Should everybody be in services? The effect of servitization on manufacturing firm performance

The servitization of the manufacturing sector refers to the evolution of manufacturers' capabilities to offer services as a complement to or a substitute for the goods that they produce. A vast literature has described these strategies and has shown that this phenomenon is widespread and growing in most developed economies. However, very little systematic evidence of the extent or consequences of servitization based on a comprehensive dataset of firms exists. In this paper, we provide such evidence using exhaustive data for French manufacturing firms between 1997 and 2007. We find that the vast majority of French manufacturers sell services in addition to producing goods. The shift toward services is growing steadily but at a slow pace. We also provide evidence of a causal impact of servitization on firm performance. Controlling for various sources of endogeneity bias, we find that firms that start selling services experience an increase in their profitability between 3.7% and 5.3%, increase their employment by 30%, increase their total sales by 3.7%, and increase their sales of goods by 3.6%. The results hold for most industries, although some heterogeneity exists.