Business-related Service Providers: Slight Increase in Growth

In the third quarter of 1999, growth in the business-related service sector has slightly weakened in comparison to the previous quarter. The seasonally adjusted annual rate of turnover has increased by half a percentage point in comparison to the previous quarter, rising to 3.9 per cent. The rate of growth in turnover, however, still remains significantly lower than the record levels reached in mid-1998. The rate of economic growth of business-related service providers has nonetheless picked up speed. The first quarter of this year saw a significant economic downturn in this sector. The second quarter of 1999, however, saw the economic situation stabilise.

As a result of the continued rapid growth experienced by business-related service providers in the third quarter of 1999, these businesses have once again employed more new members of staff than they have let go. University graduates and graduates from technical colleges are particularly in demand in this sector. Potential employees who have not completed formal training, however, have little chance of gaining employment with a business-related service provider. Demand, revenue and prices are seasonally adjusted and have remained constant since the previous quarter. Despite development in the economic situation, which is clearly very positive in comparison to that in the first half of 1999, the rate of growth still remains far below the record levels achieved in the previous two years. In comparison to the equivalent quarter last year, the third quarter of 1998, growth amongst business-related service providers has considerably fallen.

This is the result of a representative survey carried out by the Mannheim Centre for European Economic Research (ZEW), in collaboration with the "Verband der Vereine Creditreform" in Neuss, in December 1999 among more than 1,000 business-related service providers. Included amongst these business-related service providers are tax advisers and business consultants, architects, technical planners, car rental businesses, machine rental businesses, shipping and logistic firms, software providers, advertising agencies and waste disposal firms.

Positive Development in Staffing

Continuing falls in demand were the main reason for decreased growth in the business-related service sector at the beginning of the year. In the first instance, this was due to decreased growth in the economy as a whole. However, the rate of growth in the two boom-sectors – software provision and business consultancy – particularly lost momentum. Up to this point, both branches were able to take advantage of the strong demand for standard software solutions as a result of the introduction of the Euro in 2000. The outlook for the last quarter of 1999, however, seems positive. Business-related service providers expect to see improvements in the seasonally-adjusted revenues, prices and demand in comparison to the previous quarter.

Business-related service providers also expect positive developments in staffing to continue. Since the third quarter of 1996, the proportion of business-related service providers employing new staff has outweighed the proportion of service providers dismissing existing staff members. A majority of business-related service providers expect this trend to continue in the last quarter of 1999 – a sign that they expect to see continued growth.

No changes are expected in regard to revenues. The conditions in the economy as a whole have also considerably improved since the weak growth seen in the first half of the year. All significant economic indicators currently suggest that the German economy will pick up in the autumn and winter of 1999.

Machine Rental Businesses in Decline

Whilst the economic development amongst business-related service providers has on the whole increased, there continues to be significant differences in the economic situation of businesses in the various branches of this sector. Despite weakened growth, software providers and business consultants remain the boom branches amongst business-related service providers. The introduction of e-commerce solutions in many businesses could provide further impulses in this sector in the mid-term. Machine rental businesses are showing an upward trend. This may be due to the long-awaited revival of the West German construction industry. After a series of difficult years for the construction industry, many construction firms are now hesitating to invest in their own equipment, preferring to lease or rent machinery.

Waste disposal and sewage firms rank in last place amongst business-related service providers, now falling behind architects and technical planners in terms of their economic situation.

The substantial differences between East and West German business-related service providers continue to be reflected in their assessments of their economic situation. Business-related service providers from the old federal states continue to assess their financial situation much more positively than their competitors from the new federal states. There are, however, signs of a slight improvement in the economic situation of business-related service providers located in East Germany. In both the second and third quarter of 1999, for the first time since mid-1995, more firms have employed new staff than have let staff go.

Good Employment Chances for Highly Qualified Personnel

The overall positive job market amongst business-related service providers benefits highly qualified personnel only. An overwhelming majority of business-related service providers questioned as part of the latest ZEW/CREDITREFORM survey reported that they employed university graduates holding degrees in scientific or technical subjects and/or social sciences between autumn 1998 and autumn 1999. Staff holding a qualification from a vocational or professional training centre had a somewhat lower chance of being employed by a business-related service provider. Business-related service providers let more employees without a formal qualification go, than they employed. The employment chances of poorly qualified staff are not only worsening in the economy as a whole, but also in terms of their employment with business-related service providers, which despite the recent depreciation in the economic outlook are continuing to grow.

Poorly qualified personnel are particularly affected by fluctuations in the economic situation. Even in 1996, a particularly weak year for business-related service providers, university graduates still had good chances of employment in the job market. Graduates from technical colleges, those holding a vocational qualification, and unqualified personnel, however, were considerably more often victims of dismissals.

The fact that the recruitment and dismissal of staff depends on the economic outlook becomes particularly apparent where the individual branches of business-related services are compared. Since 1995, architects and technical planners have dismissed more staff than they have recruited across all qualification levels. Poorly qualified personnel were particularly affected by this phenomenon. Similarly, waste and sewage disposal firms let more staff members go than they employed between 1998 and 1999. But even in the case of architects and technical planners, as well as waste disposal agencies, highly qualified personnel have clear advantages in the job market. University graduates and graduates from technical colleges were less frequently affected by dismissals than those who had completed a vocational training course and unqualified personnel. The job market is somewhat different when it comes to business consultants and software providers. Since 1995, it is above all university graduates, and graduates from technical colleges, who have found employment in these branches. But even in the two boom branches in this sector, unqualified personnel has significantly worse chances in the job market than qualified applicants. It is only in the past two years of intense growth amongst software providers and business consultants that the employment chances of unqualified applicants have improved. Significant economic growth may be a prerequisite for the success of qualified personnel in the job market, it is not, however, a guarantee for new jobs.

Although it is predominantly graduates holding a degree in a scientific subject who have been newly employed by software providers, social science graduates dominate amongst business consultants, marketing agencies as well as tax advisers and auditors. In the case of machine rental companies and shipping firms, graduates of vocational training courses are also seeing their chances of employment improve.

Job Opportunities for University Graduates in East Germany

The situation in East Germany is similar. With the exception of graduates holding a social science degree, business-related service providers have dismissed more staff than they have employed since 1995. Since autumn 1998, business-related service providers from the new federal states have provided a glimmer of hope in the job market for university graduates and graduates of technical colleges holding degrees in both scientific-technical subjects, as well as in the social sciences. In contrast to other qualification groups, these graduates have had excellent chances of employment in the last twelve months.

The Effects of Innovation

Technical developments are often given as the main reason for a fall in demand for personnel with lower qualification levels over the past years. This is not only the case for business-related service providers. Innovation has varying effects on the demand for employees amongst different business-related service providers. Product innovations, the introduction of new or significantly improved products, tend to increase the demand for workers. This does not apply, however, to unqualified personnel. Process innovations, the implementation of new or significantly improved technologies during the provision of services, have a positive effect on the demand for university graduates and graduates of technical colleges, whilst this has a negative effect on the demand for unqualified workers and those having completed training at a vocational school.

Innovations play a considerable role for business-related service providers. Around 60 per cent of business-related service providers introduced a process innovation between the third quarter of 1998 and the third quarter of 1999. This puts business-related service providers on a par with manufacturing firms. In the manufacturing industry, around 62 per cent of firms introduced product innovations in 1997, and 58 per cent introduced process innovations. Business-related service providers introduce product innovations less frequently than they implement process innovations, which were implemented by around half of all businesses. Unsurprisingly, there are clear differences between the different sectors when it comes to innovation behaviours. It is no surprise that innovations are particularly often implemented by software providers and business consultants. Shipping and storage companies, however, as well as marketing agencies, also particularly favour process innovations. Increased international competition might lead to the increased adoption of process innovations as internal business processes are optimised. Shipping and business consultancy firms admit often to be facing competition from abroad. Vehicle rental companies and tax advisers, as well as auditors, however, are relatively reserved when it comes to implementing innovations.

The economic situation and a willingness to innovate quite obviously go hand in hand. The proportion of architects and technical planners, as well as waste disposal firms for example, who have implemented process innovations between 1998 and 1999 has decreased significantly more than in other branches. The overall frequency of innovations has slightly fallen between 1998 and 1999. Particularly in the case of business-related service providers, innovation projects often involve the implementation of computers. Around three quarters of work spaces in this sector are equipped with a PC. In comparison to 1998, this proportion has increased by approximately 3 percentage points. Business-related service providers from the new federal states are more frequently affected by demand fluctuations than their West German competitors. In East Germany, 77 per cent of work spaces are equipped with a computer, in West Germany, only 73 per cent. If, however, individual sectors and the size of the groupings is taken into account, this trend is reversed.

More Exporting Firms

The proportion of business-related service providers exporting services has increased slightly in the past year. The tendency to export services has increased above all amongst shipping firms, software providers, marketing firms, as well as waste disposal and sewage firms. These are also the very branches which in the ZEW/CREDITREFORM economic situation survey in summer 1998 particularly often expected to see improved exporting possibilities for themselves as a result of the introduction of the Euro. As was previously the case, there are considerable differences between business-related service providers in East and West Germany when it comes to export orientation. The proportion of exporting firms in the new federal states is around 20 percentage points lower than in West Germany.

Shipping firms and business consultancies not only export services relatively frequently, they are also particularly affected by foreign competition. Tax advisers and auditors, vehicle rental firms and architects seem, however, to be more active within their local markets.

Contact

Prof. Dr Ulrich Kaiser, Phone: +49(0)621/1235-134, E-mail: kaiser@zew.de

Ulrich Kaiser is employed as a senior researcher at the Mannheim-based Centre for European Economic Research (ZEW) in the Research Department "Industrial Economics and International Management". ZEW was founded in 1990 on the basis of an initiative of the Federal State of Baden-Wuerttemberg in co-operation with the Landeskreditbank Baden-Wuerttemberg and the University of Mannheim. In terms of research, the institute has a clear focus on microeconomic and industry analyses, as well as Econometrics. ZEW currently employs 70 researchers in the following Research Departments: International Finance, Labour Markets, Industrial Economics, Environmental Economics, and Corporate Taxation. The Research Department “Industrial Economics and International Management“ comprises 22 researchers, whose focus is on the innovative behaviour of German economy, the development of markets and regions, as well as on the service sector. The economic survey has been carried out quarterly by ZEW and Creditreform since the second quarter of 1994. A selected, representative cross-section of 4000 companies is surveyed quarterly by the ZEW and Creditreform since the second quarter of 1994. The random sample is frequently refreshed by start-up companies.