Service Science, Vol. 1, No. 1, December 2009 1 THE REGIONAL SPECIALIZATION OF SERVICE SECTOR IN CHINA - FROM 1993 TO 20061 Jie Zhang Department of Industrial Economics, School of Management, Fudan University, Shanghai, China, 200433 [email protected] ABSTRACT Using the Krugman index, we calculate the regional specialization of 29 provinces‘ service sector in China. Further, we analyze some specific industries of the service sector through the location quotient. Then we compare the degree of specialization of 10 provinces between each other. The main conclusions of this paper are: Firstly, the average specialization of service sector is lower than manufacture sector because of the specific characteristics of service industry; Secondly, the specialization degree of service industry in China has been descending then increasing since 1990; Thirdly, metropolitan areas have remarkable advantages in the developing of producer service industry and knowledge intensive service industry. Keywords: Service industry, Specialization, Krugman index, Location quotient 1. Introduction Recently, researchers thought more and more about the manufacture industrial distribution and specialization in China. The related empirical research includes Young (2000), Bai (2004), Fan (2004), Lin (2007), Miao (2007), Xu (2008), etc. But for the service sector, the discussion is not as comprehensive as manufacture sector. There are two probable reasons: One is the un-tradable characteristic of service product which means low fluidity compared with manufacture sector. Service sector mainly provides services for local residents in local market area; therefore, the topic of location choice and specialization is not important. The second reason is accessing statistical data of service industry is difficult for researchers. The classification of service data in yearbook of China (Chinese Statistical Yearbook, 2007) is not well-completed. Service sector is now steadily increasing its importance in the economy of China. In 2007, the ratio of agriculture, manufacture, and service sector in the GDP of China is: 11.7%, 49.2%，and 39.1%. In 2008, the ratio turns out to be: 11.3%, 48.6%，and 40.1%. As the industry specialization in the world becomes more and more intensive, the classification of service industry has been much more delicate than ever. For example, the producer service becomes an important component of service sector whose ratio exceeds 70% now. As Krugman(1991) said, some service product is not tradable whose location Gini coefficient is close to zero. The distribution of these service industries is consistent with the demographic distribution of local market; but some kind of service is tradable, for example security, futures, high-tech service and even entertainment service. Their distributions are 1 This work was supported in part by the ―2007 Jin Miao Plan‖ of Fudan University, ―211 Project‖（211XK06）, International Visiting Scholar Program of Harvard Business School. Jie ZHANG is an Associate Professor in Department of Industrial Economics, School of Management, Fudan University, Shanghai, China, 200433. E-mail:[email protected] 2 Jie Zhang totally different with un-tradable service. The most remarkable characteristic is agglomeration. For example, the security exchange locates in New York, high tech service in Silicon Valley and Boston‘s Route 128, and movie and entertainment industry in Hollywood of Los Angeles. An important change recently is that accessing of service industry data has become easier. This can be detected through NAICS of 1997 whose most important adjustment is the statistics index of service sector (The North American Industry Classification System (NAICS)). New NAICS system adds some new rising producer service and knowledge intensive industries. In the old SIC systems there are 10 divisions and 5 of them are related with service sectors. In NAICS there are 20 divisions totally, 16 are related with service sectors. In China, new National Economic Industry Classification( GB/T4754-2002) also adds six new divisions including ―information transmission, computer service and software‖, ―hotel and meal‖, ―lease and business service‖, ―water conservancy, environment and public establishment‖, ―education‖, ―international organization‖ (National Bureau of Statistics of China, GBT4754-2002). And in 2006, the National Bureau of Statistics published the statistics data of culture industry in China (Chinese Culture Industry Development Report, 2006). All these indicate that the service sector is becoming a significant part of the economy in China. The detailed research about service industry is urgently needed. We will focus on the regional specialization of service sector in China. Regional specialization is defined as the distribution of the shares of an industry i in total manufacturing in a specific region j compared to a norm. A region j is found to be specialized in a specific industry i if this industry has a high share in the manufacturing employment of region j. The manufacturing structure of a region j is ‗highly specialized‘ if a small number of industries have a large combined share in the total manufacturing (Traistaru and Iara, 2002). To measure the regional specialization, Location Quotient (LQ), is used to measure the ‘revealed’ location advantages of certain regions to attract and develop certain industries (Isard et al. 1960) in spatial economics, using employment data. In fact, employment data are used in a number of studies on the regional specialization of economic activities in the United States (Kim, 1995; Ellison and Glaeser, 1997; Dumais et al., 1997). Bai. etc (2004) construct a Hoover coefficient using output data instead of employment data. A Hoover coefficient of localization can also be constructed from employment data. Krugman Specialization Index is another index to measure the specialization of different region. This index is a relative measure of regional specialization and was first used in Krugman (1991), comparing the industrial structures of the US and Europe. It sums up the absolute difference of the industrial structures of two regions (Traistaru and Iara, 2002). We will give the detail function of LQ and Krugman Index later. Existing research about regional specialization of China are mainly from Cheng and Huang (2005, 2006). In the paper of 2005, they use LQ , RCA and K-spec three indexes to analyze the regional specialization of service industry and its inside sectors in China. They found that there are some essential differences between the service and manufacture sector. It is improper to overemphasize the regional division and specialization of service industry. Huang and Cheng use six most developed provinces in China as research samples, Beijing, Shanghai, Shandong, Jiangsu, Zhejiang and Guangdong. Using index of LQ, RCA and K-spec, they find: Inside the service sector, the difference of those traditional service industries among 6 provinces was shrinking while the difference of knowledge intensive service industries was increasing. Using K-spec index, we calculate the specialization of service sector in 29 provinces of China from 1993-2006. The difference between this research and Cheng and Huang is: they calculate the K-spec index of east\middle\west area from 1990 to 2002, but not on the province level. Our calculation is based on the province data, and we find the The Regional Specialization of Service Sector in China 3 trend of specification in service sector is downward firstly, and then upward. We explain this trend. And then we analyze the detailed industries inside the service sector using the Location Quotient. At last, we compare the degree of specialization between each other of 10 provinces which locate in Bohai Rim, Yangtze River Delta, and Pearl River Delta. 2. Methodology and data 2.1. Methodology The indexes we use to measure the regional specialization are location quotient, Krugman specialization index. These two are the most popular and effective indexed to measure the agglomeration in regional science. 1. Location quotient Location quotient is an index which is in common use to scale the specialization of an area. Its formula is shown below (Cheng and Huang, 2005): LQ [e / e ]/[E / E ] ik ik k ik ik k ik e is the amount of employment of industry k in area i， e is the total employment of area i, E is the ik k ik ik amount of employment of industry k in all over the country, E is the total employment in all over the country. k ik If the index LQik is bigger than 1, it means that the specialization of industry k in area i is greater than the average level of all over the country. 2. Krugman specialization index Our approach to specialization is to calculate a measure which allows us to compare each province's industrial structure with that of the average of the rest of the other provinces. To construct this measure, referred to as the Krugman specialization index, also called K-spec index, we proceed as follows. For each province, we calculate the share of industry k in that province's total employment, denoted sik . Corresponding to this, we calculate the employment share of the same industry in the production of all other provinces. We then measure the difference between the industrial structures of province i and all other provinces by taking the absolute values of the difference between these shares, summed over all industries (Traistaru and Iara, 2002). Krugman specialization index is calculated as below: first compute the difference of specialization of one area with the other areas in the whole country, and then sum the absolute values of all the differences. This index shows the industry specialization of one area compared with other areas (Miao, 2007). K s s i k ik ik is the ratio of employment of industry k in area i to all the employment of this area. s Eik ik E k ik sik is the ratio of employment of industry k in all areas except i to all the employment of these areas. 4 Jie Zhang Eik s ji ik E k ji ik The number of Krugman specific index is between 0 and 2.