak  compared  to  the
primary  and  secondary  sectors.  Fourthly,  services  are  not  well  organised  on  the  business
market,  mainly  because  of  their  diversity  and  a  perceived  lack  of  common  interests  of
business operators.

As mentioned above, the services sector has been the main generator of new jobs, but – as the
economic analysis in this Communication shows – it can not be taken for granted to continue.
If Europe does not improve its track record on development of high skilled human resources
in  a  knowledge-based  economy,  the  business-related  services  sector  will  become  less
competitive.  This  could  lead  to  a  de-localisation  of  services  jobs,  similar  to  what  has  been
experienced within manufacturing, loosing markets to US and Asian providers.

9

Communication from the Commission. Industrial Policy in an Enlarged Europe. COM (2002) 714 final.

9

                                                
It  is  against  this  background  that  the  present  Communication  examines  the  crucial  role  of
services for the competitiveness of European enterprises. This economic analysis then forms
the basis for policy actions to be implemented through a wide range of specific actions inside
a coherent EU  policy framework in close  co-operation  with  all  the  stakeholders,  and  taking
into account the specific framework conditions in the various services sectors making up the
business-related services sector.

I.4.

Structure of the Communication

As  mentioned  above,  there  is  a  need  to  create  better  awareness  of  the  role,  potential  and
competitiveness  of  business-related  services  through  a  comprehensive  economic  analysis.
Chapter II  describes,  on  the  basis  of  available  data,  the  economic  importance  of  these
services,  and  Chapter III  analyses  their  competitiveness.  Chapter IV  draws  the  policy
conclusions based on these analyses. Annex I includes a box illustrating the use of services in
the  value  chain  and  additional  figures  providing  statistical  information.  Annex  II  presents  a
graphic illustration of the scope of the Communication. Annex III outlines the user needs in a
long  term  strategy  on  services  statistics  to  be  implemented  by  the  Commission,  led  by
Eurostat and the Member States as a prerequisite for further progress in analysis, monitoring
and policy formulation regarding the market for business-related services.

II.

THE IMPORTANCE OF BUSINESS-RELATED SERVICES IN EUROPE

II.1. What are business-related services?

Services  have  traditionally  been  defined  in  negative  terms,  not  by  what  they  are,  but  what
they  are  not  (tangible,  durable,  storable,  transportable,  etc.).  The  services  sector  has  been
considered  the  residual  activities  of  the  economy  –  what  is  left  after  classifying  agriculture
and manufacturing. This approach, combined with the fact that the services sector comprises a
large  number  of  very  heterogeneous  activities,  has  made  a  commonly  accepted  definition
difficult. This, amplified by  a  low  level  of  organised  representation  of  services  providers  at
EU policy shaping level, has made it difficult to define a coherent strategy for addressing the
problems and needs of the service sector. But with the  ever-growing importance of services
for a knowledge-based economy, work has intensified on defining and qualifying the notion
of services. The main characteristics of the services sector can be summarised as follows:

– 

– 

– 

The  output  is  generally  characterised  as  being  intangible  by  nature.  However,  the
output  of  some  services  activities,  for  instance  research,  software  development  etc.
can  be  codified  and  traded  in  much  the  same  way  as  physical  goods.  In  addition,
through  information  technology,  many  services  can  nowadays  be  embedded  in
physical products and thus stored, transported and delivered via physical means.

The  production  of  services,  knowledge  intensive  services  especially,  requires
interaction between the producer and the client. This interaction focuses attention on
the so-called “soft technology” (e.g. qualifications, skills and expertise) to be present
on both the supply and demand side.

Knowledge-intensive  services  provide  the  intangible  assets  (know-how,  software,
organisational skills, R&D capabilities etc.) which have often become key drivers of
value creation, whereas physical and financial assets tend to become commodities of
relatively lesser importance.

10

The scope of this Communication is the wide range of market services directly affecting the
competitiveness  of  enterprises,  both  manufacturers  and  other  services  providers.  As
mentioned  in  the  introduction,  these  services  activities  are  collectively  referred  to  as
“business-related  services”  consisting  of  4  major  groups  of  activities,  namely  business
services10, distributive trades, network services and financial services (see box 1 page 8). The
Communication has a special focus on the knowledge intensive part of business services, such
as  computer  and  professional  services,  due  to  their  role  as  drivers  of  the  knowledge  based
economy.

The  economic  analysis  in  this  and  the  following  chapter is  based  on  the  existing  official
statistics. The gaps in the coverage of the services sector should be taken into consideration
and  thus  results  interpreted  with  caution.  It  is  an  explicit  priority  of  this  Communication  to
initiate the development of the official statistics at national and EU level to facilitate further
analysis, monitoring and policy formulation in this area (see Annex III).

II.2.

The importance of business-related services in the market economy

Business-related  services  constitute  the  largest  sector  of  the  economy  employing  around
55 million persons in 2001 – or nearly 55 % of total employment in the EU market economy.

According  to  Structural  Business  Statistics,  the  business-related  services  sector  (excluding
financial  services)11  constitutes  53 %  of  total  employment  in  the  EU  market  economy  in
2001, while manufacturing has a share of 29 % (or around 29 million persons employed), see
figure 1. Business-related services are especially prevalent in the Netherlands (65 %) and the
United  Kingdom  (61 %).  The  least  dominant  role  of  business-related  services  –  in  terms  of
employment - is found in Portugal (45 %), Germany (46 %) and Italy (48 %).

On average, total value added created by business-related services constitute 54 %12 in 2001
compared  to  34 %  for  manufacturing  (see  figure  A  in  annex  I).  The  share  of  value  added
differs  substantially  across  Member  States,  as  business-related  services  in  the  Netherlands
account for 61 % and the United Kingdom for 60 %, compared to 44 % in Finland and 48 %
in Germany.

10

11

12

Communication from the Commission. The contribution of business services to industrial performance -
A common policy framework COM(98)534 final.
As  the  term  “business-related  services”  is  not  an  aggregation  used  in  official  statistics  proxies
frequently has to be used, in cases where the statistics do not allow aggregation of data to the level of
business-related  services.  The  employment  in  business-related  services  as  defined  in  box  1  has  been
estimated by using two sources, Structural Business Statistics and National Accounts. In the SBS data
used  for  this  section,  no  harmonised  data  for  financial  services  are  available.  The  employment  in
business-related  services  including  financial  services  can  be  estimated  at  around  55  per  cent  of  total
employment in the EU market economy.
Excluding financial services, cf. footnote 11.

11

                                                
Figure 1. Employment in the market economy 2001. Broken down by sector.

65

61

56

56

55

55

55

53

51

50

49

48

46

45

100%

80%

60%

40%

20%

0%

NL 

UK 

SE 

LU* 

BE 

DK* 

FR

EU 13

AT

ES 

FI

IT 

DE* 

PT 

*DK, DE, LU = 2000

Business related services Hotels and restaurants Manufacturing Construction

Source: Eurostat: SBS data.

The  services  sector  is  characterised  by  a  very  large  number  of  micro  enterprises  (less  than
10 employees). They constitute 33 % of total employment within the services sector in the EU
compared to 18 % in manufacturing. In business-related services, micro enterprises are most
dominant in distributive trades (38 %). On the other hand, a similar proportion of employment
is  found  in  large  enterprises  in  business-related  services  (33 %,  compared  to  30 %  in
manufacturing).  Transport  and  communication  is  characterised  by  a  large  share  of
employment in large enterprises (57 %).

Micro enterprises in the services sector are particularly dominant in Italy, Spain, Portugal and
Ireland,  whereas  the  United  Kingdom,  France  and  the  Netherlands  show  a  relatively  large
percentage of employment in large services enterprises.

II.3.

The growth of the business-related services sector

At  the  beginning  of  the  third  millennium,  the  European  economy  can  be  characterised  as  a
services economy. A closer look at the last decade shows considerable growth for business-
related services in a number of Member  States  and interestingly,  the pattern  is not  uniform,
see  figure 2.  On  the  one  hand,  Germany,  starting  from  a  services  share  less  than  the  EU
average, shows high growth rates in both employment and value  added. However, countries
such as the Netherlands and the United Kingdom, with very developed services sectors, also
show high growth rates. This indicates that there is still a strong potential for growth, with the
right framework conditions in place.

12

Figure 2. Change in share of business-related services between 1990 and 2001. Value
added and employment.

8,0%

7,0%

6,0%

5,0%

4,0%

3,0%

2,0%

1,0%

0,0%

5,8%

5,4%

7,7%

5,4%

5,5%

5,1%

3,9%

3,7%

6,7%

6,0%

5,3%

5,3%

2,3%

3,9%

2,5%

4,0%

3,0%

US

DE**

UK***

NL

IT

FI

BE*

ES

AT

FR

Value added

1,8%

Employment

2,4%

2,1%

3,6%

0,9%

DK

* Estimates for 2001; ** Estimates for 1990; *** Estimates for the employment

Sources: Based on Eurostat (New Cronos) and OECD in Figures 2002.

Business-related  services  have  been,  by  far,  the  main  source  of  job  creation  in  the  EU.  It
should  be  noted  that  the  growth  in  employment  in  business-related  services  in  several
Member States exceeds the growth in the US. On the other hand, the US shows a very high
growth  in  value  added  compared  to  the  EU.  This  also  supports  the  higher  growth  rates  in
labour productivity observed for the US compared to the Member States, see chapter III.2.

Furthermore,  a  future  growth  can  be  expected  from  the  Candidate  Countries  which  are
characterised by economies with relatively smaller shares of employment in business-related
services and especially within knowledge-intensive business services, see figure B in annex I.
The economic structure in the Candidate Countries differs from the existing Member States,
as  business-related  services  constitute  only  around  40 %  of  total  employment  compared  to
more than 50 % in the Member States.

Challenge

The development of business-related services in regional and local markets, also in the less
developed regions of an  enlarged EU,  is crucial for the competitiveness and catching-up of
the economies in these regions.

13

II.4.

Enterprise dynamics in business-related services

More  than  1 million  new  enterprises  were  established  in  2000  in  the  10  Member  States  for
which data are available. 66 % of all new enterprises were started in business-related services,
with  business  services13  (28 %)  being  the  most  outstanding  sector,  see  figure 3.  The
distribution of new enterprises by economic activity clearly reflects the general development
towards a service and knowledge-based economy within the EU.

Figure 3. New enterprises broken down by activity – 2000.

8,7

9,8

100%

80%

60%

18,8

19,8

21,8

18,6

19,8

27,7

24,9

28,7

25,6

5,0

4,8

5,4

12,0

11,1

5,7

8,8

5,3

11,8

34,1

11,7

40%

81,5

76,1

75,4

72,8

69,4

69,1

66,5

66,2

66,0

62,6

54,2

20%

0%

LU

DK

SE

NL 

BE

UK

IT

EU10

FIN

ES

PT

Business related services Other services Manufacturing & construction

Source: Eurostat: Business Demography 2000.

To get a better idea of the  dynamics of  the different  sectors,  the  number  of  new enterprises
can be compared to the existing stock of enterprises (enterprise birth rate). The highest share
of new enterprises is found in business services (10.9 %). By contrast, new enterprises in the
manufacturing industry only account for 6.0 % of the existing stock. Business-related services
are the most dynamic segment of the economy, with the largest share of start-ups in the EU.

More  important  than  the  mere  creation  of  new  enterprises  is  their  survival;  not  every  new
activity is sustainable. Nearly 75 % of the new enterprises established in 1998 survived their
two  first  years  of  activity.  In  all  Member  States  covered,  new  enterprises  within
manufacturing  industry  had  a  higher  survival  rate  than  in  services,  except  for  the  United
Kingdom.

In many business-related services markets entry barriers are low and one or a few persons can
start an  enterprise  and  compete  on  the  market  with  only  a  small  amount  of  capital  and  few
resources  available.  Thus,  business-related  services  are  contributing  to  a  dynamic  business
environment  through  economic  growth  and  opening  up  of  new  job  opportunities.  Of  even

13

Financial services is included in business-related services.

14

                                                
greater importance than the direct effects is the indirect contribution from new enterprises to
increased competitive pressure, forcing existing companies to react by improving efficiency,
introducing innovative processes and products, which again boosts productivity.

Challenges

Business-related services are the most dynamic sector of the economy implying high rates of
births and deaths of enterprises. To establish a solid basis for policy formulation related to
entrepreneurship,  more  knowledge  concerning  the  factors  behind  success  and  failures  of
entrepreneurship within business-related services is needed.

Insufficient  management  experience  can  be  a  reason  for  business  failure.  Training
programmes, tailored to the specific needs of SMEs in business-related services, are needed
to improve conditions for survival.

II.5.

The  interaction  between  business-related  services  and  other  sectors  of  the
economy

Since  business-related  services  are  the  dominant  part  of  the  European  market  economy,  the
sector is important in its own right for the European economy. However, the most important
feature  of  business-related  services  is  that  they  are  present  in  -  and  integrated  into  -  every
stage  of  the  value  added  chain.  They  are  a  fundamental  necessity  for  the  existence  of  all
enterprises,  whether  in  manufacturing  or  services,  micro  or  large  enterprise.  All  enterprises
need  services  to  produce  and  to  be  competitive,  see  main  services  grouped  by  productive
function in box 1 in Annex 1.

Services can be produced either internally by the enterprise itself – independent of its activity
– or they can be purchased. Many enterprises have outsourced some of their services activities
previously produced in-house in order to procure these services in a competitive market or to
obtain  greater  flexibility,  see  point II.6  below.  As  a  consequence,  business-related  services
have become more specialised and thus capable of delivering products of higher quality and
differentiation, increasing the competitiveness of the users of these services.

Growth  of  business-related  services  is  usually  explained  by  the  migration  of  employment
from  manufacturing  industry  to  services  due  to  the  outsourcing  of  the  services  functions
previously  produced  in-house.  But  the  reasons  for  the  growth  are  multiple.  Changes  in
production  systems,  more  flexibility,  stronger  competition  on  international  markets,  the
increasing role of ICT and knowledge and the emergence of new types of services are other
important factors. Due to a lack of statistical information on the demand  for services by the
different  sectors  of  the  economy,  the  interrelationship  between  the  sectors  is  currently  not
well  documented.  However,  according  to  new  economic  analysis  using  input-output  tables
from  National  Accounts  it  is  possible  to  indicate  the  magnitude  of  the  interrelationship
between the different sectors of the economy, see figure 414.

14

The  estimated  intermediate  consumption  of  business-related  services  at  aggregated  EU-15  level  is
calculated  by  using  available  harmonised  input-output  tables  for  9  Member  States  for  the  latest  year
available.

15

                                                
Figure 4. The relations between business-related services and the other sectors of the
economy in the EU.

M a n u f a c t u r in g

C o n s t r u c tio n ;
H o te ls   &   R e s ta u r a n ts ;
R e a l  E s ta t e

2 9 %

B u s in e s s   r e la t e d
S e r v ic e s

1 2 %

4 6 %

2 %

1 1 %

P r im a r y  S e c to r

P u b lic   S e c to r

S h a r e  o f  in te r m e d ia te   B R S  s a le s  g o in g   to  o t h e r  s e c t o r s

S h a r e  o f  in te r m e d ia te   B R S  s a le s  g o in g   to  B R S
A ll  f ig u r e s  a r e   b a s e d  o n  t o t a l  s u p p ly   ( d o m e s t ic   p r o d u c t i o n   p lu s  i m p o r t s )

Source: Calculations based on OECD input/output database.

The  figure  shows  that  manufacturing  industry  is  an  important  user  of  business-related
services,  as  nearly  30 %  of  the  intermediate  output  from  the  sector  is  consumed  by
manufacturing  companies.  Nevertheless,  crucial  for  understanding  the  growth  of  business-
related services in the last decades is the demand for business-related services created by the
sector itself as a consequence of the penetration of these services into the value chain of all
enterprises.  The  role  of  the  public  sector,  as  a  market  consuming  around  11 %  of  business-
related services, is noteworthy. The public sector is an important market for business-related
services, with a considerable growth potential.

A more detailed breakdown of the consumption of services shows that business services (such
as IT-consultancy services, advertising or accounting) is the most important group of services
consumed  both  by  the  manufacturing  and  public  sector  in  Europe,  as  business  services
constitute  more  than  one  third  of  total  input  of  business-related  services.  Furthermore,  the
close  linkage  between  distributive  trades  and  manufacturing  can  be  observed  as  well  as  the
relative importance of financial services for the public sector.

Challenges

There  is  a  need  for  new  knowledge.  The  process  of  interaction  between  business-related
services  and  their  clients  requires  much  more  in-depth  analysis  and  availability  of  input-
output tables with sufficient country and sectoral coverage.

The public sector has been identified as an important user of business-related services, which
suggests that public-private co-operation could be an important means to further enhance the
business-related services market.

16

II.6.

The importance and impact of outsourcing of services

The  process  of  externalisation  of  services  functions  has  been  an  important  driver  of  the
growth  in  the  services  sector.  Outsourcing  decisions  are  not  solely  driven  by  labour  costs
aspects,  but  frequently  by  the  need  to  gain  access  to  specialised  skills  (quality  aspects)  in
order  to  increase  flexibility.  An  enterprise  has  to  make  strategic  and  often  long-term
decisions: whether to produce the necessary services by itself or to contract these services out
to  specialised  companies.  Part  of  the  economic  performance  of  manufacturing  and  services
enterprises  related  to  price,  quality  or  market  positioning  can  be  linked  to  “make  or  buy”
decisions.

In addition to the advantages related to quality and cost, outsourcing allows concentration on
core  business.  To  fully  benefit  from  the  advantages  related  to  outsourcing,  the  services
purchaser  needs  to  implement  the  necessary  organisational  and  managerial  changes.
Especially  for  SMEs,  the  lack  of  appropriate  skills  amongst  the  employees  can  hamper
reaping the benefits of outsourcing.

Outsourcing of more strategic services such as IT, professional training, sales and marketing
and product innovation is becoming a major issue in improving competitiveness. Sometimes
the services provider might take control of an entire business process such as human resources
or IT, leading to the so-called BPO (business process outsourcing). Outsourcing is, however,
not without risk. The financial viability of the partner must be taken into account, as well as
loss of control and leakage of crucial know-how.

Parallel to the outsourcing of services by manufacturing firms, there is also a phenomenon of
manufacturing  firms  increasingly  becoming  service  providers,  as  some  production  activities
are being de-localized to countries where labour is less expensive than in the EU. Nowadays
some  services  such  as  call  services,  ticketing,  software  programming,  technical  support  etc.
seem to follow a similar pattern. The types of services remaining within the companies in the
EU  are  “headquarter  activities”  (e.g.  coordination,  management,  quality  control,  design).
These  activities  are  so  knowledge  intensive  that  they  can  only  be  provided  by  face  to  face
transactions (e.g. to pass tacit knowledge that cannot be codified). At the same time, however,
there is a distinct trend towards cooperation between firms in R&D  activities,  the  necessary
outsourcing of R&D by many SMEs, and the existence of a specific R&D service activity.

Challenges

Competition in the services market is impaired by the lack of possibilities for measuring the
prices for comparable services from alternative services providers. Agreed standards need to
be  developed  to  improve  transparency.  Standards  would  furthermore  benefit  the  services
providers by enabling them to focus on the internal process of services production.

In  contrast  to  the  supply  of  goods,  the  delivery  of  a  service  usually  involves  a  close
interaction  between  the  services  provider  and  the  client,  making  it  difficult  to  distinguish
between  the  delivery  process  and  its  outcome.  An  objective,  a  priori  definition  of  all  the
elements  of  quality  of  a  service  provided  is  in  general  not  possible  at  this  stage.  A
comprehensive European quality policy for services does not exist, but needs to be developed.

Access  of  SME’s  to  business-related  services  must  be  facilitated  by  providing  the  training
necessary to obtain the required skills of the employees.

17

III.

THE COMPETITIVENESS OF EUROPEAN BUSINESS-RELATED SERVICES

III.1. Key factors contributing to competitiveness

As mentioned in chapter I, business-related services play a key role in fulfilling the ambitious
objective of the Lisbon strategy. The Lisbon strategy  for sustainable development combines
the  goals  of  competitiveness,  full  employment,  social  cohesion  and  environmental
sustainability.  It is recalled that the business-related services constitute the  main  segment of
the  European  economy  and  that  they  are  at  the  same  time  the  major  contributor  to  the
performance  of  the  other  sectors  of  the  economy.  Consequently,  business-related  services
should  benefit  from  the  simultaneous  pursuit  of  the  objectives  –  enhanced  competitiveness,
full employment, social cohesion and environmental sustainability – which lie at the core of
the Lisbon strategy.

Economic  growth  is  a  precondition  for  obtaining  a  sustainable  increase  in  real  income  and
standards  of  living.  Historically,  growth  in  productivity  has  been  the  principal  source  of
economic  growth.  Productivity  growth  depends  on  the  quality  of  physical  capital,
improvements  in  the  skills  of  the  labour  force,  technological  advances  and  new  ways  of
organising these inputs. This chapter will focus on analysing aspects of the last three elements
by  looking  at  ICT  usage,  R&D  and  innovation  in  services,  human  capital  and,  finally,
international  trade  and  foreign  direct  investment  in  services  as  indicators  for  the
competitiveness of European business-related services.

III.2.

Labour productivity growth in business related services

The  recent  development  in  overall  productivity  growth  in  the  EU  has  caused  concern  and
threatens the possibility of achieving the goals of the Lisbon strategy. In the first half of the
1990s,  the  EU  experienced  an  annual  average  growth  in  labour  productivity  (1.9 %)
considerably exceeding the US (1.2 %), but the pattern changed dramatically in the following
period  1995-2001.  The  annual  growth  rate  declined  to  1.2 %,  while  the  growth  in  the  US
expanded to 1.9 %. The development was mainly caused by the relatively poor productivity
performance  of  the  European  business-related  services  compared  to  the  US,  see  figure  C
Annex I.

This  reinforces  the  need  for  effectiveness,  at  both  the  European  and  the  national  level,  in
pursuing  productivity  gains  and  higher  employment  rates  as 
the  pre-requisite  for
competitiveness.

The underlying trends are important when analysing the reasons for the different performance
of European and US business-related services, since sector specific patterns can be observed.
The main reason for the difference in growth is the very strong growth performance of the US
distributive trades sector – both compared to the corresponding sector in the EU and to other
sectors  of  the  economy.  The  only  sector  generally  experiencing  higher  growth  rates  is  the
telecommunication  sector  in  the  EU  –  exceeding  also  the  corresponding  US  sector.  In  the
second  half  of  the  1990s,  the  European  telecommunications  sector  experienced  increased
competition  due  to  market  liberalisation.  For  the  other  business-related  services  sectors,
which have not been exposed to the same extent of competitive pressure, productivity growth
differs considerably both between Member States and between the EU and the US. In general,
the  development  of  business-related  services  sectors  in  the  US  indicates  a  larger  growth  in
productivity compared to the corresponding sectors in the EU.

18

III.3. Measurement problems

The  reported  figures  on  the  continuing  labour  productivity  gap  with  the  US  give  cause  for
concern, but before analysing and explaining the reasons for the slow growth of productivity,
the  problems  related  to  measurement  of  services  productivity  should  be  emphasised.  The
concepts  of  labour  productivity  work  well  for  manufacturing  enterprises,  but  are  subject  to
considerable uncertainty when it comes to measuring productivity in the services sectors.

Productivity  improvement  in  business-related  services  depends  heavily  on  investment  in
intangibles, such as training, customer relationship management, brand image and creation of
an  efficient  organisation,  as  well  as  investment  in  software  and  information  and
communication  technologies.  There  is  an  urgent  need  for  defining  “intangible  investment”,
both in statistical terms and in company  reports, to enable  intangible assets  to  be  identified,
measured and reported.

An illustration of the deficiencies in existing services statistics and thus in the measurement of
economy-wide productivity is shown in box 2 in annex III.

Challenges

In  general,  the  statistical  coverage  of  the  services  sector  is  lagging  behind  the  coverage  of
manufacturing, but the statistical gaps are particularly serious in relation to measurement of
productivity.

Lack of reliable information about the intangible  assets of a company results in uncertainty
and  speculation  on  its  real  value.  Measurement  and  reporting  of  intangible  assets  have
become  a  major  concern  for  governments,  enterprises,  investors  and  other  stakeholders.
Services  enterprises  are  particularly  exposed  to  this  problem  since  they  are  almost  entirely
based on intangible assets.

III.4. Use of ICT by the enterprises in business related services

Evidence  from  recent  studies  on  productivity  growth  and  use  of  ICT  suggests  that  ICT  is
enabling rapid productivity growth in sectors having invested heavily in ICT, see figure 515.
The use of ICT can help companies increase their overall efficiency in combining labour and
capital,  the  so-called  multi-factor  productivity.  This  is  assumed  to  be  the  main  explanatory
factor behind the recent productivity growth achieved by distributive trades in the USA and
Australia.

15

European Competitiveness Report 2002 (SEC (2002) 528).

19

                                                
Figure 5. Contribution of ICT-using services to annual average labour productivity
growth, percentage points.

1,4

1,2

1,0

0,8

0,6

0,4

0,2

0,0

-0,2

USA

AUS

UK

IE

SE

AT

KO

BE

NO

DK

NL

FI

JAP

DE

IT

ES

FR

Note: ICT –using services include distributive trades, financial services and business services

1996-2001*

1990-95

Source: OECD.

Unfortunately, no sectoral data are available, but overall IT expenditures in the EU amounted
to  4.2 %  of  GDP  in  2001  compared  to  5.3%  in  the  US  and  4.0%  in  Japan.  To  narrow  the
productivity  gap,  the  EU  has  to  increase  investments  in  ICT,  especially  in  business-related
services.  It  is  particularly  important  to  reap  the  benefits  related  to  improvement  and
innovation  of  the  business  processes  by  better  integration,  expanding  or  customising  the
services offered.

Given the lack of official statistics on ICT use at the sectoral level, the Commission launched
in late 2001  a separate  activity  to monitor and assess the maturity  and impact  of  e-business
across different sectors of the European economy16.

Challenge

There is a need to further stimulate the integration of ICT into business processes. Of special
importance for business-related services is improvement of framework conditions for digital
delivery in terms of sufficient network infrastructure, establishment of messaging standards,
quality certification and accreditation.

16

The e-business W@tch. The results, including the specific sectoral reports, are regularly published and
available  at  www.ebusiness-watch.org,  or  via 
the  Commission’s  Europa  web-server  at
www.europa.eu.int/comm/enterprise/ict/policy/watch/index.htm.

20

                                                
III.5. R&D and innovation by enterprises in business-related services

Some of Europe’s most innovative companies are to be found in the business-related services,
but the overall level of R&D in these sectors is generally low and lags substantially behind the
US. Whilst the EU economy has developed into a services economy in the last decades (see
chapter II),  market  services17  still  account  for  a  relatively  small  amount  of  total  business
expenditure  on  R&D.  The  EU  average  in  2001  is  13 %  -  with  large  differences  across
Member States, see figure D in Annex I. The corresponding US figure is 34 %, so even if the
R&D expenditures of services enterprises have grown substantially since 1991, the gap to the
US has widened in the same period.

Challenge

A  greater  direct  involvement  in  collaborative  R&D  projects,  together  with  the  high  tech
industries,  could  result  in  more  rapid  development  of  technologies  as  well  as  a  faster
deployment of the new technologies. The involvement of services companies in the Research
Framework Programme could also be increased by inclusion of appropriate topics in the WP.
The EU target of devoting 3 % of GDP to research and development18 will be less difficult to
achieve if the services sector plays a larger role, reflecting its overall economic weight.

III.6. Human skills

Without the growth generated by  business-related services in the  second  half of  the  1990’s,
unemployment in  the  EU  would have  been  even  higher  than  at  present.  Although  there  is  a
plentiful labour  supply,  a  breakdown  by  educational  attainment  of  the  jobs  created  shows  a
mismatch  between  supply  and  demand.  In  all  sectors  of  the  economy,  and  not  only  in  the
knowledge-intensive business services, there has been a growing demand for highly educated
employees  (first  and  second  stage  of  tertiary  education),  see  figure E  in  Annex  I.  This
development confirms the need for a larger supply of employees with further training.

The  problems  of  skills  shortages  are  addressed  in  the  European  Employment  Strategy  and
have  led  to  considerable  investment  in  a  general  upgrading  of  the  European  labour  force.
Existing  data  suggest,  however,  that  the  growth  of  medium-  and  high-skill  employment,
especially  in  the  knowledge-intensive  business  services,  has  outstripped  the  growth  of  the
supply  of  employees  with  the  corresponding  attainment  levels.  As  the  level  of  educational
attainment is higher in the US and Japan, skills shortages in these countries are not expected
to hamper the productivity of knowledge-intensive business services in the same magnitude as
in the EU19.

A skilled labour force contributes to productivity growth by enabling the companies to utilise
and  take  advantage  of  their  investments  in  ICT  and  other  innovative  features.  The  labour-
intensive  nature  of  many  business-related  services,  the  high  degree  of  interaction  with
customers, the knowledge intensity of many services and the importance of tacit knowledge
are all factors implying the importance of sufficient supply of skilled human capital for future
productivity gains.

17

18

19

It is important to note that sectoral breakdown of R&D expenditures is subject to serious problems of
methodology  and  international  comparability.  For  instance,  different  levels  of  outsourcing  of  R&D
activities hamper the comparability of sectoral data across countries.
Communication  from  the  Commission.  More  research  for  Europe  –  Towards  3%  of  GDP.
COM(2002) 499 final, and investing in Research, an action plan for Europe. COM(2003)226 final.
OECD : Science, technology and industry scoreboard 2003.

21

                                                
Challenge

Continuous learning and updating of skills is of special importance for the competitiveness of
business-related  services’  enterprises  due  partly  to  their  labour  intensity,  partly  to  the  fact
that the quality of the input of the individual employee is of vital importance for the services
offered. The supply of training for employees of SMEs must be specifically addressed in the
policy framework. Business-related services are highly sensitive to changes in labour market
conditions. Business-related services encounter continuously emerging  needs with regard to
employment  flexibility,  which  should  be  accounted  for  in  labour  market  regulations  (for
instance part-time employment, mobility)20.

III.7.

International trade and foreign direct investment

trade  and  foreign  direct 

International 
the
competitiveness  of  European  business-related  services.  For  the  sector  to  be  seen  as
competitive,  European  business-related  services  should  show  leadership  in  foreign  trading
and investments.

investment  reveal  a  key  dimension  of 

One  of  the  characteristics  of  the  services  sector  is  the  importance  of  presence  in  the  local
market. This is the reason for the relatively large share of business-related services in foreign
direct  investment  (66 %  of  total  inward  and  outward  investments);  with  business  services
(34 % of foreign direct investments in business-related services) and financial and insurance
services (30 %) as the dominant sectors.

The preference  of  business-related services  for  foreign direct  investment  is  also  reflected  in
the limited share of business-related services in total international trade in goods and services
at around 18% in the EU, somewhat higher than in the US (16%) and Japan (13%). However,
international  trade  in  business-related  services  accounts  for  around  two-thirds  of  total
international trade in services of the EU.

European  business-related  services  hold  a  major  market  share  (26 %)  of  international  trade
(exports + imports) in business-related services compared to the US (18 %), see figure 6. This
can  be  interpreted  as  a  strong  indicator  of  competitiveness  of  European  business-related
services.  However,  the  differences  in  market  shares  are  larger  in  imports  than  exports  (see
figure 6). The EU is a major importer of business-related services, implying only a small net
surplus.  The  positive  net  balance  is  created  by  relatively  large  surpluses  for  financial  and
insurance  services,  transportation  and  IT  services,  whereas  some  knowledge  intensive
business-services  (legal,  accounting  and  management  services,  advertising  and  market
research) and royalties show a large deficit. The overall net US balance is the double of the
EU  one,  in  absolute  terms  (35  billion  €  versus  17  billion  €)  and  clearly  better  using  the
exports/imports cover rates: 124% of surplus versus 108%.

An  improved  trade  balance  with  the  rest  of  the  world  presupposes  that  business-related
services are confronted with increased competitive pressure, raising their productivity. In the
present situation, this is in general the case for network and financial services following a still
on-going liberalisation, but not for some business services and distributive trades that in many
cases are operating in fragmented and closed markets.

20

The  Commission  Proposal  for  a  Directive  on  the  Recognition  of  Professional  Qualifications
(COM(2002)119) can make a key contribution to increase skills mobility through improved conditions
for free movement of qualified professionals throughout the EU.

22

                                                
Figure 6. Exports and imports of business related services. 2001.

EXPORTS
EXPORTS

IMPORTS
IMPORTS

Rest of the 
Rest of the 
world
world
44%
44%

EU 
EU 
27%
27%

US
US
21%
21%

JAP
JAP
8%
8%

Rest of the 
Rest of the 
world
world
50%
50%

EU 
EU 
24%
24%

US
US
16%
16%

JAP
JAP
10%
10%

Source: Eurostat: Foreign trade. Note that intra-EU trade is excluded from the totals.

European services providers continue to face a wide range of restrictions in dealing with third
countries. The inclusion of services activities into the WTO agreement constituted one of the
major steps of the Uruguay Round. However, barriers to trade in services have proven to be
more varied and complex than the barriers to trade in goods. In order to continue to open the
global trade in services, negotiations are taking place within a multilateral framework on the
basis of the "General agreement on Trade in Services" (GATS) which entered into force on 1
January 1995. In addition, and without detriment to the negotiations held in this multilateral
framework, the EU pursues negotiations on services at bilateral and plurilateral level, such as
the free  trade  agreements concluded with Mexico and Chile, and the negotiations  underway
with Mercosur and the Gulf Co-operation Council.

Challenges

Multilateral and bilateral negotiations must open up global trade in business-related services.
The  direct  advantages  for  enterprises  in  the  sector  are  obvious,  but  the  indirect  effects  are
equally important: liberalisation of international trade in business-related services, together
with  the  abolition  of  Internal  Market  obstacles  to  cross-border  trade  and  investment  in  the
EU  following  on  from  the  Directive  on  Services  in  the  Internal  Market,  will  put  EU
enterprises  under  stronger  competitive  pressure,  giving  them  a  competitive  advantage
compared to enterprises from third countries.

To  the  extent  that  a  number  of  business-related  services  are  also  sold  to  consumers,  their
treatment  in  terms  of  liberalisation  and  market  access  must  take  into  account  consumer
concerns.

IV.

THE WAY FORWARD

IV.1. Key policy issues

The economic analysis shows that business-related services constitute the largest sector of the
EU  economy  employing  around  55 million  persons  in  2001  –  or  nearly  55 %  of  total
employment in the EU market economy. Business-related services have been, by far, the main
source of job creation in the EU. The business-related services is also the most dynamic sector
in terms of establishment of new enterprises. More than two-thirds of all new enterprises start
up  within  business-related  services.  But  the  analysis  also  points  out  that  the  sector’s  recent

23

development in productivity is lagging considerably behind the development in the US. At the
same time, the future employment in the sector is threatened by a de-localisation of services
jobs – from call centers to IT services – to the US and Asia.

These challenges identified in the analysis must be dealt with urgently.  If not, the European
business-related services sector is at the risk of losing markets. If we are not able to provide
better framework conditions tackling the problems, there will be a risk of rapid migration of
employment – already experienced in certain segments of business-related services – to other
regions, as has been the case in many manufacturing sectors. This would in particular be to
the  detriment  of  the  industrial  sectors,  which  are  all  dependent  on  the  availability  of  a  top
class service infrastructure.

Based  on  the  range  of  challenges  for  business-related  services  in  the  EU  listed  in  the
economic analysis, the following key policy issues have been identified:

1.  Market  integration  and  competition  in  business-related  services  markets  is  not  vigorous
enough to ensure and strengthen their competitiveness;

2.  The  inputs  necessary  for  the  production  (labour  qualifications,  integration  of  ICT  and
capital) are lacking in quality and quantity;

3. The outputs from the business-related services enterprises  are  not  sufficiently  transparent
(standards), valued (reporting on intangible assets) or documented (quality);

4. The provision and use of business-related services is limited in less developed regions and
candidate countries, mainly affecting SMEs and convergence processes;

5. Knowledge about the sector and the markets is scarce, hampering the decision making of
enterprises and policy makers.

1.

Market  integration  and  competition  in  business-related  services  markets  is  not
vigorous enough to ensure and strengthen their competitiveness21

1.1.  Elimination  of  obstacles  to  trade  in  services  in  the  Internal  Market  and
international  trade.  The  abolition  of  obstacles  to  cross-border  trade  and  investment  in  the
EU  following  on  from  the  Directive  on  Services  in  the  Internal  Market  and  the  possible
extension  of  the  Notification  Directive  (98/34),  together  with  liberalisation  of  international
trade in business-related services, will put EU enterprises under stronger competitive pressure
and  will  provide  the  EU  regulatory  framework  necessary  for  the  opening  of  those  markets
which  are  still  too  fragmented  and  protected.  This  will  give  European  enterprises  a
competitive  advantage  compared  to  enterprises  from  third  countries  in  the  present  situation
where outsourcing to these countries poses a growing risk to the EU services enterprises and
employment.

The  elimination  of  legal  and  administrative  obstacles  inside  Europe  is  a  necessary  but  not
sufficient  condition  to  obtain  a  real  single  market  for  services.  There  are  other  barriers

21

The Services Directive will be a key tool in solving this problem of failing integration of the services
markets in Europe. For business-related services the situation is not identical for all services, since some
markets  have  already  high  degree  of  competition  and  integration  at  European  level.  However,  the
proposed actions apply to a majority of business-related services, especially with respect to the need of
better market integration.

24

                                                
hampering the full integration of service markets: economic, social, cultural, etc. Many of the
economic barriers can be reduced with the promotion of complementary measures such as the
reinforcement of entrepreneurship, networks, skills, common quality standards or innovation.
The wide set of barriers is another element justifying the complementarity of legislative and
non-legislative  measures  derived  respectively  from  the  Directive  on  Services  in  the  Internal
Market  and  from  this  Communication  in  order  to  achieve  a  competitive  internal  market  for
services.

1.2.  Boost  competition  in  the  business-related  services  markets.  The  competitiveness  of
business-related services can only be obtained through competitive markets. The introduction
of  competition  in  some  service  sectors  like  telecommunications  and  air  transport  has
increased  the  number  of  enterprises  operating  under  market  conditions,  reducing  prices,
improving  quality  and  boosting  employment  and  the  range  of  services  offered.  Those
previously  protected  enterprises  have  become  more  competitive  and  motivated  to  adapt
themselves 
innovation,
entrepreneurship,  productivity  and  growth,  especially  in  those  services  sectors  traditionally
operating in more fragmented and closed markets.

to  pro-competitive  strategies.  Competition 

important  for 

is 

Similarly, in other sectors, like certain business services, their markets have been operating to
some extent  under  competitive conditions  and  the  administrative  environment  has  been  less
regulated.  Nevertheless,  competition  policy  has  an  important  role  to  play  in  encouraging
competition in particular in professional services and distributive trades.

1.3.  Modernisation  of  public  administrations.  The  competitiveness  of  many  business-
related services is closely linked to the performance of public administrations. A wide range
of services, traditionally provided by public authorities, can also be delivered by businesses.
In  particular,  the  development  of  e-government  and  the  good  management  of  services  of
general  economic  interest  with  enhanced  private  financing  can  result  in  better  co-operation
between public and private operators in the interest of users and providers of these services.
Public Private Partnerships (PPPs) should thus be encouraged, leading to gains in efficiency
and also lower costs to the user as a result of competitive pressure.

Complementary  actions  to  improve  service  innovation  and  modernisation  in  public
administrations  should  also  be  promoted  through  benchmarking  of  best  practices  among
Member  States.  Finally,  new  modernised  public  procurement  rules  as  proposed  by  the
Commission will further strengthen competition between services providers.

2.

The  inputs  necessary  for  the  production  (labour  qualifications,  integration  of  ICT
and capital) are lacking in quality and quantity

2.1.  Ensure  continuous  learning  and  updating  of  skills.  The  shift  towards  a  knowledge-
based  economy,  in  which  business-related  services  play  a  determinant  role,  depends  on  a
labour force with skills adapted to this change, ensuring its employability and thus leading to
a  better  balance  between  employment  protection  and  flexibility  of  work  organisation  (e.g.,
part/time,  teleworking).  Furthermore,  it  will  facilitate  the  mobility  of  workers  helping  to
overcome  skills  imbalances,  in  particular  in  sectors  such  as  computer  and  other  knowledge
intensive services.

If Europe does not improve its track record on development of high skilled human resources
in  a  knowledge-based  economy,  the  business-related  services  sector  will  become  less
competitive.  Policy  measures  related  to  the  qualifications  of  the  labour  force  in  the  EU

25

particularly  for  SMEs  must  be  implemented  in  order  to  avoid  a  de-localisation  of  services
jobs, similar to what has been experienced within manufacturing.

2.2.  Support  integration  of  ICT  in  the  business  processes.  All  enterprises  in  the  field  of
business-related services especially SMEs, must fully exploit the potential of ICTs to increase
their  productivity.  This  has  already  happened  in  the  US,  where  productivity  growth
acceleration  occurred  in  ICT  using  as  well  as  ICT  producing  sectors.  However,  ICT-using
services  in  Europe  have  shown  weak  productivity  growth  in  the  last  years.  ICT  should  be
more and better integrated in ICT-using business-related services to ensure that the ambitious
goals  of  the  Lisbon  strategy  will  not  be  put  at  risk.  Moreover,  the  role  of  certain  ICT-
producing services should be promoted to increase the performance of ICT in any service or
manufacturing sector. New technology does not lead to productivity gains in itself. It requires
the relevant input from services to support its implementation, application and integration into
the business processes.

2.3.  Encourage  R&D  and  innovation  in  business-related  services.  Services  companies
show  a  high  level  of  innovation,  and  are  often  the  leading  edge  users  of  advanced
technological  developments.  Furthermore,  knowledge  service  activities  (e.g.,  management
consultancy,  computer  services,  R&D  services)  act  as  catalysers  of  innovation  processes  in
the  entire  economy.  Some  of  Europe’s  most  innovative  companies  are  to  be  found  in  the
services sector, but the overall level of R&D in this sector is generally low. The level of R&D
in services lags substantially behind the US.

Policy  innovation  initiatives  should  promote  both  specific  actions  oriented  towards  services
activities  (e.g.,  role  of  organisational  service  innovation),  and  more  active  participation  of
services  companies  in  R&D  programmes.  The  involvement  of  services  companies  in  the
national  and  European  R&D  Programmes  should  be  improved  to  address  their  specific
problems and needs. The EU target of devoting 3 % of GDP to research and development will
be less difficult to achieve, if the business-related services sector plays a larger role, reflecting
their overall economic weight.

3.

The  output  from  the  business-related  services  enterprises  are  not  sufficiently
transparent  (standards),  valued  (reporting  on  intangible  assets)  or  documented
(quality)

3.1. Standardisation. Voluntary standards provide solutions to interface problems that occur
when  the  provision  of  services  crosses  national  borders.  They  permit  the  user  to  compare
products and prices, which enforces competition and efficiency. In the absence of previously
agreed and balanced standards22, market transparency remains low and the effect of switching
to an alternative supplier can be both costly and risky. Standards would benefit the  services
providers by enabling them to focus on the internal process of services production and obtain
some  economies  of  scale.  They  would  also  be  able  to  increase  the  market  presence  and
negotiating  position  of  services  providers  by  compliance  with  standards.  The  Commission
will promote the setting up of such voluntary standards led by the services providers, in the
same way as for manufactured products.

22

An “over-standardisation” process or the emergence of many different non-compatible standards across
the different EU countries would lead to negative effects.

26

                                                
3.2.  Reporting  on  Intangible  assets.  Reliable  information  about  the  intangible  assets  of
companies  is  needed,  both  at  the  level  of  the  enterprise,  and  in  government  policy
development in order to avoid inefficient resource allocation. It also results in uncertainty and
speculation  on  its  real  value.  Measurement  and  reporting  of  intangible  assets  has  become  a
major  concern  for  governments,  regulators,  enterprises,  the  accounting  profession,  investors
and  other  stakeholders.  Services  enterprises  are  particularly  exposed  to  this  problem  since
they  are  almost  entirely  based  on  intangible  assets.  Productivity  improvement  in  business-
related  services  depends  heavily  on  investment  in  intangibles,  such  as  training,  customer
relationship management, brand image, internal organisation, investment in software and ICT.

Businesses  have  now  gained  considerable  experience  in  the  use  of  various  voluntary
guidelines  for  reporting  on  intellectual  capital  and  other  forms  of  intangible  assets.  These
efforts will only have long-term value if there is convergence of the taxonomies, rather than a
proliferation  of  reporting  methods.  The  Commission 
improved
identification,  measuring  and  reporting  in  order  to  overcome  the  present  lack  of  reliable
information about the intangible assets of a company. This would be  complementary to, but
separate  from  ongoing  developments  in  the  fields  of  accounting  rules  and  corporate
governance.

to  address 

intends 

3.3.  Quality.  Quality  is  besides  prices  the  most  important  factor  in  the  attractiveness  of  a
product  to  its  market  and  is  thus  fundamental  in  ensuring  competitiveness.  Quality  plays  a
significant role in defining the differentiation factor for companies, reputation and producing
competitive  advantages  and  specialised  services.  A  knowledge-based  society  cannot  be
competitive without high quality services.  In addition, European services should be ready to
compete  in  quality  since  low-wages  countries  (e.g.,  those  in  Asia)  will  often  have  a  better
position to compete in costs.

However, in contrast to the supply of goods, the delivery of a service usually involves a close
interaction  between  the  services  provider  and  the  client,  making  it  difficult  to  distinguish
between  the  delivery  process  and  its  outcome.  An  objective,  a  priori  definition  of  all  the
elements  of  the  quality  of  a  service  is  in  general  not  yet  possible,  and  there  is  no
comprehensive  European  quality  policy  for  services.  Similar  to  what  is  being  done  for
manufactured products, the Commission will encourage and support the drawing up of quality
indicators and promote best services practices.

4.

The  provision  and  use  of  business-related  services  is  limited  in  less  developed
regions and candidate countries, mainly affecting SME and convergence processes

In  the  context  of  globalization  of  the  economy,  business  services  operate  as  the  "brains  of
industry"  which  may  provide  competitive  advantage  to  those  firms  and  regions  which  have
easy access to advanced business services. By their own nature these services tend to cluster
in core metropolitan areas which are well connected internationally.

The development of regional markets for business-related services, in particular those related
to advanced services facilitating innovation in SMEs, is a necessary element for the catching-
up  process  of  the  less  favoured  European  regions,  including  the  accession  countries.  These
services  can  also  contribute  to  a  more  competitive  regional  environment  and  thus  attract
inward investment. Moreover, it is in the services sector where most of the new quality jobs
that  regional  policy  is  trying  to  create  will  take  place.  Both  public  and  private  services
competing  on  an  equal  footing  and  exploiting  synergies  among  them  can  contribute  to  this
desirable development path. Modern regional development policy tends to be a more service-
inclusive policy which does not only focus on the manufacturing sector as a matter of priority.

27

5.

Knowledge  about  the  sector  and  the  markets  is  scarce,  hampering  the  decision
making of enterprises and policy makers

There  is  an  urgent  need  for  improving  the  level  of  economic  information  and  analysis,  in
particular through improved services statistics. The essential role of business-related services
for  the  growth  and  sustainable  development  of  the  EU  economy  is  not  fully  recognised  by
business operators, professional organisations, economists, policy makers and the media. The
main reason is that existing research and statistics do not properly reflect the role of services
in  the  economy.  Improvement  of  the  knowledge  and  statistical  coverage  of  the  business-
related  services  is  an  important  action  in  order  to  better  understand  the  real  forces  behind
competitiveness.  This  is  an  essential  instrument  for  giving  guidance  to  decision  making  by
business operators, policymakers and other stakeholders and for monitoring of progress in the
implementation of policy areas of action described in this Communication.

The fact that the duration from the time of presentation of a proposal for new statistical data
to  the  time  of  availability  of  data  is  long,  explains  the  approach  of  presenting  a  relatively
detailed  strategy  in  annex  III  “Statistics  on  the  services  sector  –  outline  of  user  needs  in  a
long-term strategy” simultaneously with this Communication and the proposed policy actions.
The improvement of services sector statistics has to be seen in the full context of collecting
statistical information on enterprises.  In order to manage  the  level of the respondent  burden
on enterprises, priorities for statistical requirements related to enterprise statistics have to be
established.

IV.2.

Establishment of a coherent policy framework

The  analytical  part  of  this  Communication  demonstrates  that  it  is  necessary  to  address  the
framework conditions affecting costs and quality of business-related services, which depend
on a number of issues, related to current EU policies. These issues have two main dimensions:

Firstly, it is necessary to further investigate together with all stakeholders where current EU
policies affecting the framework conditions of enterprises do not take sufficient account of the
specific nature of services. When this is the case, these policies must be moulded into a shape
that corresponds to the new economic realities.

Secondly,  a  coherent  framework  must  be  sought  in  order  to  create  better  synergies  and
mutual  reinforcement  between  the  various  policy  areas  affecting  services.  One  or  several
isolated policy actions will only lead to limited progress in European competitiveness due to
the complexity of this concept. Conditions must be created for both strong productivity and
employment  growth,  contributing  to  sustainable  increase  in  real  incomes  and  standards  of
living.  The  means  lie  in  adaptation  to  structural  changes  and  implementation  of  measures
subjecting  business-related  services  to  competitive  pressure  resulting  from  the  appropriate
application of all relevant Community policies.

The  Commission  is  convinced  that  the  implementation  of  policy  actions  mentioned  above
under points 1-5, taking into account sector specific conditions will result in lower prices and
higher quality in these services that in turn will raise the demand. At an aggregate level, it will
result in more economic activity, leading to higher real income and demand and improve the
competitiveness of all European enterprises. The rise in aggregate demand will subsequently
encourage  new  investment  in  the  economy  as  a  whole  and  create  new  employment
opportunities. Such a virtuous cycle is only sustainable if all policies contribute. The notion of
sustainable  development  is  in  itself  a  clear  example  of  the  necessity  to  create  synergies
between economic, social and environmental policies.

28

It  is  emphasised  that  the  proposed  policy  actions  do  not  apply  to  the  same  extent  to  the
various  activities  that  make  up  business-related  services.  The  challenge  lies  in  finding  the
most  appropriate  combination  of  actions  and  to  establish  which  policy  actions  should  be
applied within a catalogue of policy actions to be implemented in the specific services sectors,
according to their specific framework conditions.

IV.3.

Implementation

The  policy  challenges  derived  from  this  Communication  do  not  only  concern  the
Commission, but equally the other Community institutions, the national governments as well
as  other  enterprise-related  stakeholders  with  vested  interests  in  a  well  functioning  business-
related services sector. The proposed Directive on Services in the Internal Market brings to a
close  a  long  process  of  consultation  on  barriers,  but  implementation  of  the  accompanying
measures will necessitate an ongoing consultation of all involved parties concerned, based on
more detailed policy proposals which the Commission will draft on the basis of the key policy
issues identified in this Communication.

These discussions should lead to more targeted actions, meeting the requirements of business-
related  services  and  taking  into  account  the  specific  framework  conditions  applying  to  the
individual  activities. A  balance  between  their different priorities  will be  determined  and  the
main actors and timetables for the implementation will be identified.

This  consultation  will  be  organised  through  a  European  Forum  on  business-related  services
which the Commission will establish in the forthcoming months: it will be composed of the
Community  institutions,  Member  State  representatives,  professional  organisations,  workers
representations,  research  institutions  and  other  enterprise-related  stakeholders.  The  work
foreseen to be carried out by this Forum, will complement in a more focussed and expert way
that of other bodies, such as the Enterprise Policy Group(s).

This discussion will lead to an Action Plan to be proposed by the Commission in the first half
of 2005. This Action Plan will be complementary to and reinforce the measures undertaken in
the Directive on Services in the Internal Market and due account and synergy will be sought
with progress in the implementation of the Directive.

29

ANNEX I

Classifications of services and additional figures.

Box 1. Major services required for the performance of enterprises (functional approach)

FUNCTIONS
IN ENTERPRISES

MAIN BUSINESS-
RELATED SERVICES

Administration Management consultancy

Human
resources

Financial
intermediation

Production
and technical
function

Legal services
Auditing and accounting
Temporary work
Recruitment of personnel
Professional training

Banking
Insurance
Renting and leasing
Engineering and technical
services
Tests and quality control
– R & D services
Industrial design
Maintenance and repair
of equipment

FUNCTIONS
IN ENTERPRISES
Information
management

MAIN BUSINESS-
RELATED SERVICES

Computer and IT services
Telecommunications

Marketing
and sales

Transport
and logistics

Facility
management

Advertising
Distributive trades
Public relations
Fairs and exhibitions
After-sales services
Logistics
Transport services
Express courier
Security services
Cleaning services
Catering
Environmental services /
waste disposal
Energy and water services
Real Estate (warehouses)

30

Figure A. Value added in the market economy2001. Broken down by sector.

61

60

56

56

55

54

54

53

51

51

49

48

44

100%

80%

60%

40%

20%

0%

NL 

UK 

SE 

FR 

DK*

BE 

EU 12

PT 

AT 

ES 

IT 

DE* 

FI 

* = 2000

Business related services

Hotels and restaurants

Manufacturing

Construction

Source: Eurostat. SBS data.

Figure B. Employment in Candidate Countries 2000. Broken down by sector.

100%

80%

60%

40%

20%

0%

Average

PL

CZ

BG

SK

LT

LV

EE

Business-related services

Other services

Manufacturing 

Other industry

Source: Eurostat. SBS data.

31

Figure C. Labour productivity growth in business-related services, 1995-2000.

20.0

15.0

10.0

5.0

0.0

-5.0

DK

D

F

I

NL

A

FI

UK

US

Distributive Trade

Post and Telecommunications

Business Services

Total market services

Source: Calculations based on OECD STAN database 2001.

Figure D. Share of services in business R&D.

40

35

30

25

20

15

10

5

0

ES

DK**

US* 

IE**

IT

NL*

UK

BE

EU* 

FI

SE

FR*

DE*

JAP* 

* = 2000  ** = 1999

2001

1991

Source: OECD, ANBERD database 2003.

32

Figure E. Employment growth by sector and level of education, 1995-2000.

Total annual rate of growth

ISCED 1-2 annual rate of growth

ISCED 3-4 annual rate of growth

ISCED 5-6 annual rate of growth

10.0

5.0

0.0

-5.0

-10.0

-15.0

Manufacturing

Electricity, gas and water

Distributive trade

Transport and communication

Financial intermediation

Business services

Note:  ISCED  1-2:  Primary  and  lower  secondary  level  of  education,  ISCED  3-4:  Upper
secondary and post secondary non tertiary level, ISCED 5-6: First and second stage of tertiary
education.

Source: Eurostat. Labour Force survey.

33

ANNEX II

Scope of Communication

The interrelations between services and enterprises:

The place of business-related services and the scope of the Communication

Enterprises by economic sector

Agriculture

Manufacturing
and Construction

Services

Business 
support 
services

Non-Market 
services

Public administrations

Non-profit sector

Households
Consumers

Consumer services
(main market services 
required by consumers)

Education

Health

Hotels, restaurants and other 
tourism-related services

Cultural and 
audiovisual services

Leisure and sport services

Industry-
related 
services

Market services

Business-related services
(Producer services)
(main services required by enterprises)

Business Services

Knowledge-intensive services

Professional training

Operational services

Distributive trades

Network services

Energy and water

Communications

Transport

Banking and insurance

Scope of the 
Communication

Legend

(consist of)

(is consumed by)

34

Statistics on the services sector - Outline of user needs in a long-term strategy

ANNEX III

I.          Introduction

Statistical  information  has  in  recent  years  gained  a  more  prominent  position  in  political
decision  making.  The  European  Council  meeting  in  March  2000  in  Lisbon  “invites  the
Commission  to  draw  up  an  annual  synthesis  report  on  progress  on  the  basis  of  structural
indicators  to  be  agreed  relating  to  employment,  innovation,  economic  reform  and  social
cohesion”. Another recent example is the adoption in December 2002 of the e-Europe Action
Plan 2005 that includes a comprehensive list of benchmarking indicators.  In order to ensure
that  political  decision-making  is  carried  out  based  on  a  reliable  and  sound  basis,  official
statistics  need  to  be  capable  of  meeting  the  growing  demand  for  supply  of  statistical
information.

The statistical  production  process  is  fundamentally  based  on  the  approach  of  measuring  the
development of and changes in certain phenomena over time.  This  approach  has  a  potential
built-in conflict with user needs being often of urgent and changing character due to shifting
political  priorities  and  agenda.  In  order  to  develop  a  long-term  strategy  it  is  essential  to
identify a number of core policy needs of a certain “sustainable” character.

The  Lisbon  strategy  focusing  on  a  sustainable  development  combining  the  goals  of
competitiveness,  full  employment,  social  cohesion  and  environmental  sustainability  is
considered a useful starting point for a long-term strategy on services sector statistics. A third
pillar regarding “sustainability”  was added to  the  Lisbon  goals in  2001. These policy issues
are highly aggregated, and the statistical needs are addressed by the development of structural
indicators. The related goals can only be achieved by addressing different policy areas such as
economic, social or enterprise policy.

Community  enterprise  policy  addresses  the  following  main  areas:  Competitiveness,  Internal
the
Market,  Innovation,  Entrepreneurship  and  e-Business.  The  Communication  on 
competitiveness  of  business-related  services  and  their  contribution  to  the  performance  of
European  enterprises  (in  the  following  named  Communication  on  Services)  constitutes  an
integral part of Community enterprise policy  and addresses  those  main  areas,  supplemented
with other topics such as knowledge intensive services, skills and intangibles.

Box 1. Policy issues addressed in the Communication on Services.

I

II + IIIa

IIIb

Sustainability
(economic, social, environmental)

Competitiveness
(productivity, employment,
globalisation)

Entrepreneurship Innovation

R&D

Internal Market e-Business

Knowledge intensive services

Intangibles

Skills

Sign: I: Lisbon goals; II: DG ENTR policy; III a and b: Policy issues included in the Communication on Services

This  paper  focuses  on  the  user  needs  for  services  statistics  related  to  the  formulation  and
monitoring of policies covering the services sector. This field of enterprise policy is becoming
more  and  more  important,  as  the  services  sector  accounts  for  an  increasing  share  of  the
economies in the Member States of the European Union. The majority of jobs created since
1970  has  been  created  within  the  services  sector  and  business-related  services  create  the
largest  share  of  value  added.  As  a  result,  the  future  competitiveness  and  prosperity  of  the
European  countries  is  linked  to  the  productivity  gains  and  job  creation  in  the  services

35

industries  and  their  contribution  to  the  competitiveness  of  manufacturing  industry.  As  the
business-related services are very heterogeneous, ranging from highly specialised, knowledge
intensive activities such as computer services and engineering services to low skilled jobs in
industrial  cleaning,  growing  demands  not  only  for  a  larger,  but  also  for  a  more  detailed
statistical  coverage  are  frequently  brought  forward  by  users  from  governments,  branch
organisations, researchers, etc..

II.        Services sector statistics: current situation

During the late eighties and the nineties national and international statistical institutes began
developing statistics  on  the services sector, due  to  the  growing  economic  importance  of  the
services  sector  and  the  derived  needs  for  statistical  information  from  different  groups  of
users23.

As a consequence, several EU Regulations covering the services sector were adopted, i.e. on
statistical  business  registers,  structural  and  short-term  business  statistics.  Following  the
implementation of these Regulations, the European Statistical System has been considerably
improved.  As  an  illustration  of  the  improvement:  before  the  adoption  of  the  Structural
Business  Statistics  Regulation  December  199624  harmonised  structural  business  statistics
were only available for extraction, manufacturing, energy and water supply and construction.
Thus, the implementation of the SBS Regulation also covering business-related services and
other services sectors must be seen as a very important achievement.

Nevertheless, serious deficiencies in our understanding of the structure of the services sector
and the factors influencing the growth of services enterprises remain. The available statistical
material does not reflect appropriately the dominant position of services in the economy and
also fails to show the extent of the interdependence between business-related services and the
other sectors.

There are several reasons for this situation:

– 

– 

23

24

Services are difficult to define and thus to measure. The main characteristics of the
services  sector  are  that  the  output  can  generally  be  characterised  as  being  of
intangible nature. However, the introduction of information technology has changed
this  situation  in  the  sense  that  services  nowadays  can  be  imbedded  in  physical
products  and  thus  delivered  and  stored  via  physical  means.  Normally,  a  service
contains  a  considerable  element  of  personal  contact  between  the  producer  and  the
client – a social inter-action. This social interaction puts focus on the so-called “soft
technology”,  being  the  qualifications  of  the  employees  in  terms  of  level  of
knowledge, capability of presenting to and communicating with the customer, etc..

The  development  of  new  technologies,  products,  types  of  enterprise  relation  is  fast
and  changing  rapidly;  consequently  the  need  for  inclusion  of  new  indicators  or
variables  puts  pressure  on  the  existing  data  collection  to  an  extent  not  previously
experienced.

For  an  overview  of  the  conceptual  development  and  practical  measurement  issues  in  the  field  of
services statistics, see UN-Economic and Social Council. Report of the Australian Bureau of Statistics
on statistics of services (doc. E/CN.3/2003/12).
Council Regulation (EC, EURATOM) N° 58/97.

36

                                                
– 

Furthermore,  many  statistical  offices  were  faced  with  severe  budget  cuts  in  the
nineties, hampering the enlargement of the statistical programmes. Also the political
demand  for  reduction  of  the  respondent  burden  has  made  new  statistical  surveys
more  difficult  in  many  countries.  The  improvement  of  services  statistics  has  to  be
seen  in  a  global  context  covering  all  statistical  information  to  be  supplied  by
enterprises.

III.       Proposed building blocks for future services sector statistics

In  order  to  furnish  the  policy  makers  with  needed  and  relevant  statistical  information  and
indicators on business-related services, the Communication on services presents a strategy for
future statistics on the services sector, see chapter IV.1.5. The fact that the duration from the
time  of  presentation  of  a  proposal  for  new  statistical  data  to  the  time  of  data  availability  is
long,  explains  the  approach  of  presenting  a  relatively  detailed  strategy  simultaneously  with
the Communication and the proposed policy actions. There is an urgent need for access to the
different types of data described in this paper in order to monitor the economic development
and formulate the future policy concerning business-related services.

As  a  consequence  of  the  dynamic  development  within  the  services  sector,  Eurostat  and  the
national statistical institutes have developed proposals for improving the data availability on
services in the area of structural business statistics25. The outline of future user needs and the
proposals for new indicators and variables have been built upon the future amendments of the
Structural  Business  Statistics  Regulation  proposed  by  Eurostat.  The  user  needs  mainly
concern  the  domain  of  structural  business  statistics,  but  due  to  the  cross-cutting  nature  of
services, other statistical domains are addressed as well, see figure 1.

Figure 1. Statistical domains addressed in the strategy.

I n f o r m a t i o n
S o c i e t y
S t a t i s t i c s

L a b o u r   M a r k e t
S t a t i s t i c s

S t r u c t u r a l
B u s i n e s s
S t a t i s t i c s

N a t i o n a l  
A c c o u n t s

( S h o r t - t e r m
S t a t i s t i c s )

I n n o v a t i o n
  a n d
R & D   S t a t i s t i c s

( B a l a n c e   o f
P a y m e n t )

In order to operationalise the policy needs for statistical information, a set of building blocks
for the development of new statistics on services has been identified. The building blocks are
the following:

25

Concerning  the  considerations  of  Eurostat  in  the  field  of  services  statistics,  see  Eurostat:  Services
Statistics: Strategy for Services Statistics – a Complement to the Strategy on Short-term Statistics (doc.
CPS 2002/46/4/EN) presented at the SPC meeting, Palermo, September 2002.

37

                                                
1.

2.

3.

4.

5.

Structure of the services sector describing basic economic and employment variables
(including  issues  such  as  an  enterprise  dynamics,  entrepreneurship,  international
trade in services (exports and imports of services, foreign direct investment))

Labour input (employment qualifications, skills, education, hours worked)

Technology and knowledge input (ICT usage, e-business, e-commerce, research and
development, innovation and intangibles)

Enterprise  interactions  (outsourcing,  purchases  of  services,  networking,  strategic
alliances, franchising)

Services outputs (products, prices, productivity)

The different building blocks and the reasoning behind the needs are described further in the
following.

Figure 2. Building blocks of statistics on the services sector.

TECHNOLOGICAL DEVELOPMENT AND INNOVATION
TECHNOLOGICAL DEVELOPMENT AND INNOVATION

Technology and 
Technology and 
knowledge inputs
knowledge inputs

Labour
Labour
inputs
inputs

Services sector
Services sector

structure
structure

Services
Services
outputs
outputs

I
I
I

M
M
M
P
P
P
A
A
A
C
C
C
T
T
T

T
T
T
E
E
E
K
K
K
R
R
R
A
A
A
M
M
M
R
R
R
U
U
U
O
O
O
B
B
B
A
A
A
L
L
L

Enterprise
Enterprise
interactions
interactions

OTHER SECTORS OF THE ECONOMY
OTHER SECTORS OF THE ECONOMY

III.1.    Structure of the services sector

Basic information concerning the magnitude in terms of employment and value added of the
individual services activities is fundamental  for policy  formulation, but is missing for many
services  activities  at  the  detailed  activity  level,  especially  within  business  services  as  this
sector is very heterogeneous. In the Structural Business Statistics Regulation, manufacturing
industry is covered by 241 distinct activities compared to 32 for market services26. In national
accounts data, the need for more detailed information is even more profound – users are often

26

See Eurostat :  Services  Statistics :  Strategy  for  Services  Statistics  –  a  Complement  to  the  Strategy  on
Short-term  Statistics 
the  SPC  meeting,  Palermo,
September 2002.

(doc.  CPS  2002/46/4/EN)  presented  at 

38

 
 
 
                                                
left  with  “other  market  services”  as  a  residual.  Analysis  is  hampered  by  the  aggregation  of
section  K  of  NACE  and  as  a  minimum,  the  split  into  knowledge  intensive  services  and
operational services should always be offered as an alternative aggregation.

Entrepreneurship  is  one  of  the  key  elements  in  the  new  economy,  and  new  enterprises  are
contributing to create a dynamic business environment through economic growth, the opening
of new job opportunities and innovation of production processes and products. Issues such as
the magnitude, survival and job creation of new enterprises constitute an important part of the
Community  enterprise  policy.  Even  if  the  contribution  of  new  enterprises  to  economic  and
employment  growth  is  limited  in  the  start-up  phase,  new  enterprises  play  a  central  part,  as
they  contribute  to  increased  competition,  flexibility  and  innovation  in  the  economy.
Harmonised statistics are urgently needed in the area of business demography.

The  interpretation  of  the  performance  of  new  enterprises  cannot  be  carried  out  properly  by
only  analysing  traditional  enterprise  data.  There  is  a  strong  coincidence  between  a  new
enterprise and the owner behind it – the entrepreneur, as the vast majority of new enterprises
start up without any employee. If a policy for creating better framework conditions for  new
entrepreneurs  is  to  be  formulated  on  a  sound  basis,  questions  on  the  gender  and  age  of  the
new  entrepreneurs,  their  education,  skills  and  other  competencies  of  the  new  entrepreneurs
should be answered by statistics as well.

The ultimate goal of a policy concerning creation of new enterprises is not only the creation,
but  also  the  survival  of  new  enterprises  in  order  to  create  new  job  possibilities  and  new
products and services in the ever-changing economy. In order to judge the contribution to and
the importance of new enterprises for economic growth, it is necessary to follow enterprises
for a longer period than just the initial year of start-up. Not all new activity is sustainable, and
a proportion of new enterprises will close down again. The establishment of a new enterprise
is  not  in  itself  a  criterion  of  success.  The  decisive  element  is  the  contribution  of  the  new
enterprises  to  the  creation  of  value  added  and  employment.  Statistics  throwing  light  on  the
different factors determining business success is a priority area.

The Council meeting in March 2001 in Stockholm stated that “the creation of an effectively
functioning internal market in services is one of Europe’s highest priorities”. The exports and
imports  of  manufactured  goods  are  covered  by  statistics,  but  we  lack  detailed  product
information  about  the  international  trade  in  services.  Information  about  the  economic
importance of  barriers for  cross-border trade in services  is also urgently needed.  Due to the
importance of presence in the local market, foreign direct investments in the services area are
of  relatively  greater  importance  than  within  manufacturing  industries,  and  statistical
information  concerning  foreign  direct  investment  (also  allowing  for  splitting  up  into  green-
field  investments  and  investments  in  existing  enterprises)  and  other  cross  border  enterprise
relations are highly in demand. Especially the last item seems to be of increasing importance
in the form of joint ventures, license agreements or other forms of close co-operation across
the national borders.

III.2.    Labour input

In  order  to  understand  the  job  creation  processes  in  the  business-related  services,  it  is  not
sufficient to rely only on basic statistical information on numbers of persons employed. Much
more detailed information  is  needed  on the  qualifications  of the  employees  such as  level  of
education, work experience, gender and age. As the learning of the employees becomes more
of a continuously on-going process (life-long learning), information about the formal level of
qualification  is  not  sufficient.  It  is  necessary  to  collect  information  on  training  activities  in

39

order  to  supplement  the  information  on  the  formal  qualifications  of  the  labour  force.
Information technology makes the process of work a mobile process and breaks the physical
links between employees and their place of work. The increasing importance of teleworking
needs to be reflected in the future enterprise statistics.

The  question  of  skills  gaps  is  highly  placed  on  the  political  agenda  and  one  way  of
overcoming  the  gap  is  opening  Europe  up  to  non-European  citizens  with  the  required
qualifications. Information about the size of this immigration and their workplaces is needed
together  with  information  about  the  emigration  of  skilled  European  citizens  in  order  to
identify  possible  barriers  for  the  European  knowledge-based  economy.  Also  the  apparently
more frequent use of temporary foreign workers, in particular within foreign affiliates, needs
to be addressed by future statistics.

III.3.    Technology and knowledge input

In  many  of  the  activities  within  the  services  sector,  especially  within  the  knowledge  based
activities  such  as  IT-services  or  engineering  services,  but  also  within  the  more  traditional
sectors such as distributive trades or transport activities (GALILEO), an intensive innovation
process is ongoing. Innovation in the services sector is generally brought about by investment
in acquisition of new skills, new organisational structures, new ways of co-operation, creation
of new enterprises and relations with customers and suppliers. These types of innovation are,
as regards contents, different from the innovation in physical products, requiring new methods
of measurement of innovation.

Innovation requires investment in R&D, product development, training, customer relationship
management  and  creation  of  an  efficient  organisation  with  appropriate  investment  in
information and communication technologies. These types of expenditures on intangibles are
pre-requisites  to  enterprise  product  and  service  output.  They  lead  to  the  creation  of  new
products, new services and new technology. Examples of intangible assets are organisational
infrastructure  (information  systems,  networks,  administrative  structures  and  processes),
market and technical knowledge, patents, software, designs, brand names and human capital.
There  is  an  urgent  need  for  defining  “intangible  investment”  in  statistical  terms  to  enable
intangible assets to be identified, measured and reported.

The  use  of  ICT  in  enterprises  is  dramatically  changing  the  conditions  for  the  business
processes  of  manufacturing  and  services  enterprises.  It  is  essential  to  monitor  this
development,  not  only  IT  readiness  of  enterprises,  but  also  the  more  complicated  areas  of
impact  of  use  of  IT  on  business  processes,  organisational  structures  and  ultimately  on
business performance and productivity. The e-Europe Action Plan has identified a number of
indicators for benchmarking purposes for which statistical information is still not available.

III.4.    Enterprise interactions

In  understanding  the  development  of  the  services  sector,  the  measuring  of  the  outsourcing
process  is  of  importance.  Statistics  covering  the  services  sector  have  focused  on  the  supply
side,  but  we  need  more  information  about  the  demand  for  services  by  manufacturing
enterprises and other services enterprises and how this demand influences the development of
the  business-related  services.  An  example:  outsourcing  of  IT  services  is  important  in
understanding the development of computer services - does the recent development of more
user-friendly software change this outsourcing process? Demand side studies are furthermore
required  for  more  detailed  input-output  tabulations  which  are  important  for  understanding
interactions between business-related services and the manufacturing industry.

40

The types of co-operation between enterprises are changing, as different sorts of networking
is becoming more frequent and of strategic importance for enterprises. This is a difficult area
to measure statistically, but information concerning such enterprise interactions is needed for
understanding the competitiveness of enterprises.

III.5.    Service outputs

Aggregated information about total turnover of business-related services is not sufficient for
carrying out in-depth economic analysis. In order to understand the development of a sector, it
is necessary to  collect  information  about  the  detailed breakdown of the turnover by product
categories.  An  example:  how  large  a  part  of  total  turnover  in  computer  services  is  derived
from customised software? Which part of the turnover of the branch derives from the selling
of  services  such  as  training  and  how  large  is  the  part  from  selling  of  software  or  Internet
services?  As  the  quality  of  the  existing  product  nomenclature  for  services,  CPA,  must  be
characterised as poor, there is a need for its revision.

Information  on  producer  prices  is  essential  for  deflation  of  services  turnover  and  for
calculating  real  output  from  the  services  sector.  To  measure  the  price  of  a  service,  it  is
essential to capture both the content and the quality of the service. Due to increased bundling
of  different  services,  not  only  the  identification  of  the  quality,  but  also  the  identification  of
many services offered is difficult.

The reported figures on the continuing productivity gap with the US give cause for political
concern,  but  before  analysing  and  explaining  the  reasons  for  the  observed  slow  growth  in
productivity,  the  problems  related  to  measurement  of  services’  productivity  should  be
emphasised.  The  concepts  of  productivity  work  well  for  manufacturing  enterprises,  but  are
subject to  considerable  uncertainty  when  it  comes  to  measuring  productivity  in  the  services
sector.

In the absence of physical outputs, productivity improvement in the sector depends heavily on
investment in intangibles, such as training, customer relationship management, brand image,
and creation  of  an  efficient  organisation,  as  well  as  investment  in  software  and  information
and communication technologies. Growth in intangible investment is nowhere more apparent
than in the services sector.

The deficiencies in existing services statistics and thus in the measurement of economy-wide
productivity are shown in box 2.

41

Box 2. Methodological problems related to measurement of productivity in services.

Defining the output of services. For several services activities, outputs are difficult to measure
due to their intangible nature. Detailed information about the “products” produced by services
enterprises  are  lacking  as  well  as  the  composition  of  the  turnover  of  services  enterprises.
What is the output of banking or retailing?

Price  and  quality  of  services.  Little  information  exists  about  services  producer  prices  and
changes in the quality of the outputs produced. How to deflate output and adjust for quality
changes?

Impact of labour input. The skills of the employees are crucial for the quality of the services
offered. How to measure quality and impacts of skills for services outputs?

Impact  of  technology  input.  Currently,  no  official  data  are  available  on  the  measurement  of
the impact of IT on business processes. How does the use of IT influence the productivity of
enterprises?

Mutual  dependency  of  users  and  producers  of  services.  The  productivity  of  manufacturing
enterprises  is  influenced  by  their  usage  and  purchase  of  business-related  services.  How  is
outsourcing  of  services  or  take-up  of  new  innovative  services  products  influencing  the
performance of manufacturing enterprises and how is the increasing interdependence between
manufacturing and services enterprises influencing the overall productivity growth?

As  the  European  Union  has  set  itself  the  goal  of  becoming  “the  most  competitive  and
knowledge-based  economy  in  the  world”,  the  development  of  methodologies  to  measure
output  from  and  productivity  within  business-related  services  and  the  production  of  the
relevant statistics should be given highest priority.

IV.       The way forward for development of a long-term strategy on services statistics

As mentioned in figure 1 in chapter III, the above-mentioned user needs mainly  address  and
focus on the need for Structural Business Statistics, but as the knowledge-based economy is
of a cross-cutting nature, the paper also addresses the needs for development of new and more
detailed  statistics  in  other  areas  as  National  Accounts,  Information  Society  and  Social
Statistics.

The  proposed  way  forward  is  to  elaborate  a  detailed  strategy  on  statistics  on  the  services
sector in co-operation between Eurostat and DG ENTR and other stakeholders. As an input to
the  development  of  the  strategy,  it  is  proposed  to  organise  a  workshop  bringing  users  and
producers of services sector statistics together in order to identify the needs and priorities.

The existing Regulations should be carefully analysed in order to see whether they constitute
the  tools  for  an  enlarged  statistical  coverage  of  the  services  sector  (being  matching  of
different,  existing  registers  or  adding  of  new  questions  to  existing  surveys)  or  whether  new
tools (launching of new surveys) need to be developed. In some of the areas mentioned above,
pilot surveys, which are mainly financed by DG ENTR, have already been carried out or are
planned to be carried out by Eurostat and the NSIs. The experiences gained should be used in
assessing the feasibility of collecting such data and thus include the variables in the existing
Regulations or to create new Regulations in order to set up permanent data collections.

42