# **Section 6: Conclusions**

By highlighting the “servitization of manufacturing” in India, we present evidence that the distinction between manufacturing and services firms is artificial. Our work suggests that over the period 1994-2013 both the share of servitized firms and the share of services sales in total revenue increased threefold. Much of the servitization in Indian manufacturing can be attributed to high-tech industries, and towards provision of financial and business and professional services.

Manufacturers servitize because of economies of scope in offering services bundled with goods or due to consumers’ preferences for goods bundled with services. In the absence of competition, manufacturers are not inclined to offer services based on consumers’ preferences. However, when countries open up to trade, manufacturers’ response can change. Our analysis suggests that servitization in India is strongly and positively correlated with exposure to import competition. It is notable that low productivity manufacturers servitize more aggressively when exposed to import competition.

Servitization boosts revenue but does not help shield manufacturing revenue from import competition. Our results suggest that although a 10 percent increase in servitization intensity is associated with a 2.6 percent increase in manufacturing revenue, servitized firms with higher exposure to imports actually register a decline in manufacturing revenue. This suggests that servitization may be a gradual escape route from manufacturing into services. In fact, we find that servitization is positively associated with product innovation in services rather than manufacturing, and it is also associated with a switch out of manufacturing. In this story of transition from being a manufacturer to a service provider, firm productivity seems to play a negative role. Said differently, the firms that innovate more in services and those that switch out of manufacturing are the low productivity ones, thereby suggesting that (this form of) structural transformation may be more premature deindustrialization (Rodrik, 2015) rather than an endogenous transition to a more advanced stage of development.

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