1. Introduction
The intermediate sector of an economy, be it regional or national, has recently come
into focus in the literature. This sector is, for instance, essential in numerous recent
models dealing with what is sometimes called the economics of cities or the economics of
agglomeration, (see e.g. Fujita & Thisse, 2002). The set-up in these types of models is
usually such that the production function of the final sector exhibits increasing returns in
the number of intermediate inputs. This is achieved by using the monopolistic
competition model developed by Dixit & Stiglitz (1977) with a conventional CES
aggregator over the varieties of the intermediate sector. In this manner, the performance
of the final sector depends on the performance of the intermediate sector, (which operates
under the monopolistic regime). One of the advantages of this structure is that it is
possible to show in a neat fashion that the final sector, in the aggregate, experiences
increasing returns in the labor force of a region1. Thus, it allows for an explanation of the
relationship between “size” and productivity, which in itself is an explanation of why we
observe cities. Furthermore, in the cluster literature the formation of a set of specialized
input suppliers located in proximity to a localized industry is usually pointed out as one
explanation for why firms localize in the first place. Specifically, this is one of Marshall’s
(1920) three famous reasons for co-location, the other two being a pooled labor market
and information spillovers.
A typical input sector for the manufacturing sector is the producer service sector,
which is emphasized in, among others, Rivera-Batiz (1998). Why manufacturing firms
would purchase services such as marketing, finance, logistic etc., instead of producing
them internally is usually explained by the standard argument in Stigler (1951) 2.
Specialized producer services firms achieve economies of scale, which makes it more
productive for manufacturing firms to purchase the services externally. Specialization
spurs efficiency and scale economies results in lower unit costs. In addition, Hansen
(1993, p.256) maintain that the technological progress in general provides a greater
potential for service specialization and that add-on services constitute an increasingly
larger share of the value of new products; “...approximately two-thirds of the value-
added in the computer market”, he writes, “consists of software and maintenance
services-add-ons that tend to be provided by firms in the service sector rather than in
manufacturing”3. Surveying the literature on services, Glasmeier & Howland (1994)
conclude that a vast amount of research suggests that services, as inputs to other
industries, enhances productivity as well as that their presence in a region stimulate the
competitiveness of other industries in the region. Producer services may, for example,
facilitate for manufacturing firms to adapt skills, products and processes to changes in the
market as well as help to reduce organizational, managerial and informational barriers to
adjustment, (Marshall et al, 1987).
1 The reason is that the number of intermediate suppliers increases with size, which in turn allows for a higher
degree of specialization.
2 The great increase in producer service employment in advanced economies caused by the externalization can
also be coupled to the rise of the flexible system of production, see for instance Coffey & Bailly (1991).
3 As an example, only about 10-15 % of the purchase price of an IBM computer can be derived to the cost of
manufacturing, (Reich, 1991). The rest is due to various services.