Servicification of Investment and Structural Transformation: The Case of China

Abstract

Structural transformation is a key feature of economic development. Traditional literature attributes it to changes in the sectoral composition of consumption. Different from it, we argue that the servici fication of investment goods, which is induced by investment-specific technological change, becomes an increasingly important reason for structural transformation, particularly for the rise of the services economy. Our study of the input output tables finds that the share of service inputs in investment goods have grown significantly in many countries since the 1980s, especially for investment-intensive economies such as China. To assess if the investment channel is quantitatively significant, we build a standard model with three broad sectors, but instead add an investment production function employing factors from all three sectors. Moreover, we incorporate investment-specific technological change by allowing the productivities of the three sectoral inputs to evolve over time. We calibrate the model to the Chinese economy from 1981-2014 and perform counter-factual experiments accordingly. We find that the technological change in the investment sector accounts for 33.1 percent decline in employment share of agriculture, 36.0 percent increase in employment share of manufacturing and 31.5 percent increase in employment share of services over the period. The magnitude of this effect on the share of services keeps growing, particularly after 2000. Our findings are not unique for China, but also apply to other economies experiencing servici fication of investment sector.