Business services in regional economies: exploring the co-evolution of supply, demand, and sectoral interactions

Abstract The aim of this paper is to demonstrate how economic growth stimulates business-service providers to develop new service varieties, which, in turn, enhance the productivity of business-service buyers. This creates a coevolutionary process where service suppliers and customers interact, leading to an increase in the number of differentiated service offerings. We introduce a framework for local economies, wherein business-service sectors evolve in response to local demand potential, while non-business-service sectors grow based on each economy’s supply potential. Business service growth is more rapid in local economies with higher demand potential, while non-business-service sectors expand faster in areas where the business-service supply potential is greater. A key assumption is that business service firms operate in a monopolistic competition environment, where an increase in business-service capacity leads to an expansion in the variety of services offered. This, in turn, enhances the diversity of service offerings in municipalities with strong demand potential. Additionally, service providers not only deliver innovation-related information to client firms but also unintentionally disseminate knowledge within the region, fostering knowledge spillovers among firms.