Strategic Consideration on Upgrading Industries Through Developing

Strategic Consideration on Upgrading Industries Through Developing
Producer Services in the Midwest
WU Xiaoyun
Institute of Industrial Economics, Jiangxi University of Finance and Economics, China, 330013
[email protected]
Abstract: Factor intensity, value increment, industrial relatedness and industrial fusion are
characteristics of producer services. Producer services not only can upgrade the industrial structure, but
also can upgrade the single industry. There are fundamental conditions for the development of producer
services in the Midwest. Under the financial crisis, these regions can take advantage of the opportunity
of the industrial structure adjustment to upgrade industries by developing producer services to reduce
the local disparity and achieve the spanning development.
Keywords: producer services, upgrading industries, measures
1 Introduction
After the financial crisis broke out, the industrial development highly depending on the foreign market
in eastern coastal areas of China has been severely affected and a large number of export-oriented
enterprises have been in trouble and even closed down, so that we begin to reflect the
"outward-dependent" mode of economic development with the higher risk. To cope with the financial
crisis and achieve the balanced and coordinated development of industries in the long run, our country
must shift to "open-independent" economic development mode. That is to say, our country must fully
develop the domestic market, improve the capability of independent innovation and develop on our own
by adjusting the structure and optimizing the industrial layout. Under this background, it is important to
research on how the relatively backward Midwest seizes the opportunity to catch up with the eastern
area. Based on the "theory of newly developed advantages", economic growth in a region is increasingly
dependent on capital, technology, human capital, knowledge and other "creative resources", and the
underdeveloped regions can achieve economic spanning development through learning, imitating,
introducing technologies and systems of developed region directly. D. Hirschman, a well-known
development economist, argued that a region should dispatch selectively limited resources to certain
industrial sectors, enable them develop firstly, then promote the development of other industries in order
to achieve overall economic development (Zhongliang Shi, 2007). So it is significant for the Midwest to
upgrade industries by implementing development strategies. Producer services integrating knowledge
and technology, as intermediate input sector in the production process, at both ends which is high value
added in the industrial chain, link to the agriculture, manufacturing and other service industry forward
and backward, play an important role in upgrading industries. Therefore, this paper argues that the
Midwest can upgrade industries by developing producer services to achieve the spanning development.
There are many achievements overseas about the role that producer services play on the development of
the agriculture, manufacturing or other service industry. Professor Michael Porter (1990) argues
producer services are an important component of product value and a major source of differentiation
when studying competitive advantages of enterprises from the perspective of value chain. Dilek
Cetinda-ment Karaomerioglu and Bo Carlaaon(1999) think that producer services complement and
support the manufacturing sector and the two sectors should fuse into one. Kenneth A. Reinert, in his
paper Non-agricultural Development in Rural Areas: a Trade Perspective, have explored the effect that
producer services have on the price of agricultural products by creating agricultural output model.
Postner H·Harry(1982) have measured the law of time series of producer services using input-output
method and found it is increasing, which means the effect that producer services have on other sectors
has being strengthened. Domestic scholars believe that producer services promote economic growth
directly, upgrade industries, are the most dynamic source and power of regional economic growth.
Huang Guohua and zhou Hui (2007) think that government should carry out strategic adjustment of
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industrial structure to reduce energy consumption and environmental pollution, enhance product added
value and optimize technology structure of industry, and producer services are the key to upgrade
industries. Yanqiao Cao and Xigang Ding (2008) argue that producer services not only upgrade the
whole structure level, but also upgrade the manufacture and service sector. Lizhu Dong (2008) thinks
they are the engine of upgrading industries when she analyses effect producer services have on
upgrading industrial structure of Beijing. But it is found that researches on upgrading industries by
developing producer services are still at an initial stage, and the analysis from the perspective of three
industries is less fruitful.
On the bases of the exist results, this paper discusses the feasibility and ways to upgrade industries by
developing producer services in the Midwest. The following contents are that: chapter two discusses the
mechanism of producer services upgrading three industries, chapter three analyses the fundamental
condition in the Midwest, chapter four make some advices on how to develop producer services.
2 The Mechanism of Producer Services Upgrading Three Industries
Producer services are defined by Browning and Singelman (1975) when they classified the service
sector. Now it is generally acknowledged that producer services include finance, insurance, law,
accounting, management consulting, research and development, marketing, engineering design, product
maintenance, transportation, storage and communication. As an intermediate input sector in the
production process, producer services have characteristics of factor intensity, value increment, industrial
relatedness and industrial fusion. Through linkages backward and forward with other industries and
mutual penetration, producer services play an important role in upgrading industries.
2.1 Producer services upgrade three industries
There are three major patterns of evolution of upgrading industries: firstly, the main body of industrial
structure in order is primary industry, secondary industry, tertiary industry; secondly, three industries are
labour-intensive, capital-intensive, technology-intensive in order; thirdly, industrial structure are pushed
forward from inefficiency to high function to maximizing knowledge.
The ways to upgrade industries by producer services are as follows: firstly, the development of producer
services make the output value of tertiary industry increase and optimize the industrial structure;
secondly, producer services consists chiefly of technology-intensive industries, which can put industrial
structure forward to being technology-intensive; thirdly, producer services are related with other
industries, can promote efficiency of these industries by inputing technology-intensive services.
2.2 Producer services upgrade the agriculture sector
By providing interim products, producer services are involved in various concrete links with agriculture.
They can render the professional service to reduce the product cost, improve the product quality,
diversify the range of product and increase efficiency of agricultural chain. There are the following two
reasons: firstly, the number of experts and firms is growing in the industry sector. They can supply
agriculture with the specialized research institutions and advanced infrastructure by providing good
services with human capital and knowledge capital to promote the agricultural development. Producer
services result from social division of labour. The services include finance, law, management consulting,
customer service, advertising, marketing and so on. They fuse into the system of agricultural production
and sales, which promote agricultural industrialization. These services can coordinate micro-household
and macro-market, improve the efficiency of commercial transaction, reduce the transaction cost, and
realize added value of the agricultural chain to upgrade agriculture.
2.3 Producer services upgrade the manufacturing sector
Producer services, as an important part of intermediate inputs in manufacturing, improve the utilization
ratio of labour and capital and the quality of commodities and other services. On the other hand,
producer services promote product differentiation and non-price competition, realize added value of
product. Smiling Curve put forward by Zhenrong Shi, board chairman of Acer Group, illustrates their
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contribution to manufacturing(it describes the distribution of the added value of computer production
procedures at first. Because it is like mouth when smiling, it is called Smiling Curve. Then it is used to
describe the distribution of value of manufacturing chain.). The graph is as follows:
high
after 1990s
added value
before 1990s
R&D
brand
designing
device
logistics
assembly
marketing
low
upper reach
Graph 1
middle reach
lower reach
Smiling Curve
From the upper reach to the middle reach to the lower reach, the added value is high at both ends and
low in the middle. R&D, designing, marketing, logistics and brand belongs to service industries with
high added value. Assembly is labour-intensive, whose added value is low. Obviously, producer services
can push manufacturing forward to the two ends with high added value for a profit increase and
persistent competitive advantage to upgrade manufacturing.
2.4Producer services upgrade the service sector
Producer services link to other service industries backward and forward through intermediate input,
promote development of these industries by providing professional services. On the other hand,
according to general regulation of industrial structure, antecedent industry represents a major component
of tertiary industry at first. With the rise of late-development industry, the proportion is decreasing and
the proportion of late-development industry is increasing. Commercial trade is the first independent
service industry, occupied the largest proportion of tertiary industry when the level of other service
industries is low. With the elevation of the economic level, increase in leisure time and development of
production socialization, informatization and marketization, demand for commercial trade is decreasing
and demand for producer services is increasing. So the development of producer services and larger
proportion in tertiary industry upgrade the service sector directly.
3 The Analysis of the Fundamental Condition for the Development of Producer
Services in the Midwest
With the implementation of the strategies for Western development and the rise of the central area, there
are good fundamental conditions for the development of producer services in the Midwest: agricultural
production grows steadily; industry develops rapidly; the ratio of tertiary industry increases; the
industrial layout is optimized; the step of urbanization is speeded up; education, science and technology,
culture and other undertakings is in full swing; fixed assets investment increases rapidly; construction of
infrastructural facilities is enhanced; economy and society develop rapidly.
3.1The level of urbanization and industrialization is increasing in the Midwest
These create the location conditions to the space agglomeration of producer services. Industrialization
and urbanization are the two most important factors of the development of producer services: the former
provide requirements and the latter provides expansive space. The urbanization level attained 40.8% and
34.8% in the central and western regions(He Qingming, 2008). Based on foreign experience and the
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general law, it will enter the boost phase when urbanization attains 30%, and the percentage of
urbanization will increase 1% every year. With the reform of the economic system and household
register system, our country urbanization level will increase more than 1% every year, which will
promote the development of producer services. At present the central and western regions are mostly in
the latter part of the initial stage of industrialization and manufacturing develops stably in these regions.
After the financial crisis broke out, these regions can make full use of interval of time to bring the
economy to soft landing. Yongbao Wu, Researcher from Chinese Academy of Social Sciences, said "the
process of industrialization, urbanization and upgrading of industrial structure are speeding up in the
Midwest. Geographical position of these regions is good for expanding domestic demand. Though the
economic growth rate will decline like the eastern region, it may still maintain 10% or more. All of these
facilitate the shift of industry and foreign investment". The development of manufacturing and the
consciousness of specialization strengthened provide large market requirements for producer services.
3.2 The infrastructure facilities are continuously perfected
Transportation and communication system is necessary for the development of producer services.
Especially, transportation, storage and logistics must rely on a developed transportation network which
can bring the more vast development space for these industries. Meanwhile, producer services are
information and technology intensive, so telecommunications infrastructure is important for these
industries, which can change the location selection model, improve service quality, reduce the price and
transaction cost and increase production efficiency. At present, a relatively complete transportation
network including aviation, railways, highways and waterways has been basically realized in the
Midwest. In 2009, the investment in infrastructure construction is 1.5trillion, most of which are invested
in the Midwest, accounting for 37.5 percent of economic stimulus plan. Central finance directed to the
Midwest will enhance the transportation infrastructure construction, provide trustful guarantee for
producer services. Though compared to the eastern region, there being still a big gap, communieation
network has been constructed in central cities and rural towns of the Midwest, attributing to rapid
construction of postal and telecommunications facilities. Now the growth of communication services is
obviously higher than that in the eastern region. In the countryside, post telecommunication office
outlets and coverage rate of broadcast and TV Services have been increased greatly. The penetration of
broad band Internet is 11.5%-27.1% in the Midwest, and the growth of netizens is 52% and 40.6%,
which is 39.3% higher than in the eastern region(China Internet Development Statistics Report, 2009).
3.3 Labour force resources are abundant in the Midwest
Producer services include labour, capital and technology intensive industries, so labour force shows dual
structures which involve not only highly professional and technical positions, for example, lawyer,
financier, engineer and so on, but also other positions, for example, bank clerks. Labour force resources
are abundant in the Midwest. Now basic education develops rapidly, attributing to the increasing
financial input. Higher education has formed several radiate encircles. As notions of employment
changes and the policy of encouraging high quality talent to take up an occupation in the Midwest is
implemented, more and more high quality talents will overflow into the Midwest. Not only that, many
migrant workers professionally trained began to return home and start an enterprise after the financial
crisis broke out. All of these prepared the ground for the development of producer services.
3.4 The policy of promote industrial development has been in action in the Midwest
The regional policy plays an important part in the development of producer services, because it not only
creates endogenetic development, but also attracts exterior enterprises to promote the development of
local industries smoothly. In 2007, Commerce Department and the national development bank jointly
promulgated the "Proposals on Supporting the Midwest to Facilitate the Grads Transfer of Processing
Business" and hoped to realize the industry cluster in the Midwest. Except tax incentives, the national
development bank would provide 30 billion loans at preferential interest rate for facility coordination in
the Midwest. By the State Council's approval, in 2009, the National Development and Reform
Commission and Commerce Department jointly amended "Industrial Catalogue for Foreign Investment
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in the Central and Western Regions". Limitations on foreign investment in service sector of the Midwest
will be appropriately relaxed. It further develop industries with comparative advantage (labor-intensive
and resource-based industries) and enterprises with advanced technology. Besides, a series of policies
have been put forward to give active aid to the development of the small firms and technology
innovation. Producer Services will benefit from these series of preferential policies and obtain long-term
development.
4 The Role of Government and Some Advices on how to Develop Producer
Services to Upgrade Industries
Daniel Bell thought that the central task was different at different stages of social development including
service society, agricultural society and industrial society. In service society, not only the relationship
between man and machines, but also the relationship between men and men should be coordinated. In
this situation, the role of government is different from the former. Government should pay more
attention to coordination between men and men. Creating good surroundings for enterprises, formulating
policies, perfecting laws and regulations and coordinating the implementation of the plans are the main
tasks of government. Therefore, the government in the Midwest should take measures to facilitate the
development of producer services to upgrade industries.
4.1 Accelerate the development of industries serving agriculture
At present, Farmers' capacity to increase agricultural input is very limited. Producer services serving
agriculture should be developed to help realizing agricultural industrialization. The measures include:
strengthening the construction of agricultural technology service system in order to intensify agricultural
research and efforts to expand application of advanced agricultural technology, improve the
comprehensive system of agriculture-related services, strengthen the ability to prevent and mitigate
disasters that affect agriculture, etc; further reforming and perfecting the circulation system of
agricultural product and forming a batch of agricultural conglomerates to help selling products;
perfecting agricultural information service system and progressively setting up the business network
which covers the domestic and foreign markets; further improving the rural financial system and
developing agricultural insurance to improve financial services in rural areas; striving to develop new
farmer professional cooperative organizations to optimize marketing, information services, technical
training, agricultural storage and processing of agricultural products, purchasing management, etc.
4.2 Promote the Trend towards Servitization of Intermediate Inputs in Manufacturing
The correlation between service industry and manufacturing are strongest in all. To deepen the
professional division of labor in manufacturing and service industries can not only provide the
development of producer services with a broad space, but also upgrade the manufacturing sector. So the
separation of the core business and sideline should be encouraged to deploy the inner resources. The
government should guide and encourage enterprises to focus on technology research and development,
brand operation, non-core services outsourcing and specialization through management innovation and
business process reengineering. The government should pay attention to standardizing market order and
promoting fair competition, advocating integrity to reduce the risk in service outsourcing, building
information sharing platform, improving the intermediary system and promoting cooperation between
enterprises to combine the socialized service with manufacturing smoothly.
4.3 Eliminate the institutional barriers to the development of service industry
Our country should expedite to reform monopoly industries in order to set up a uniform, standard and
open market access system; guide private capital and foreign capital to participate in the reorganization
and renovation of state-owned enterprises to strengthen market competition and upgrade industries.
Except a tiny number of service enterprises that must be funded solely by the state, our country should
open up both internationally and domestically, allow various types of capital to enter, encourage
enterprises that have a leading and demonstrating function to enter the service market by providing tax
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preferences, easing credit terms, setting up industrial investment funds. Our country should set up the
effective regulatory system to improve the planning for industries, focus on an overall review and
standardization of the collection of charges, prefect the service standard system, introduce marketing
approaches to the profession association to promote its advantages of standardizing market behavior,
developing self-discipline in the industry and communicating with governments and enterprises.
4.4 Encourage the space agglomeration of producer services
Areas should be divided according to all-directional radiation and cluster development, taking into
account urban construction, traffic, dwelling, environment and social and economic development. The
space agglomeration of producer services may be supported by planning layout, well-defined industrial
policies and financial support. Our country should eliminate policy discrimination against the service
industry, implement the same policy with regard to water, electricity and lands with manufacturing. Big
cities which mainly provide producer services with space should give priority to the development of
these industries, intensify all-directional radiation to promote the adjustment and upgrading of industrial
structure.
4.5 Bring in and foster high-quality talents
Producer services are technology-intensive, so talents play an important part in the development of these
industries, especially finance, insurance, management consulting, research and development. Talents
who are familiar with the advanced management concepts and expertise should be brought in by
improving their living conditions. As the higher education develops rapidly, scientific and technical
personnel working for universities and large enterprise should be encouraged to go down to the
grass-roots units. Majors involving service industry should be added in colleges and secondary
vocational schools. Overall quality of producer services employees should be enhanced by establishing
training camps to strengthen job training and introducing the vocational qualification credentials system.
5 Conclusion
As the major form of modern services, producer services which have characteristics of high innovation,
widespread permeability, efficiency multiplicity, and deep industry relatedness, play an important part in
upgrading industries. Under the financial crisis, if the central and western regions seize opportunities,
rise to the challenges, upgrade the industrial structure by adjusting industry policy and developing
producer services, these regions will go upstream and achieve the spanning development.
：
Acknowledgments
The work is supported by Postgraduate Innovation Fund of Jiangxi province (YC09A075)
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