10 (WTO 2013). This may reflect growing R&D investments in certain services sectors, the outsourcing of R&D to specialized laboratories that are classified in the services sector, as well as better measurement of R&D in services (Lopez-Bassols and Millot, 2013). When innovation is defined to take forms other than R&D – marketing and organizational innovation for instance – the share of innovating firms is relatively similar across manufacturing and services in most countries (Pires, Sarkar, and Carvalho 2008).

• _Growing linkages with other sectors._ Services are increasingly used as intermediate inputs in manufacturing production. On average, around 40 percent of gross output produced by OECD services industries is used as intermediate inputs by other industries (Pilat and Wölfl 2005). Further, manufacturing exports increasingly include more inputs from service industries – between 30% and 40% of manufacturing exports in OECD economies is actually value added that has been created within (domestic and foreign) services industries. Evidence is also indicative of services improving the productivity of manufacturing (Arnold, Javorcik and Mattoo 2011; Banga and Goldar 2004).

# <u>Productivity growth and catch-up</u>

That the expanding opportunities for productivity gains have been realized is reflected in the sizable overlap between productivity growth among the service and manufacturing sectors. While the manufacturing sector typically experienced faster productivity gains than the service sector, the differential has shrunk since 2000 across most developed and developing economies. In many developing economies, including China, India, and some in Sub-Saharan Africa, average productivity growth in services has recently exceeded that of manufacturing (IMF 2018).

Furthermore, some service subsectors register as fast growth in labor productivity as the topperforming manufacturing subsectors. Across a sample of 19 advanced and 43 developing economies, for example, labor productivity in transport and communications as well as financial intermediation and business activities is comparable to, or higher than, in manufacturing (IMF 2018). This is reinforced by other evidence which suggests that knowledge, ICT, and trade intensive services such as telecommunication, finance, and distribution have recorded higher rates of productivity growth than manufacturing (Jorgenson and Timmer 2011). Evidence from the United States suggests that some services are also making a larger contribution to aggregate TFP growth.<sup>5</sup> The reallocation of resources from agriculture to services has featured prominently in the contribution of structural change to aggregate productivity growth in developing economies. In Africa for example, where the positive contribution of structural change since 2000 has been particularly large, the bulk of this contribution was accounted for by the movement from agriculture into services (Enache, Ghani, and O’C onnell 2016; McMillan, Rodrik, and Sepulveda 2017). And in India, the positive contribution of structural change to economic growth after the 1990s was largely attributable to the expansion of high-productivity service activities: finance, IT,

> 5 Productivity shocks across different sectors can lead to heterogeneous effects on TFP.

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