THE DETERMINANTS OF SERVICES SECTOR GROWTH: A Cross Country Analysis

Javed IQBAL,* Muhammad SALAM** and Misbah NOSHEEN***

Many developing countries do not have at all the comparative advantage for manufacturing the services sector which serves to be a potential avenue for economic transformation and economic growth. The exiting literature related to services sector focuses mainly on the advance economies. Less attention has been given to this sector though it is supposed to play a major role in economic growth of developing economies. The current study is a comparative analysis of selected developed and developing economies in order to identify the major determinants of service sector growth in these economies. For estimation purposes, the current study uses both the static, as well as the dynamic panel data estimation techniques. Findings of the study indicate that in both the developed and developing countries, GDP per capita and FDI play a significant role in growth of services sector, while trade openness tends to affect the growth, negatively. Productivity differential does not have any significant impact on growth of this sector in both samples of the countries. In case of developing economies, innovation has significant effect on service sector’s growth in developing countries only. In order to check the sensitivity of results, this study examines the effect of these explanatory variables on service sector’s growth by interaction with other variables; interestingly the results support and confirm them without interactive terms.