Similar to the estimations shown in Tables 3 and 4, it is not the intensity of service input use, but the composition of services (complex services) and the origin of services (imports) that matter for productivity. The coefficient on services intensity is positive, and for most industries, it is statistically insignificant. An exception is the Chemicals and Pharmaceutical sector. An increase in service intensity in the pharmaceutical sector is associated with an increase in productivity. For other major manufacturing industries, a higher share of complex services is associated with higher productivity.

The use of imported services is positively correlated with productivity across manufacturing industries. Imports of services by firms in the electronics industry is associated with a 13 percent higher productivity relative to not importing services, while for firms in the textile and apparel industry the productivity premium associated with service imports is 7 percent. Firms in the Chemicals and pharmaceutical industry have a 9 percent productivity premium from importing services and firms in the automobile industry have a productivity premium of 15 percent. Exporting services is particularly important for firms in the electronics, chemicals and pharmaceuticals and IT service and ITES industries. Being internationally integrated in GVCs not only with goods, but also with importing and exporting services is particularly important for industries with highly sophisticated products and high technological content.

# 5. Concluding Remarks

The fragmentation of production across countries has allowed firms to increase specialization while reaching greater economies of scale through connecting to GVCs. This has enabled firms and countries to reap higher levels of productivity – an important factor for sustained per capita growth in the long run. Services play an important role as inputs as well as coordinators of the production process. Our findings indicate that Indian firms that are deeply integrated in GVCs are likely to be among the best performers and spend more on sophisticated services.

The findings from the analysis of the firm data show that: _First_ , firms integrated in GVCs have a productivity premium between 13 and 22 percent relative to domestic firms, with the productivity premium increasing with the extent of integration into GVCs. Double and triple mode firms, i.e., firms integrated at an intermediate and high level have a much higher productivity premium relative to firms participating in GVCs in a limited or low level. There is some variation across industries, with the productivity premium from deeper levels of GVC participation being higher in the auto, electronics and IT/ITeS industries compared to textiles and chemicals. _Second_ , intensifying the share of spending on service inputs is not necessarily associated with an increase in productivity. The composition of service use matters more for productivity. _Third_ , an increase in the share of service expenditures on complex services by 1 percent is associated with a 10 percent higher productivity. Thus, a firm’s purchase of technological know-how, licenses or sophisticated professional services is associated with a higher productivity as these services involve using more sophisticated production licenses, better management tools or digital value-added services. In particular, the intensive use of IT and IT-enabling services, which are highly sophisticated, is associated with higher productivity. _Fourth_ , the origin of services (domestic vs. foreign) also matters. Firms importing services have a 10 percent higher productivity compared to firms not importing services. Around three percentage points of this productivity premium can be attributed to imports of complex services. Complex services are characterized by a higher level of value-added that is created in their production 16