September 24, 2012

Unleashing Competition in EU Business Services

Stagnant productivity growth European business services due to lack of competition

Press release
In most member states of the EU, the business services industry saw little to no productivity growth in the last two decades, due to weak competition. Business services markets work best in countries with flexible regulation on employment change, low regulatory costs for firms starting up or exit a business and more openness to foreign competition.

These conclusions were drawn by Henk Kox in CPB Policy Brief 2012/04, ‘Unleashing competition in EU business services’, which is published today.

Business services is a large industry, focused mainly on offering services to other firms. Business services represent between 10% and 25% of total input costs of firms throughout Europe. Due to stagnant productivity growth, business services have become more expensive, which also diminishes the outside competitiveness of European firms— in comparison to the US, for example.

The productivity stagnation in European business services is due to a lack of competition. This phenomenon, which discourages firms from pursuing innovation and achieving higher productivity, is visible in most branches of the business services industry and also in most EU countries. An intra-EU comparison shows that business services markets work best in countries with flexible regulation on employment change, with low regulatory costs for firms to start up or exit a business and openness to foreign competition. The positive effects of policy change towards these ends are projected to be the highest in Austria, Italy, France, Spain and Portugal.

This indicates the focus areas for policymakers, if they want to strengthen the productivity of business services. Such a course could prove instrumental in attaining the goals of the European Commission, expressed in its Europe 2020 strategy, to further develop the Single European Market for Services.

Dutch business service providers are an integral part of this trend is the conclusion of Henry van der Wiel, Jürgen Anthony and Fred Kuypers in their simultaneously published (in Dutch) CPB Policy Brief 2012/03, 'Nederlandse zakelijke dienstverleners onvoldoende geprikkeld' (‘Dutch business services insufficiently stimulated’).

Spokesmen

Edwin van de Haar Read more
Henk Kox Read more

Read the accompanying press release.

The study analyzed the persistence (over time) of firm-level inefficiencies. The evidence further suggests that competition between small firms and large firms in business services is weak. Markets for business services work best in countries with flexible regulation on employment change and with low regulatory costs for firms that start-up or exit a business. Countries that are more open to foreign competition perform better in terms of competitive selection and productivity.

“Business services” is a catchword for a heterogeneous group of services branches. It includes not only professional services (accountancy, legal, engineering, marketing, tax and management consultancy, architects), but also IT, software services, technical testing, contract research, labour search services (temporary work, headhunting), industrial cleaning and security services. Business services are mainly used as inputs by other firms.

The policy simulations in this paper show that greater import openness strengthens competition in business-services markets. The largest positive impact comes from lower regulatory barriers for growing and shrinking firms. More particularly, competitive selection would be fostered by a reduction of administrative and regulatory costs related to labour contracts, bankruptcy and start-up requirements.

A key element of the European Commission’s Europe-2020 strategy is the Single European Market for Services. Business services forms one of the largest industries in Europe —and given its productivity stagnation, it deserves to be a priority target of the Europe-2020 strategy. Improving the way the business services market functions may have large positive knock-on effects for the EU economy.

This CPB Policy Brief is simultaneously published by The Centre for European Policy Studies (CEPS) as CEPS Policy Brief 284.

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Contacts

Henk Kox Read more