the most prone to servicification, as generally these manufacturing firms have the most services activities. Industries such as motor vehicles, chemicals, plastics or even transport equipment tend to have a higher services content in the supply chain. Traditional low‐tech companies have lower services content. However, the mix of service inputs is similar across sectors.

Firm‐level studies also indicate that there is variation in the level of servicification across industries. Crozet and Milet (2015) show that the industry with the lowest share of services sold is food, beverage and tobacco while the highest is chemicals and plastic products. Kelle (2013) finds that manufacturing firms in Germany that also export services tend to provide R&D, engineering and construction services. In Belgium, Ariu et al. (2016) find that many goods from the transportation, chemical and machinery/electrical industries exhibit high shares of services exports.

**Servicification can increase firm performance.** The increased use, production and export of services by manufacturing firms is associated with increased economic performance. The few country‐specific firm‐ level studies on this subject show that the servicification process of downstream manufacturing firms is tightly associated with positive economic gains. For instance, Crozet and Milet (2015) show that selling services by French manufacturing firms increases their profitability from 3.7 to 5.3 percent and is correlated with increased levels of employment. Servicification can also support the trade performance of firms. Lodefalk (2014) shows that in Sweden manufacturing firms that are involved in services have better performance in terms of exports. Firms that servicify receive an export premium, and the trade literature shows that firms that command an export premium tend to be more productive (Barnard et al _._ , 2006; Eaton and Kortum, 2002).<sup>10</sup>

**However, the opposite seems to be true in Turkey: manufacturing firms with services tend to be less productive.** Benchmark regressions show that firms with a services affiliate in Turkey perform worse than those without a services affiliate. This outcome holds for both exporters and non‐exporters. Box 3.2 contains an explanation of the benchmark regressions and results. TFP is calculated using a state‐of‐the‐ art measure following Ackerberg et al. (2015), henceforth ACF.<sup>11</sup> Figure A1 in Annex 1 shows similar results graphically using the TFP distributions for four categories of firms: non‐exporters with no service affiliates, non‐exporters with services, exporters with no services, and exporters with services.

> 10 The recent firm‐level literature takes the heterogeneous characteristics of firms in terms of their productivity into account (e.g. Melitz, 2003; Eaton and Kortum, 2002; Bernard et al _._ , 2006). This literature shows, for instance, that exporters are generally more productive (Eaton et al _._ , 2004), bigger, more skilled, and more capital endowed than non‐exporters. This helps explain their self‐selection into export markets, as they can cover the fixed upfront costs of entering a new market abroad. Moreover, firms that have foreign investment appear to be even more productive than the ones that only engage in exports (Helpman et al _._ , 2004).

11 The TFP measure from Ackerberg et al _._ (2015) is an advanced productivity measure that improves the previous approaches to TFP due to their collinearity problem. The TFP measure in this report is a weighted average across firms with the firm’s size used as a weight. In addition, Figure A1 in Annex 1 shows that when using alternative TFP measures such as Hsieh and Klenow’s (2009; 2014) TFPQ or TFP from Olley and Pakes (1996) and Levin and Petrinsohn (2003), as well as labor productivity, the patterns are largely sustained.

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