Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

Abstract: During the period 2007-2016 in Sweden we can observe how the share of business (producer) services gradually increases as an aggregate phenomenon. The service categories are partitioned into ordinary (OBS), knowledge-intensive (KIBS), and very knowledge-intensive business services (VKIBS). The growth is faster in local and regional economies that have large demand potentials. Other sectors grow faster when located in places where the business-service supply potential is larger. We outline a theoretical framework where service suppliers locate their capacity in response to the size of the service-demand potential, whereas other sectors of the economy, locate and expand in response to the service-supply potentials, for each of the three service categories OBS-services, KIBS-services and VKIBS-services. These model alternatives are assessed in a series of dynamic econometric exercises. A major assumption is that business-service firms operate in a context of monopolistic competition, which means that when the capacity to supply and deliver business services increases, then the number of service varieties also increases, and thus adds to the multiplicity of varieties in local economies (municipalities) that have a large demand potential. In the model framework the service suppliers are selling innovation-relevant information to customer firms in a region, and thereby also unintentionally spread information and knowledge among firms in the region. In this way, business-service suppliers become knowledge providers and important actors in the relevant regional innovation system.

Keywords: Random choice; business services; demand and supply potentials; co-evolution

JEL-codes: C23; L84; R11; R12; R30

21 pages, June 1, 2019

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