Transaction Cost, Innovation And Service Industry Structure Upgrading

China’s economic growth rate has begun to fall since 2012, from 7.7% in 2012 to 7.7% in 2013, and to 7.4% in the first half of 2014. The economy enters a new normal stage of development. At the same time, the service sector is growing stronger. In 2013 the added value of services industry for the first time became the largest industry in proportion in the national economy. Thus the new normal puts forward higher request to the service industry development. However, many problems exist in the development of service industry in China. One of the most significant is the service industry development level is low-the low value-added proportion of traditional service industry is larger and the high value-added knowledge intensive service sector is too low. Therefore, while maintaining the rapid growth of the total services, to speed up the service industry structure upgrading is the urgent need to solve practical problems in our country.The core factor in the development of knowledge intensive services is the knowledge innovation and communication. Innovation and dissemination of knowledge is a dynamic system. It’s a process that gathering the related to create and spread new knowledge. A variety of stakeholders are involved in this dynamic process and directly affected by the institutional environment and organizational factors. Therefore, the level of the transaction cost directly affects the success or not of the creation and the dissemination of knowledge.This paper starting from the perspective of transaction cost to analysis how the change of this cost influence knowledge innovation and diffusion, so as to promote the development of knowledge intensive services and reform traditional service industry and thus promote the service industry structure upgrading. After theoretical analysis, this paper also makes empirical research with the data from 2004-2013 years in 28 provinces and cities in China (excluding Tibet, Gansu and Guizhou provinces), which using the financial convenience degree and the government efficiency and the foreign direct investment to measure transaction costs, using the proportion of the added value of modern service industry in the third industry to measure the service industry structure. Test results confirmed that transaction costs reduced can promote the service industry structure upgrading through the intermediary variable--knowledge innovation and diffusion.Finally, based on the above theory and empirical analysis, this paper puts forward that our country should further perfect the market economic system construction, accelerate the reform of government management system and improve the social credit system to upgrade the service industrial structure.