Structural Change: Do Services Substitute or Complete the Industry?

Abstract

This study analyzes the nature of the relationship between the services and the industry, i.e., substitution or complementarity, given the increasing share of services (tertiarization process) in the world economy. The economies in the world evolved towards a services-dominated structure over a half-century. This evolution resulted in a decreasing industry share despite continuously increased industrial production. We used a dataset covering the 1970-2018 period for 173 countries to investigate this question by employing the panel vector of auto-regression analysis (Panel VAR). We also approached the problem by estimating a dynamic panel data model by the two-step system GMM for robustness. The study also calculates the linkages between the industry and the services. The empirical results show that services do not substitute industry. There is a complementary role of the services for the industry, but the complementary role of the industry for services is ambiguous.