Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
An Empirical Analysis of Service Sector Growth in
Selected Asian Countries
Michael D. Clemes, Baiding Hu and Xuedong Li
The paper models the growth performance of the service sectors in China,
Vietnam, Thailand, and Malaysia using data from 1995 to 2012 and
examines the potential relationships between value-added in the service
sector and value-added in the manufacturing sector, exports, imports, and
government spending. The spillover effects between the service sectors and
the manufacturing sectors in the selected Asian countries is also modelled.
The data analysis is based a simultaneous equations model in order to
investigate these effects. Finally, this paper presents its findings and policy
implications.
Keywords: The Service Sector, Spillover Effects, China, Malaysia, Thailand,
Vietnam
JEL: C3, O4
Research Field: Economics
1. Introduction
The growth of global corporations and the development of modern technology have
accelerated the rise of a service-dominated economy in many countries (Nissana,
Galindob, & Méndezc, 2011). The service sector is identified as a crucial contributor
to accelerating economic growth and furthering economic development in developed
and developing countries (Gani & Clemes, 2013; Mizuno, 2005). The service sector’s
ability to create employment is also highlighted in the literature (Buera & Kaboski,
2012). Gani and Clemes (2010) indicate that the expansion of the service sector has
played an important role in the economic development of the Asian countries. In
addition, the collaboration between the service sector and other sectors, particularly
the manufacturing sector, has become more significant in the sustainable
development of all sectors and the national economies of the Asian countries (Gani
& Clemes, 2002).
In general, the service sector has been deemed a residual tertiary sector after the
manufacturing sector and the agricultural sector in many developing countries (Gani
& Clemes, 2013). However, the importance of the service sector is fully recognized
only when the basic needs and demands of the primary and secondary sectors are
satisfied (Gani & Clemes, 2010; Park & Chan, 1989). Moreover, Gershuny and Miles
(1983) have categorized service activities into two major groups: market and nonmarket. Market services include producer services, distribution services, personal
service, and communication. Non-market services include social services. However,
__________________________________________
Michael D. Clemes: Senior Lecturer, Lincoln University, PO Box 84, Lincoln University, Lincoln 7647,
Christchurch, New Zealand, E: mike.clemes@lincoln.ac.nz
Baiding Hu: Senior Lecturer, Lincoln University, PO Box 84, Lincoln University, Lincoln 7647,
Christchurch, New Zealand, E: baiding.hu@lincoln.ac.nz
Xuedong Li: Research Assistant, Lincoln University, PO Box 84, Lincoln University, Lincoln 7647,
Christchurch, New Zealand, E: xuedong.li@lincolnuni.ac.nz
Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
the service sector has been categorized with difficulty, due to the diverse activities
normally associated with it in many economies (Lovelock, Patterson, & Wirtz, 2011).
Jansson (2006) defines the service sector based on production and distribution as
the tertiary stage in a description of an economy. Table 1 shows the division of the
economy into three stages.
Table 1: The Service Sector as the “Tertiary Stage”
Mining, agriculture, forestry, fishing
Manufacturing and building industry
Wholesaling
and
Transport
retailing hotels
and
and
communication
restaurants
1.1
Banking,
insurance
and other
business
services
Health,
education,
child and elder
care and
other personal
services
Primary production stage
Secondary production stage
Tertiary production stage
Contribution of this Current Study
In recent years, the service sector has been identified as playing an ever-growing
role in the development of the many countries’ economies (Buera & Kaboski, 2012).
However, there have been only a few studies with a general focus on the service
sector in the Asian region, mainly Gani and Clemes (2002, 2010), Singh (2010),
Anwar and Sam (2008) and Kanungo (2005). In particular, published economic
research on the service sectors in China, Malaysia, Thailand and Vietnam is sparse.
Therefore, this study empirically investigates the potential factors that contribute to
the expansion of the service sectors in the selected four countries. The expansion of
the service sector is also compared between China and the three other countries.
Moreover, the relationship between the service sectors and the manufacturing sector
in all four countries is also examined.
The purpose of this research is to firstly compare the growth performance of the
service sectors in China, Vietnam, Thailand, and Malaysia, and secondly to examine
the potential relationships between value-added in the service sector and valueadded in the manufacturing sector, exports, imports and government spending. This
research uses a simultaneous equations model to estimate the spillover effects
between the service sectors and the manufacturing sectors in the selected Asian
countries.
The paper is organized as follows: Section 2 describes the sectorial composition of
China, Malaysia, Thailand and Vietnam. Section 3 presents the estimation
framework. Section 4 includes the data analysis and discussion, the estimation
procedure and presents the empirical results. The final section presents the
conclusion and implications.
2. Literature Review
Figures 1-4 show the changes of value-added in three major sectors (manufacturing,
agricultural and services) in the gross domestic product (GDP) and the growth of the
Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
service sector in China, Malaysia, Thailand and Vietnam from 1995 to 2012.
However, as shown in Figures 1-4, the data for value-added in the service sector,
growth of the service sector, value-added in the manufacturing sector, and valueadded in the agricultural sector in Vietnam and Thailand in 2004 and 2012 are
missing from the Asian Development Bank Data Base, respectively. Figure 1 shows
that Thailand’s service sector is the main contributor to GDP. Moreover, value-added
in the service sector to GDP in Thailand has been more than 50% during the last
decade. This is higher than the value-added in the service sectors in China, Malaysia
and Vietnam.
Figure 1: Value-added in the Service Sector in GDP (In Percentages)
PRC
MAL
THA
VIE
60.00
55.00
50.00
45.00
40.00
35.00
30.00
1 9 9 51 9 9 61 9 9 71 9 9 81 9 9 92 0 0 02 0 0 12 0 0 22 0 0 32 0 0 42 0 0 52 0 0 62 0 0 72 0 0 82 0 0 92 0 1 02 0 1 12 0 1 2
Figure 2: Growth Rate of the Service Sector (In Percentages)
PRC
MAL
THA
VIE
20.00
15.00
10.00
5.00
0.00
1 9 9 51 9 9 61 9 9 71 9 9 81 9 9 92 0 0 02 0 0 12 0 0 22 0 0 32 0 0 42 0 0 52 0 0 62 0 0 72 0 0 82 0 0 92 0 1 02 0 1 12 0 1 2
-5.00
-10.00
Additionally, Figure 2 shows that the growth rate of the service sectors in the
selected four countries has been fluctuating over the ten years period. However,
China has a relatively higher growth rate in its service sector than in those of the
other three countries. In particular, China’s service sector growth rate was at 16% in
Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
2007, which was much higher than the growth rate of the service sectors in the other
three countries.
In terms of the manufacturing sector, Figure 3 shows that China’s GDP has relied
heavily on the growth of its manufacturing sector. The share of the manufacturing
sector to China’s GDP is close to 50%, which is higher than Malaysia, Thailand and
Vietnam, particularly during 1995 to 1999 and 2007 to 2012.
Figure 3: Share of the Manufacturing Sector to GDP (In Percentages)
PRC
MAL
THA
VIE
50.0
45.0
40.0
35.0
30.0
25.0
20.0
1 9 9 51 9 9 61 9 9 71 9 9 81 9 9 92 0 0 02 0 0 12 0 0 22 0 0 32 0 0 42 0 0 52 0 0 62 0 0 72 0 0 82 0 0 92 0 1 02 0 1 12 0 1 2
In terms of the agricultural sector, Figure 4 shows that value-added in the agricultural
sectors in China and Vietnam has decreased significantly during the last decade.
Meanwhile, the growth rate of Malaysia and Thailand’s agricultural sectors has only
changed slightly between 2005 and 2012. The value-added in the agricultural sector
has declined in the four selected countries. However, a considerable amount of
research is still conducted in the agriculture sector throughout the world, even
though the agricultural sector is not dominant in many countries (Gani & Clemes,
2010) .
Figure 4: Share of the Agricultural Sector to GDP (In Percentages)
PRC
MAL
THA
VIE
30.00
25.00
20.00
15.00
10.00
5.00
1 9 9 51 9 9 61 9 9 71 9 9 81 9 9 92 0 0 02 0 0 12 0 0 22 0 0 32 0 0 42 0 0 52 0 0 62 0 0 72 0 0 82 0 0 92 0 1 02 0 1 12 0 1 2
Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
Gani and Clemes (2002) indicate that Asian countries experienced structural
changes in the 1980s leading to their economies becoming more competitive in
international trade. For example, China’s “reform and opening-up” policy in 1978 has
developed and promoted the manufacturing sector, which has attracted great
attention from academia (Liu & Li, 2012; Wong, 2013).
3. The Estimation Framework
The estimation framework in this study was formulated after two key issues were
addressed.
First, identifying the potential contributors to the growth of the service sectors in
China, Malaysia, Thailand and Vietnam. Second, overviewing the possible spillover
effects from the service sector to the manufacturing sector and vice versa in the
selected four countries. The estimation framework in this study is based on the
framework used in Gani and Clemes’ (2002, 2010) studies. The empirical methods
used in the authors’ studies analyse the two issues in the selected five ASEAN
countries (Indonesia, Malaysia, Philippines, Singapore and Thailand) and the four
Pacific Island countries (Fjiji, Papua New Guinea, Tonga and Vanuatu). In Gani and
Clemes’ (2002, 2010) studies , the service sector (ser) is hypothesised to be
influenced by the growth of real output (gdp), the growth of the manufacturing sector
(mangth), the growth of exports (x) and imports (im), and government spending (gov).
In addition, estimation of the spillover effects from the service sector to the
manufacturing sector and vice versa is formulated as the value-added in the
manufacturing sector (man) being influenced by the lagged value-added in the
manufacturing sector (mant-1), the growth of real output (gdp), value-added in the
service sector (sva), growth of exports (x) and imports (im) and government
spending (gov). t and i represent time and each country, respectively. The structural
equations are as follows:
(1)
(2)
serit =
manit =
α0 + α1gdpit + α2mangthit + α3xit + α4imit + α5govit +µ1t
β0 + β1manit-1 + β2gdpit+β3svait +β4xit+β5govit + µ2t
However, this current study adjusts some variables in each equation in order to
improve the appropriateness of the model for the selected four countries. Moreover,
this study adopts simultaneous equations model to estimate the spillover effects of
the service sector to the manufacturing sector and vice versa. Hill, Griffiths and Lim
(2011) stress that simultaneous models include two or more dependent variables
and consist of set equations. The two-way influence between the service sector and
the manufacturing sector can be estimated at the same time by using a simultaneous
equation model. Hence, the equations are:
(1) svait
=
(2) mangthit =
serit
α0 + α1manit + α2xit + α3imit + α4govit +µ1t
β0 + β1mangthit-1+β2serit+β3gdpit + β4govit + µ3it
=
δ0 + δ1serit-1 + δ2mangthit +δ3xit + δ4imit+ δ5govit + µ4it
In equation (1), the growth in value-added in the manufacturing sector is included to
test its influence on the growth in value-added in the service sector. Gani and
Clemes (2002) note that the improvement in efficiency in the manufacturing sector
may promote expansion of the service sector. In addition, the variables exports and
imports are included as they are the connection between the domestic economy and
Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
the global economy (Gani & Clemes, 2010). Exporting and importing introduce and
spread the latest technological developments, which are considered to be the core of
the service sector development (Nissana et al., 2011). Government spending, gov,
has a beneficial influence on the manufacturing sector’s growth and the service
sector’s growth, which is mainly reflected in public infrastructure development
(Temple, 1999). Further, this current study examines the relationship between valueadded in the service sector and the potential impacting variables in China, and by
combining the data for the other three countries. Malaysia, Thailand and Vietnam
have economies that are similar in size and structure. However, China has a
relatively larger economy that is much more complex in structure.
The simultaneous equation model include endogenous and exogenous variables in
two equations. These equations are applied to test the spillover effects from the
service sector to the manufacturing sector and vice versa. In terms of the
endogenous variable, service sector growth is predicted to be determined by the
growth in the manufacturing sector. In terms of the exogenous variable, the service
sector combines with the variables of GDP and government spending in order to
examine its impact on the manufacturing sector. In addition, the variable mangth is
also both an endogenous and exogenous variable. There is a connection assumed
between the growth of the service sector and the growth of the manufacturing sector
as the manufacturing sector and the service sector can jointly improve the diversity
of products, and this combination strengthens their international competitiveness
(Yoon & Choi, 2002). The growth of GDP, gdp, is expected to have a favourable
influence on the growth of the manufacturing sector. The remaining variables: the
growth of exports (x) and imports (im), and government spending (gov), have the
same justification for being selected as explained in Equation 1.
4. Data, Estimation Procedure and Empirical Results
The data period for the selected Asian countries (China, Malaysia, Thailand and
Vietnam) extends from 1995 to 2012. The Asian Development Bank is the data
source for all variables in the selected countries: service sector growth, value-added
in the service sector, manufacturing sector growth, value-added in the manufacturing
sector, growth of exports and imports, government expenditure, gross domestic
product (GDP).
The collected data is analysed using Eviews8 software. The potential influence of the
variables on the growth of the service sector is estimated using panel estimation, in
Malaysia, Thailand and Vietnam. Moreover, the potential factors of value-added in
the manufacturing sector, growth of exports and imports, and government spending
in the expansion of each country’s service sector are identified using multiple
regression analysis. Further, a simultaneous equations model is applied to test the
spillover effects from the service sector to the manufacturing sector and vice versa.
The results of the regression analysis relating to Research Questions 1 and 2 are
presented in Tables 2-4. The goodness of the fit is measured by the adjusted R 2
which is considered to be satisfactory (Nieuwenhuis, 2009).
Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
Results of Service Sector Expansion
Table 2: Regression Results of Service Sector Expansion in Malaysia, Thailand and
Vietnam
Variable
C
MAN_?
X_?
IM_?
GOV_?
Fixed Effects
(Cross)
_MAL--C
_THA--C
_VIE--C
Coefficient
-0.074307
1.150231***
0.102637**
-0.001349
-0.173120*
Std. Error
0.581287
0.007775
0.049064
0.042463
0.102427
t-Statistic
-0.127832
147.9326
2.091918
-0.031762
-1.690176
-1.305787
1.798999
-0.563670
Note: Significant at: ***1%, **5% and *10% respectively; Adjusted R 2 is 0.985820;
F=2317.456***
Table 3: Regression Results of Service Sector Expansion in China
Variable
C
MAN
X
IM
GOV
Coefficient
95.26422***
-1.602537***
0.469118***
-0.328453***
0.770229***
Std. Error
7.498804
0.219198
0.088513
0.105266
0.060207
t-Statistic
12.70392
-7.310911
5.299997
-3.120214
12.79299
Note: Significant at: ***1%, **5% and *10% respectively; Adjusted R2 is 0.974519;
F=163.5432***
Tables 2 and 3 present the potential contributors to value-added in the service sector
among the selected countries and China, respectively. The regression results in
Table 2 confirm that the variables of value-added in the manufacturing sector and
growth of exports have a positive influence on the value-added in the service sectors
in Malaysia, Thailand and Vietnam. The growth of imports and government spending
negatively influence value-added in the service sector. Additionally, value-added in
the manufacturing sector and growth of exports are statistically significant at the 1
per cent level and the 5 per cent level, respectively. The positive effect of the
manufacturing sector on the service sector indicates that the manufacturing sector
has an important influence on the performance of service sector development in the
three countries. In addition, the results for fixed effects for all four countries indicate
that value-added in the service sector in Thailand is higher than in China. Moreover,
Malaysia has the lowest value-added in the service sector among the four countries.
Table 3 shows that the value-added in the manufacturing sector, growth of exports
and imports, and government spending are statistically significant only for China.
The beta coefficients suggest that an increase in exports and government spending
will positively affect value-added in China’s service sector. However, value-added in
the manufacturing sector and imports have a negative influence on value-added in
the service sector.
Table 2 and Table 3 present two converse effects of value-added in the
manufacturing sector on the value-added in the service sector between the three
selected countries and China. The results indicate that the four countries focus their
Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
resources differently when developing their service sectors and manufacturing
sectors.
Results of Spillover Effects
Table 4: Simultaneous equations model Results Relating to Spillover Effects in
China, Malaysia, Thailand and Vietnam
Variable
C
MANGTH(-1)
SER
GDP
GOV
PRC
MAL
THA
C
SER(-1)
MANGTH
X
IM
GOV
PRC
MAL
THA
Coefficient
0.705842
0.040021
-0.990425***
2.193690***
-0.087029**
0.130386
-0.338344
-0.919558**
3.564252
0.316717***
0.063290
-0.142596*
0.198632*
0.063101
0.976461
-0.212395
-2.053270
Std. Error
0.517736
0.031388
0.186988
0.137598
0.033404
0.576153
0.455178
0.422743
2.313490
0.095824
0.287550
0.083074
0.115197
0.062380
1.342984
1.080149
1.430873
t-Statistic
1.363325
1.275043
-5.296739
15.94277
-2.605365
0.226304
-0.743323
-2.175216
1.540639
3.305202
0.220100
-1.716486
1.724281
1.011569
0.727083
-0.196635
-1.434977
Note: Significant at: ***1%, **5% and *10% respectively; Adjusted R 2 are 0.964668
and 0.798908.
Table 4 shows the results of the spillover effects from the service sector on the
manufacturing sector and vice versa for all four countries. The regression analysis
shows that the service sector and government spending have a negative influence
on the manufacturing sector for all countries and the lagged manufacturing sector
and the GDP growth rate are positive, influencing variables. In terms of statistical
significance, the service sector and GDP are statistically significant at the 1 per cent
level, and government spending is statistically significant at the 5 per cent level for all
four countries. In addition, the regression results from the second equation suggest
that the lagged service sector, the manufacturing sector, growth of imports and
government spending positively influence the service sector in all four countries. The
growth of exports is found to negatively influence the service sector growth four all
four countries. However, in terms of statistical significance, only the lagged service
sector is statistically significant at the 1 per cent level. The results illustrate that
service sector growth does not contribute to growth in the manufacturing sector and
growth in the manufacturing sector is also insignificant to growth in the service sector
for all four countries. Therefore, positive spillover effects from the service sector to
the manufacturing sector and vice versa are not supported by the results of the
statistical analysis.
Further, the fixed effects results indicate that the growth of the manufacturing sector
in China is statistically significant and positive. The manufacturing sector has a
higher level of significance in China than in Malaysia, Thailand and Vietnam.
Additionally, the results also show that the growth of the service sector in China and
Vietnam is positive.
Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
5. Summary and Conclusion
The influential factors involved in the expansion of the service sectors in China,
Malaysia, Thailand and Vietnam during the period from 1995 to 2012 have been
examined in this study. In addition, the spillover effects from the service sectors to
the manufacturing sectors and vice versa are tested using a simultaneous equation
model. The key findings of this paper on the expansion of the service sector and the
spillover effects between the service sectors and manufacturing sectors will add to
the extant economic literature on these effects for the four countries.
The empirical results confirm that for Malaysia, Thailand and Vietnam, there is a
strong, positive influence of value-added in the manufacturing sector. There is also a
strong, positive influence of growth of exports on value-added in the service sector
for the three countries. However, these relationships are not consistent for China, as
the effects are significant but negative for the growth of value-added in the
manufacturing sector. The findings for Malaysia, Thailand and Vietnam are
consistent with the results of Gani and Clemes’ (2002) study on the ASEAN
countries (Indonesia, Malaysia, Philippines, Singapore and Thailand).
The empirical results also confirm that the growth of exports and government
spending significantly and positively affect the value-added in China’s service sector.
The growth of exports is also positive and significant for Malaysia, Thailand and
Vietnam. However, government spending is negative and insignificant for the three
countries. The result for the effect of government spending on China’s service sector
is supported by Gani & Clemes’ (2010) results for the Pacific Island Countries.
In addition, the empirical results on the spillover effects from the service sector to the
manufacturing sector reveal a negative and statistically significant effect of the
service sector on the manufacturing sector for all four countries. However, for the
four countries, there is a positive and statistically significant effect of the
manufacturing sector on the service sector.
In terms of the political implications associated with the results, China, Malaysia,
Thailand and Vietnam would benefit from their respective governments providing
greater support for the development of their service sectors. For example, China
provides more governmental financial support for its service sector when compared
to the contribution provided by the other three countries. China’s support facilitates
the growth in its service sector as illustrated by our results. Increased government
support for the service sectors in in Malaysia, Thailand and Vietnam should also
encourage growth in their respective service sectors. In particular, an increase in the
export of services eventuating from this type of policy initiative would be beneficial
for these three countries, as their governments are currently encouraging the exports
of goods and services.
China’s economy may benefit if the governement eases the negative influence of the
manufacturing sector on the service sector. China’s manufacturing sector has been
particularly buoyant during the last decade. However, China’s manufacturing sector
is under increasing competition from other nations such as Indonesia and Vietnam. A
decrease in the output of the manufacturing sector has occurred in countries such as
Japan, and more recently in South Korea. China’s government may want to
rationalise the allocation of its resources to facilitate a more equitable development
Proceedings of 29th International Business Research Conference
24 - 25 November 2014, Novotel Hotel Sydney Central, Sydney, Australia, ISBN: 978-1-922069-64-1
of the service sector and the manufacturing sector in order to avoid repeating the
scenario. China also may not fully recognize the contribution of its service sector to
the manufacture of physical goods as it may not measure the contribution accurately
on a national scale.
Further, all four countries need to investigate the existing inter-connections between
growth in their service sectors and growth in their manufacturing sectors. This type of
comparison will provide a valuable insight into the drivers of economic growth and
should enhance the competitiveness of both sectors in the global market for all four
countries.
6. Limitations and Avenues for Future Research
The dependent and predictor variable used in this research are based on Gani and
Clemes’ (2002, 2010) studies. Thus, other potential factors such as foreign direct
investment may be considered by future researchers. In addition, this research uses
cross-country data to estimate the equations. Since the research assumes that the
selected four countries and their service sectors have similar production functions,
the estimating equations and the production assumptions may not be suitable the
economic conditions for all four countries. Therefore, a country-specific study may
provide improved individual results, which would reveal the distinguishing
characteristics of each country’s economy, and in particular, the distinguishing
characteristics of each country’s service sector.
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