Why Services Alone Can't Replace Manufacturing in Developing Economies

The Stimson Center, a Washington, D.C.-based foreign policy think tank, published an analysis in 2026 arguing that services can support development — but only if those services are globally connected and knowledge-intensive. The paper distinguishes between local, low-skill services and export-oriented, high-value services, and contends that only the latter are likely to deliver the sustained productivity growth and structural change historically associated with manufacturing.

According to the analysis, local services such as small-scale retail, domestic transport, and informal services provide income and employment but lack the productivity spillovers, scale, and export potential that propelled economies through industrialization. The Stimson authors emphasize that services linked to global markets — for example, digitally delivered professional services, specialized business services, and R&D-linked sectors — can generate higher wages, skill development, and stronger connections to global value chains.

How services differ from manufacturing

The paper lays out several mechanisms that set knowledge-intensive services apart from local services. Export-oriented services more easily capture productivity gains across firms and workers because they typically require technical skills, formal training, and integration with international clients or platforms. Those linkages can transmit standards, management practices, and investment, which then diffuse through an economy. By contrast, many local services operate in segmented, informal markets that do not create the same incentives for capital accumulation or productivity-enhancing innovation.

The analysis does not argue that services are unimportant; rather, it calls for a more nuanced policy emphasis. Countries that skip over the conditions needed for high-value services may see employment growth without corresponding gains in output per worker. The Stimson piece recommends targeting policies that build human capital, digital infrastructure, and regulatory frameworks that enable firms to connect with global demand.

Policy levers and implications for development actors

The authors point to policy levers that can cultivate globally connected services: investing in advanced skills and tertiary education, improving broadband and digital platforms, negotiating market access for service exports, and designing investment incentives that attract export-oriented firms. The analysis notes that these interventions look different from traditional industrial policy, requiring deeper links to trade policy, digital regulation, and education reform.

For Washington-based audiences, the report highlights how U.S. development programs and diplomats could prioritize support for service sectors with export potential rather than broad, local-service-focused interventions. The paper suggests rethinking aid, technical assistance, and trade promotion efforts to favor programs that help firms meet international standards and scale into global markets.

Looking ahead, the Stimson analysis calls for more empirical work to map which service subsectors actually generate the long-run gains associated with structural transformation, and for pilot programs that test targeted interventions.

Watch for whether U.S. development agencies and Hill staff incorporate this focus into programming and funding decisions, and whether the topic features in upcoming policy briefings and panels in Washington.