In contrast, servitization motivated by consumers’ preference for bundling could be an avenue to maintain or expand manufacturing revenue. Case studies of GE IBM, Siemens and Hewlett Packard suggest that servitization helped stabilize overall revenues (through diversification), while increasing revenue from main manufactured products (Visnjic and Van Looy, 2009; Sawhney, 2004).<sup>5</sup> These bundled products are also less sensitive to price-based competition which can increase firms’ profits (Mallaret, 2006). This effect may be especially important for “smoothing” services like finance, insurance or highly customized services (e.g. Cusumano et al., 2015). Analysis of French firm-level data reveals that over the period 1997-2007, servitized firms increased their sales of goods by 3.6 percent and profitability between 3.7 and 5.3 percent (Crozet and Milet, 2015).

However, servitization may not always be successful in defending domestic manufacturing sales – an outcome referred to as the _servitization paradox_ (Neely et al., 2011). Some studies have alluded to the importance of reaching threshold levels of servitization before reaping superior financial returns (Fang et al, 2008). Others argue that firms need to have the capacity to handle the cultural and organizational shifts required with servitization (Gebauer et al, 2005). Servitization may require firms to incur fixed costs of servitization, which only the more productive firms may be able to afford.

Our work contributes to the literature on the servitization of manufacturing by conducting a rigorous firmlevel study in a developing country. Most existing studies either use a case study approach or, even when they rely on firm-level data, the samples are hardly representative (e.g. Neely et al., 2011). Although a few studies such as Crozet and Milet (2015) and Breinlich et al. (2014) study servitization using representative firm-level data from France and the United Kingdom, there is no previous firm-level analysis of servitization in a developing country. We fill this gap by studying the patterns of servitization and its correlates for India. We go beyond existing work by exploring whether servitization can be seen as a transitional phase in structural transformation.

We find that the share of manufacturing firms offering services has increased threefold from one-in-five manufacturing firms in 1994 to nearly three-in-five in 2013. At the same time, the intensity of servitization has also tripled: the average share of services revenue in total revenue increased from 7 to 21 percent. Consistent with the trends in advanced countries, firms in high-tech industries are the ones that are most servitized. Among the services provided by manufacturing firms, the share of firms offering financial and business services has increased dramatically over the sample period, while a large share of servitized firms continue to offer retail and wholesale services.

Our analysis shows that servitization of Indian manufacturers is positively associated with exposure to import competition. In addition, it also appears that there are fixed costs of servitization because the phenomenon is associated with the more productive firms. The positive link with import competition is stronger for servitization driven by consumers’ preference for bundling than that based on production economies of scope. That is, firms bundle goods with services preferred by consumers to protect their markets when exposed to global competition.

Our results suggest that servitization does not shield firms from competition. In fact, servitized firms most exposed to import competition see declines in their manufacturing revenue. These results are consistent with the proposition that firms are using servitization as a strategy to gradually flee manufacturing. In this context, we find that servitization in a prior period is associated with a higher probability of product innovation in services. Furthermore, many firms have switched from being primarily manufacturers to primarily service providers by way of servitization and incremental innovation in services. We find that the

> 5 Firms opt in to servitize because it can lead to higher market values (Fang et al. 2008) or higher profitability (Neely 2008, Suarez et al. 2013, Visnjic et al. 2014; Crozet and Milet, 2015).

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