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Productivity determinants in the service industry: differences between high and low knowledge intensive sectors

Abstract:

Purpose: The service industry has become an important sector for the economic growth, particularly in developing countries. In this context, the aim of this article is to compare the productivity determinants across firms operating in low and high knowledge intensity service sectors (low knowledge intensive sectors (LKIS) and high knowledge intensive sectors (HKIS)) in Ecuador. Design/methodology/approach: The authors use a two-step estimation method. The firm productivity is estimated in the first step and the productivity determinants in the second step. To achieve the objective, the authors use an unbalanced panel database on the financial statements from formal Ecuadorian firms for the period 2007–2018. Findings: The authors’ results show that LKIS firms are slightly more labor-intensive compared to HKIS firms. Productivity determinants are similar across HKIS and LKIS firms, except for exports and market concentration. HKIS firms are more productive when the competition level is low, indicating that higher market power is associated with higher productivity. The influence of taxes on productivity depends on firm size. Small and medium-sized firms are more negatively affected than large firms. Practical implications: Taxes should be designed considering the size of the companies, since these could affect their productivity. Thus, lower taxes to small and medium firms may reduce firm size inequality. In addition, the acquired knowledge of HKIS should be spread to other firms becoming a positive externality instead of an entry barrier. Originality/value: Despite the productivity determinants of the service sector has been recently explored, in contrast to the manufacturing sector, individual and contextual determinants are less identified. In this paper the authors use a large set of firm characteristics that might affect productivity in service firms.