Thanks to their excellent performance, business services have attracted the attention of economists in recent years. According to national accounts figures, they contributed ATS 126.2 billion, or 5.2 percent, to GDP in 1996 and provided 143,490 jobs. In 1987 to 1996, average growth in value added amounted to 10.0 percent in nominal terms and 5.8 percent in real terms. Employment increased by 5.5 percent per year on average. In contrast, the services sector as a whole achieved an average job growth of 1.5 percent per year, whereas manufacturing lost 1.4 percent on average during this period. Compared to other OECD countries, Austrian business services lag behind, at a share of 6.1 percent of employment, although their growth rate is better than in most comparable countries. The speed at which they gain ground reflects the high growth potential inherent in this sector. It is expected that in-house services will be increasingly outsourced. Looking at input-output statistics for 1983 and 1995, we find that the manufacturing sector has indeed stepped up its provision of services but that additional demand for new services has been created in parallel. Available data suggest a net increase of new jobs, although no proper econometric evaluation has yet been made. In this paper it is argued that business services have a number of distinct characteristics which create barriers to competition. They are basically intangible and cannot be traded. Ex-ante quality are unobservable, which frequently leads to information asymmetries (especially moral hazard). It is thus important for suppliers to establish long-term relationships with customers and to project a quality image. For this reason the market for business services is characterized by a high degree of regulation as well as high entry barriers. The sector is also a typical example of a market with a wide range of products, dominated by some companies and little competition in spite of the generally small size of firms and the absence of economies of scale. Business services are intermediate inputs which improve a region's standing as a business location. A great variety of specialized services, usually tied to the location, leads to productivity gains for the production sector, which in turn drives supply when sufficiently large. The forward and backward linkages between the two sectors induce agglomeration economies and fosters the establishment of core-periphery patterns. In the presence of proximity advantages, e.g., arising from transportation costs, regions in the center can maintain higher real wages due to agglomeration economies, while competition between regions to attract new industries is weakened.