In the dynamic landscape of global trade, the intersection of manufacturing and services—termed servitization—has emerged as a pivotal driver of export quality enhancement. A groundbreaking study conducted through meticulous synthesis of OECD World Input-Output data, the Chinese Customs Database, and the Industrial Enterprise Database spanning 2000 to 2015 sheds unprecedented light on how multi-product manufacturing firms navigate internal resource reallocation to upgrade export quality. This empirical investigation not only challenges the conventional firm-level perspective but ventures into the granular product-level adjustments that multi-product firms engage in, revealing a complex tapestry of strategic realignment shaped by servitization.
Traditional analyses predominantly assess manufacturing servitization’s impact by viewing the firm as the homogeneous unit of analysis, often neglecting the nuanced intra-firm dynamics among varied product lines. However, this new research emphasizes that multi-product firms, distinguished by their capacity to reallocate resources fluidly across product portfolios, manifest adjustments in product quality that cumulatively influence overall export performance. The differentiation between core and non-core products becomes essential; the study finds that servitization exerts a more pronounced positive effect on the export quality of products closely aligned with a firm’s core competencies.
Expanding the analytical frame, the study categorizes manufacturing servitization into six discrete service elements: research and development (R&D), transportation, information technology, finance, education, and wholesale services—each exhibiting heterogeneous effects on product quality enhancements. R&D, transportation, information, and financial services significantly fortify core product quality, reflecting the direct influence of innovation, logistics, knowledge, and capital flows. In contrast, education and wholesale services tend to bolster non-core products, suggesting their roles in augmenting broader operational capacities rather than direct product sophistication.
Furthermore, the study’s nuanced analysis extends to trade modalities and destination markets, illustrating how processing trade, characterized by assembly and processing activities that utilize imported inputs, amplifies quality upgrading of core products more than general trade. This aligns with seminal findings by Manova and Yu (2016). Similarly, export destination emerges as a crucial determinant; shipments aimed at developed countries exhibit stronger quality improvements relative to those destined for developing nations, corroborating the framework posited by Manova and Zhang (2012). By integrating multiple service elements within a cohesive framework, the research transcends prior single-element assessments, unmasking the complex interdependencies that govern servitization-driven export quality dynamics in diverse market conditions.
Delving into the mechanisms underpinning these phenomena, the research spotlights two pivotal channels: the marginal cost effect and the product linkage effect. The marginal cost effect emphasizes firms’ strategic concentration on core products with lower incremental costs under external pressures, enhancing competitive viability. This insight resonates with the theoretical assertions of Pavlov (2021). Concurrently, the product linkage effect highlights the tendency of multi-product firms to expand their export portfolios around core offerings with technological affinity, reinforcing synergies and leveraging shared firm assets—a notion congruent with findings by Seddighi and Mathew (2020).
Empirical mediation models deployed in the study validate that servitization’s impact on export quality operates substantially through these cost-reduction and association-enhancement pathways. Practically, this underscores the strategic importance of embedding value-creating service components at critical junctures in the manufacturing process—from design through distribution—thereby systematically lowering production costs and amplifying product synergies within firm portfolios. This dual mechanism facilitates a strategic realignment that prioritizes quality reinforcement of key product lines while optimizing firm-wide resource allocation.
Beyond quality adjustments, the study reveals that manufacturing servitization influences firms’ strategic export behaviors, particularly in managing high-quality product portfolios and exit decisions. Specifically, servitization tends to deter tentative exports of high-quality products and accelerates the exit of underperforming, low-quality exports. Such selective pruning enhances internal resource efficiencies and stabilizes the export competitiveness of flagship products, reflective of adaptive behavior to external market uncertainties. In multi-product contexts where export relationships can be volatile, reliance on technological capabilities, asset endowments, and established networks tied to core products is paramount.
To further probe export dynamics, the researchers apply Melitz and Polanec’s (2015) dynamic decomposition method on industry-level total factor productivity, substantiating that servitization effectively facilitates export quality adjustments in evolving market contexts. This methodological advancement enriches understanding of behavioral patterns among multi-product exporters, illustrating servitization as a catalyst in navigating global trade complexities.
Methodologically, the study harnesses the demand residual approach pioneered by Khandelwal et al. (2013) to accurately measure export product quality at the granular product-firm-destination-year level. By regressing logged quantities and prices against fixed effects controlling for product and destination preferences and employing carefully constructed instrumental variables—particularly real exchange rate fluctuations following Piveteau and Smagghue (2019)—the analysis attains robust estimations isolating quality variations from price and demand shocks.
Instrumental variable construction, a critical component for mitigating endogeneity in price-quality relationships, innovatively integrates real exchange rate shocks adjusted by firm-specific import shares of heterogeneous goods, ensuring relevance and exogeneity. Such granularity addresses potential biases stemming from global economic fluctuations, thus enhancing the credibility of the quality estimations.
Servitization levels themselves are quantified through sophisticated value-added decomposition leveraging global input-output tables referenced in matrices representing domestic and foreign manufacturing and service sectors. The Leontief inverse matrix contextualizes inter-industry production linkages, enabling the calculation of domestic and foreign service value-added contributions to manufacturing exports. By aligning firm-level value-added data with industry benchmarks, the researchers further refine servitization metrics distinguishing between general and processing trade contexts, providing nuanced insights into different export regimes.
Another innovative aspect of the research involves quantifying product linkage within firms’ export portfolios. Using a method inspired by Hidalgo’s product space framework, product association is measured based on the conditional probability of countries having revealed comparative advantage (RCA) simultaneously in pairs of products. This network approach elucidates how the internal relatedness between products shapes firms’ strategic deployment of quality-enhancing resources, reinforcing the role of product complementarity in export success.
These comprehensive findings carry substantial implications for policymakers and corporate strategists alike. Recognizing servitization as a strategic lever implies that government policies should foster closer integration between manufacturing and service sectors, emphasizing value-added services spanning R&D, education, logistics, finance, and wholesale. Enhancing service inputs not only advances industrial upgrading but also strengthens firms’ positions within global value chains.
At the firm level, exploiting servitization involves deploying differentiated strategies targeted at core versus non-core products. Prioritizing investments in innovation, transportation, information technology, and financial services amplifies core product competitiveness, while educational and wholesale services support broader product range enhancements. Firms should tailor export strategies with sensitivity to market destinations, emphasizing compliance and quality standards when targeting developed economies, and cost efficiency when expanding within developing regions.
Moreover, trade policy frameworks can be fine-tuned to accommodate distinct needs of general and processing trade firms. Policies that ease service import restrictions, incentivize cross-border collaboration, and bolster regional service platforms can catalyze access to crucial foreign expertise and capital for processing trade enterprises. For general trade firms, tax incentives, innovation subsidies, and expanded financing options can stimulate service investments critical to export quality advancement.
Despite its significant contributions, the study acknowledges potential limitations. Its exclusive focus on Chinese manufacturing exporters suggests findings may be influenced by country-specific institutional configurations and industrial policies, potentially constraining generalizability. Future research avenues include cross-country comparative analyses integrating multi-product exporter data from diverse economies to reinforce external validity. Additionally, while this study advances understanding of composite service inputs’ roles, deeper investigation into individual service components’ causal pathways remains an open, fertile domain for exploration.
In sum, this research articulates a compelling narrative: manufacturing servitization intricately reshapes multi-product firms’ export strategies and quality trajectories through cost efficiencies and product synergies, underpinned by targeted service integration. Its insights beckon a paradigm shift in how scholars, practitioners, and policymakers conceptualize and operationalize the fusion of manufacturing and services within contemporary global trade ecosystems.
Subject of Research: Manufacturing servitization and export quality upgrading in multi-product firms with a focus on China’s manufacturing sector.
Article Title: Manufacturing servitization and export quality upgrading: evidence from China’s multi-product exporters.
Article References:
Shi, J., Li, J., Wu, J. et al. Manufacturing servitization and export quality upgrading: evidence from China’s multi-product exporters. Humanities and Social Sciences Communications 12, 1801 (2025). https://doi.org/10.1057/s41599-025-06075-1
Image Credits: AI Generated
