What Determines In-house Service Activities within Manufacturing Firms?: Micro Evidence from Korea

Abstract

This paper explores the pattern and determinants of the servicification of Korean manufacturing over the period 2006-2018. We first compute the net contribution of in-house provision of services to manufacturing value added, using data from an employee-level labour survey. We compare this result with domestic and foreign outsourcing to examine the relationship between these different modes of servicification. More importantly, based on an extensive establishment-level panel dataset, this paper empirically investigates the key determinants of in-house service activities within manufacturing firms. Our analysis suggests that the net contribution of in-house service activities to manufacturing value added was around 18.6~22.5% between 2009 and 2018. At the industry-level, in-house service activities are positively correlated with domestic outsourcing, but negatively correlated with foreign outsourcing. Our regression results indicate that companies with higher export intensities, wider networks of overseas subsidiaries or those located in the Seoul metropolitan area engage in more in-house service activities, while having domestic subsidiaries have no statistically significant effect on in-house service activities. Finally, in contrast to the industrylevel results, using firm-level data we find no clear relationship between domestic outsourcing and in-house service activities.