In September, CDP Center team published a new scientific article: “Shift in the Importance of Consumption of Professional Services and Investments (GFCF) for Manufacturing Industries by R&D Intensity in Advanced Economies” in International Journal of Finance & Banking Studies (DOI: https://doi.org/10.20525/ijfbs.v11i2).

The research revealed and analysed a trend, between 1995-2020, of a declining gross fixed capital formation (GFCF) to domestic value added in gross exports (DVA in Gross exports) ratio in manufacturing industries for most Advanced Economies, which occurred on the backdrop of increasing of intermediate consumption of professional services. According to our estimates, the identified trend will intensify as new technologies play an increasingly important role in industrial sectors – Artificial Intelligence (AI), Machine Learning (ML), Big Data and etc. As the data becomes available, we will update our research.

Our model proves the partial substitution of GFCF with intermediate consumption of professional services in Advanced Economies due to the change of production operating model (value chain management in manufacturing industries), which is evidenced by high influence of the combined factor on the DVA in Gross exports. This substitution facilitates the upgrading of value chain by creation of backward and forward linkages for manufacturing industries, depending on their R&D intensity.

Systemic and long-term nature of changes may reflect potential paradigm shift in Advanced Economies' production operating models.

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Key findings

Despite the overall growth of both GFCF and DVA in Gross exports of manufacturing industries achieved in the first period (2007 to 1995), the model reveals an emerging trend towards a declining GFCF-to-DVA in Gross exports ratio in most Advanced Economies across Medium, Medium-High and High R&D intensity manufacturing industry groups. This is evidenced by a predominantly negative relationship between GFCF and DVA in Gross exports in most annual periods. As previously discussed, this may reflect the development of new production technologies and the adoption of technological and organizational innovations, relocation of production facilities that reduce the reliance on GFCF in terms of volume.

The economic downturns of 1997-1998 and 2001-2002 significantly accelerated this emerging downward trend in GFCF-to-DVA in Gross exports ratio.

This emerging trend coincided with a robust growth in intermediate consumption of professional services by manufacturing industries across annual data and total results of the whole observed period.

Between 2010 and 2020, the previously observed emerging trend of diminishing importance of GFCF consolidated. At the end of the decade, GFCF in relation to DVA in Gross exports showed a negative slope across Medium, Medium-High and High R&D intensity manufacturing industry groups. As for the Medium-low group the model reflected low significance due to multidirectional dynamics across countries. This trend was particularly pronounced by Advanced Economies with clear technological leadership in manufacturing (USA, Germany, Japan), where the development of production technologies, the introduction of technological and organizational innovations, have reduced the need for GFCF in terms of volume.

Additionally, in second period (2010-2020) the model showed that slope of intermediate consumption of professional services to DVA in Gross exports growth diminished compared to the first (1995-2007) period. This decline was influenced by fundamental factors such as a general slowdown in global trade, which curtailed potential growth. Furthermore, the economic downturns of 2016-2017 and 2020 further shaped the overall trend.

We are satisfied with the results of assessing the combined and simultaneous impacts of GFCF and intermediate consumption of professional services on DVA in Gross exports for manufacturing industries (Formula (2)). The model reflects the partial substitution of GFCF with intermediate consumption of professional services in Advanced Economies due to the change of production operating model (value chain management in manufacturing industries), which is proved by high influence of this combined factor on the DVA in Gross exports. This substitution facilitates the upgrading of value chain by creation of backward and forward linkages for manufacturing industries.

At the same time the observed decline in the share of GFCF volume to DVA in Gross exports (especially across Medium, Medium-High, and High R&D intensity manufacturing industries) suggests a potential paradigm shift in Advanced Economies' production operating models. The increase in DVA in Gross exports attributable to an increased intermediate consumption of professional services can only partially explain the phenomenon. Without considering the trends and impacts of investments in technology development and technological and organizational innovation, the positive effect of professional services on DVA in Gross exports growth in manufacturing industries might be overestimated. To fully understand this complex relationship, further cross-industry and cross-country analyses using TiVA, national, and firm-level data are warranted.

The full article is published in Analytics section.

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Key words: gross fixed capital formation, GFCF, investments, professional services, domestic value added, domestic value added in export, R&D, manufacturing industries, international trade, global value chains, production operating models, machine learning

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