Does servicification affect firm markup? Evidence from Indian manufacturing

The past two decades have witnessed an interesting phenomenon of manufacturing firms engaging more in service-related activities. As a result, manufacturing activities have become more “servicified”. The servicification of manufacturing activities tends to reduce their cost and increase their product differentiation, which positively influences the markup of firms. We investigate whether servicification affects the price markup of Indian firms. We employ a fixed effects model on a large, unbalanced panel of manufacturing firms from 2001 to 2018 to investigate this nexus. Our study estimates price markup using detailed product-level information that allows us to overcome price bias, which is an important estimation issue across firm-level markup analysis. The results of our analysis indicate that more servicified manufacturing firms tend to experience a markup premium. Our findings remain robust to endogeneity concerns.