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In most EU member states, the business services industry has booked no productivity growth during the last two decades. The industry’s performance in the other member states was weaker than that of its US counterparts. Exploring what may be causing this productivity stagnation, this policy brief reports that weak competition has contributed to the continuing malaise in European business services. The study analyzed the persistence (over time) of firm-level inefficiencies. The evidence further suggests that competition between small firms and large firms in business services is weak. Markets for business services work best in countries with flexible regulation on employment change and with low regulatory costs for firms that start-up or exit a business. Countries that are more open to foreign competition perform better in terms of competitive selection and productivity.

The policy simulations in this paper show that greater import openness strengthens competition in business-services markets. The largest positive impact comes from lower regulatory barriers for growing and shrinking firms.  More particularly, competitive selection would be fostered by a reduction of administrative and regulatory costs related to labour contracts, bankruptcy and start-up requirements.

A key element of the European Commission’s Europe-2020 strategy is the single European market for services. Business services form one of the largest industries in Europe – and given its productivity stagnation, it deserves to be a priority target of the Europe-2020 strategy. Improving the way the business services market functions may have large positive knock-on effects for the EU economy. 

Henk L.M. Kox is Senior Economist at CPB Netherlands Bureau for Economic Policy Analysis, The Hague.