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The Impacts of Technology in the Services Sector JAMES BRIAN QUINN In recent years much attention has been appropriately focused on the structural changes technology has wrought upon manufactunng, particu- larly In the United States. But technology has created even more dramatic changes ~ the services sector, which now accounts for some 68 percent of U.S. GNP and 71 percent of U.S. employment. The shift toward services has been a long-term ~end, not only in the United States but ~ all major ~ndustnal~zed counmes (see Figures 1 and 2~. This chapter addresses a variety of issues relating to technological change and services: What are the major causes and implications of He shift toward a services economy? How has technology restructured He services sector and how does this restructuring affect U.S. trade and competitiveness? Can a services economy generate a continuously higher standard of living? How might a services economy and services technologies affect na- tional sovereignty and He nation's posture In the world? WHAT IS THE SERVICES SECTOR? Many engineers and executives mistakenly perceive the services sector as "making hamburgers" or "shining shoes." Such simplifications belie He complexity, power, technological sophishcahon, and continuing grown potentials of services in a modern economy. Although there is not complete consensus on a definition for He services sector, it is generally considered 119

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120 O _ JAAIES BRIAN QUINN 100 _ 80 % Manufactunns -~~ 1 1840 18S0 1880 1900 1920 YEAR 1940 1960 1980 1995 FIGURE 1 Employment in industrial sectors as percentage of total labor force. From Quinn (1983). FIGURE 2 Percentage of employment in service industries, five nations, selected years, 1960 to 1982. From Quinn (1986).

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THE IMPACTS OF TECHNOLOGY IN THE SERVICE SECTOR 121 to embrace all Pose Standard Industrial Classification categories in which (1) the primary output is not a product or a construction, (2) value is added principally by other means (such as convenience, amusement, feelings of well-being, improved knowledge, security, heals, comfort, location avail- ability, or flexibility) Mat cannot be inventoried, and (3) outputs are es- sentially consumed when produced (Collier, 1983; Mark, 19821. "Services" cannot be viewed as a single sector easily isolated from all others. Table 1 suggests its scale, diversity, and economic impact. If one defines an industry as a group of enterprises whose outputs are largely substitutable for each over, there is no such Ming as a single services sector. The sector is at least as heterogeneous as manufactunng; one should think of it as a grouping of diverse industries, just as manu- factunug is. This context makes it easier (l) to understand some of the more important relationships between technology and specific services industries, and (2) to dispel some of the myths about the services sector. MYTHS ABOVT THE SERVICES SECTOR The first myth about services is that they are somehow less important on a"human needs scale" (Mallow, 1954, chapters 5 and 8) than products. Hence (so Me argument goes), services cannot provide Me same value added or economic stability as a production economy. In elemental so- cieties, Me first value added is created by the mere presence or adequacy of a product, for example, producing food for sustenance, housing for basic shelter, or clothing for protection from the elements. ~ But as soon as Mere is even a localized self-sufficiency or surplus in a single product, added value is created by distribution of the product-a services activity. In fact, the added production is wordless without Me distribution. In such primitive societies other"services," such as health care, edu- cation, trading, entertainment, religion, creative designs, and nonfunc- i~onal art works, quickly become more highly valued Man basic products, whose production soon becomes the work of the poor. Similarly, in modern societies most of a product's added value is due to service functions: better design, convenience in use, packaging, distribution, marketing presen- tation, post-purchase serviceability, and so on And many of the most highly valued (high-pnced) activities in the economy are services such as architecture, art, health care, entertainment, travel, banking, investment, personal security, or education. Initial analyses indicate that measured value added in the services sector is at least as high as in manufacturing (see Figure 31. Services also appear less cyclical Man manufactunng. In He last two decades, services em- ployment has advanced an average of 2.1 percent during economic con

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IRE IMPACTS OF TECHNOLOGY IN THE SERVICES SECTOR 123 tractions and 4.8 percent dunug expansions. Employment in Me goods- produc~g sector declined an average S.3 percent In recessions and in- creased an average 3.8 percent in expansions (Office of the U.S. Trade Representative, 1983, p. 21) (see Figure 4~. This means Mat people will give up many product purchases (indicating lower marginal utility for those products) before they win sacrifice desired seances like education. telephones, banding, heath care, police, or fire protection. A second myth is Mat service ~ndustnes are much more labor-intensive and less technolog~caDy based than manufacturing. Stephen Roach of Morgan Stanley & Company, Inc., has shown Rat capital stock per services worker has been rising since Me m~-1960s and now surpasses that for manufacturing workers (Roach, 1985~. Kutcher and Mark's data- group sing 145 industries on Me basis of capital stock per worker and labor hours per unit of output-show wide variations In labor intensity in bow Me manufach~ng and services sectors. Some senice ~ndus~ies notably rail and pipeline transportation, broadcasting, communications, public ubli- ties, air transport-are among the most capi~-intensive of all industries. Nearly half of Me 30 most capital-intensive industries were services. But, 30 ~ 25 o a e Lu 20 as 15 10 v, At s o FOG. SERVICES NON-RETAIL RETAIL FIGURE 3 PIMS index of value added. Denved from Dusky survey and calculations from PIMS (Profit Impact of Management Strategy) 1985 data base, Strategic Planning Instate, Cambridge, Massachusetts.

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124 JAMES BRIAN QUINN 8 _ _ ~ Real GNP .:. | ~ RealGoods 6 _~ it. ~ Rea Services - j15~ ~11111 o2t ~ -8 _ 1 1 1 1 ~ I I I I ~1 1 1 1971 t973 1975 1977 YEAR FIGURE 4 Recession resistance of the services sector. 1979 1981 1983 surprisingly, few service industries were found in the three lowest capital- intensity deciles (Kutcher and Mark, 1983~. Profit Impact of Management Strategy (PIMS) data from the Strategic Planning Institute, Cambndge, Massachusetts, also show that aggregate capital intensities in services are comparable to those in manufacturing (see Figure 5~. Many service indusmes are very technology-intensive today. One Minks first of communications, information services, health care, airlines, and public utilities. But the banking, education, financial services, enteltain- ment, car rental, message delivery, and retailing industries have also become technology-intensive (Office of Technology Assessment, 1984~. For example, retail discounting (largely by major chain retail operations)

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THE IMPACTS OF TECHNOLOGY IN THE SERVICES SECTOR 140 20 ~ 1 - - J o o oo o lo: 80 60 40 20 o _ ......................... ; :dL MFG. All SERVICES NON-RETAIL RET-AIL F IGURE 5 PENIS indices of capital intensity. PEWS 1985 data base, Strategic Plan- n~g Instate, Edge, Massachusetts. 125 represented 48 percent of all retail general merchandise sold to Me public In 1984, and the top five merchandise chains had more than $70 billion in total sales in 1985.2 These and We large food-retailing chains require extraordinarily sophisticated computer, communications, product conuol, credit, and cash-management systems to compete successfully. The ser- vices sector is a major market for high technology~ne study indicating that 80 percent of the computing, communications, and related information technologies equipment sold in 1982 went to the services sector (Kirkland, 1985~. In Britain 70 percent of all computer systems sold in 1984 went to the services sector (The Economist, July 6, 1985~. A third myth about Me services sector is Mat it is much too small-scale and diffuse either to buy major technological systems or to do research on its own. Again, initial analysis of Me PIMS data suggest this is not true. Although detailed Herfindah] indexes are not available, concentration and mechanization in Me services sector (see Figures 6 and 7) appear to be about as high as in manufacturing.3 Thus, the sector has the potential not only to purchase technology but also to contribute to its conception, design, arid development. We have not included government agencies or municipalities in our statistics, but they clearly have similar capabilities. A fourth myth is the fear Mat a services economy cannot continue to

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126 ]~= Big QUINN 80 70 a 60 o m J tar 40 In ILL o as US ~ 10 30 20 a: MFG. AU SERVICES NON-R~AIL RETAIL FIGURE 6 PIMS indices of concent~on. PlMS 1985 data base, Strategic Planning Institute, Cambridge, Massachusetts. 90r 80 z lo FEZ ~ 50 ILL lo x z 70 60 40 30 20 10 o MPG. At SERVICES NON-R~AIL RETAIL FIGURE 7 PUPS indices of mechanization. Index of mechani7~don calculated as [Gross Book Value of Plant and EquipmentJ/[(Value AddedlNet Sales) x (Net Sales + Change in Inventory/Percent Plant Utilization)]. From PIMS 1985 data base, Strategic PI=Ding Institute, Cadge, Massachusetts.

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THE IMPACTS OF TECHNOLOGY Ill THE SERVICES SECTOR TABLE 2 Productivity Increases in Me Services Sector 127 Percent Average Annual improvement 1960-1983 1970-1983 . Telephonelcommu~cations 6.1 6.8 Air ~sportadon 5.8 4.5 Raided (revenue Tic) 5.1 4.8 Gas, elec~icalublides 2.7 1.Oa Commercial fig o.gb Hotels/motels 1.6 0.8 a 198 1 data bl982 "a. SOURCE: Bureau of Labor Stadshcs, Office of Product and Technology. create an ever higher level of per capita income. Part of this fear is We belief that services do not lend themselves to productivity increases through technology infusions. Our analysis suggests Mat the overwhelming pro- portion of productivity increases In both manufacn~nng and services have denved from capital and technological infusions. Between 1975 and 1982 there was a 97 percent Increase in new technology investment per service worker (Office of the U.S. Trade Representative, 1983, p. 24~. Some service industries have undergone significant improvements in productivity over the last two decades. In others, such improvements have not been very impressive (see Table 21. At Me margin, services and manufactunug seem about equally attractive to capital (see Figure 8~. Consequently, one would expect a continuing willingness to invest in services for productivity improvements and com- petinve advantage whenever services can offer adequate returns. Because less attention has been given to automating services than to manufacturing, many oppormnides to improve productivity still exist, and office automa- tion is high on both producers' and users' lists of priondes (Collier, 1983). Services can create real grown in per capita income as long as any of Tree conditions obtain: (1) We product sectors can produce enough output at continuously lower relative costs to release purchasing power for over desired (services) uses, (2) it is possible to increase productivity in existing services, or (3) entrepreneurs can conceive of new services having higher marginal value to buyers Man existing services or products. Widen wide limits, the services economy is a natural outgrowth of productivity increases in Me goods-producing sector. Whereas agriculture once demanded some 70 percent of aB employment in the United States, less Man 4 percent of die work force now produces much more food per capita including 50 percent more of Me major grains Man Me country can eat (see Figure 11.

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128 JAAlES BRlAlI QUINrN 120 toe 2 80 60 ~ 40 an By 20 o ILL MFG. ALL SERVICES NON-RETAIL RETAIL FIGURE 8 PIMS indices of investment efficiency. From PIMS 1985 data base, Stra tegic Plamiing Institute, Cambndge, Massachusetts. A similar productivity phenomenon is now at work in manufacturing. Win a decrease in the number of hours of work needed to produce or buy a basic automobile, radio, or washing machine, He percentage of the economy able to be devoted to other things naturally goes up. Since Be average person can eat only so many pounds of food or use so many cars, washing machines, or appliances, Me marginal utility of over Wings nses, and in recent years these Dings have often been services. As We perceived value (relative utility) of these activities increases, a given expenditure on services will create greater value at He margin and wealth is enhanced. For decades, He services sector has provided the U.S. engine for grown (see Table 31. Once survival needs are met, the relative value (or utility) of all other objects, concepts, or services is solely a creation of He human mind. Pearls, gourmet foods, more comfortable furniture, vacations, phonograph records, parks, high-powered cars, or Gavel have value only because people create this value in Heir minds. Thus, Here is no intrinsic limit to the wealth a services economy can create, over than the limits of human imagination in finding or placing higher values on new services. Such limits seem remote at the moment.

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THE IMPACTS OF TECHNOLOGY IN THE SF8 VICES SECTOR TABLE 3 Services Grown 129 Compound Annual Growth (percent) . 1960-1984 1980-1984 Sector Goods-producing 2.82 4 Agriculture, forestry, fisheries 1.43.1 Construction 0.71.2 blanufac~ring 3.52.6 Mining 2.11.0 Services-producing 4.03.6 Communication 7.14.7 Telephone, telegraph 7.64.7 Radio, television 2.96.2 Finance, insurance, real estate 4.02.9 Banking 3.81.7 Insurance 3.00.2 Secundes, commodities brokers 4.616.9 Real estate 4.23.3 Public utilizes 3.91.9 Services 4.12.4 Amusements, recreation 3.44.9 Auto repair 4.21.5 Business services 6.87.2 Heals services 5.23.6 Legal services 4.66.4 Personal services 0.41.9 Transportation 2.1-1.0 Wholesale, retail trade 3.94.7 SOURCE: New York Times (October 27, 1985). THE LIMITS OF CURRENT DATA To help show how technology affects the generation of wealth through He services sector and the structure and competitiveness of a modern econ- omy, this paper draws upon ~nfonnahon collected from four data bases: the Bureau of Labor Statistics, the U.S. Department of Commerce, He Stan- dard & Poors Corporation's Compustat Tapes, and the PIMS data base. Aggregate data for the services sector are compared against aggregate GNP and manufacturing sector data and are analyzed for each major services sector to reveal certain key variables and make appropriate comparisons among the sectors. This chapter also draws upon information obtained from

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THE IMPACTS OF TECfINOLOGY IN THE SERVICES SOPOR 149 fields, but Heir productivity (in GNP per person) has consistently lagged behind that of Be United States, largely because of a less-produc~ve services sector (see Table 101. As an economy moves ever closer to a total services base, a most important question emerges: What does Me nation trade to obtain the manufactures and raw materials it needs from external sources? Although U.S. manufacturing and agricultural exports have suffered notable relative declines in recent years, He United States has had a strong positive net balance of Bade in services and income from investments abroad, excluding payments for investments in the United States (see Table 1 1~. Some have questioned whether traditional arguments of comparative advantage will be relevant in world services trade, especially in financial or informaiion- based services where everyone can buy the same hardware (and often the same software) and connect into He same networks (Deardorff and Jones, 19851. This problem is compounded in the technology because the de- velopers of much of the technology used in services trade are suppliers (often manufacturers) whose incentives are to sell and Nodule Weir technologies as widely and quickly as possible worldwide. With rapidly advancing generic technologies such as electronics and communications driving the services industries, it will be difficult to es- tablish or maintain a national competitive advantage in any given services industry. Nations' trade and economic policies may have to focus more on improving education infrastructures and removing bamers to fast and flexible deployment of technologies and less on traditional investment- onented industrial policies (Grossman and Shapiro, 19851. For example, The Economist (November 29, 1985) asserts that by early deregulation of TABLE 10 Comparative Services Productivity, United States and Japan (dollar output per hour) Japan U.S. U.S./Japan 1970 1980 1970 1980 1980 Private domestic business 3.59 6.01 9.40 10.06 1.67 Agriculture 1.37 2.38 16.53 18.36 7.71 Selected services Transportation and communication 3.86 5.66 9.29 13.14 2.32 Electricity, gas, water 14.01 19.74 21.98 25.38 1.29 Trade 2.88 4.53 6.88 7.92 1.75 Finance and insurance 6.69 12.03 8.21 8.20 .68 Business services 3.39 3.60 7.69 7.59 2.11 Manufacturing 3.91 8.00 7.92 10.17 1.27 SOURCE: UNIPUB (1984).

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150 JAMES BRIAN QUINN TABLE 11 United States Net Trade Balancea (billions of current dollars) Category 1965 1970 1975 1980 1981 1982 Net goods and 1983 1984 sentences balance 8.3 5.6 22.89.013.20.1-31.9- 90.1 Merchandise balance 5.0 2.6 8.9- 25.5- 28.0- 36.4- 62.0- 108.3 Services balance 0.2 0.2 1.86.3S.37.44.80.8 Net illvesunent income 5.3 6.2 12.830.434.129.125.419.1 Q Excludes misty mansions. SOURCE: U.S. International Transactions 1960 1984, Washington, D.C.: U.S. Department of Commerce, Bureau of Economic Analysis. communications markets, the United States gained a lead in bow use and production of communications technologies Tat Europe's more regulated sectors may never close. On We other hand, there is little room for com- placency. Many countries and companies have proved that Weir skills in managing services enterprises are formidable indeed. The United States must work hard not to dissipate its lead in communications as it did in manufactunug. Ominously, however, many of the same causes of lost position are beginning to appear in this sector, namely, a short-term on- entation, inattention to quality, and overemphasis on scale economies as opposed to customers' concerns. The made balance in merchandise has been negative in 11 of We last 24 years. In more than half of these, however, services Concluding ~n- vesunent returns) have put the current account in the black. But even adding $10 billion for Me U.S. 10 percent share of understated world services made (Office of Me U.S. Trade Representative, 1983, p. 108), long-term prospects do not look encouraging for U.S. trade balances unless manufacturing returns to Me United States and Me strong U.S. dollar weakens. Table 12 gives a detailed breakdown of U.S. services Bade. Many experts believe that the net effect of services trade is even more seriously understated by definitional and reporting biases. For example: As their major customers increasingly sought international raw ma- tenals, supply sources, economies of operating scale, or markets, bod U.S. and foreign banks followed their customers overseas In the 1970s. By the early 1980s, 30 40 percent of all U.S. bank profits came from ~ntemational operations, with many of Me money center banks ex- ceeding 50 percent (The Economist, March 16, 1985~. The International Trade Commission cited an estimate that In 1982

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152 JAAlES BRIAN QUINN nearly 25 percent of U.S. merchandise exports went to U.S. services businesses overseas. Some services, such as Filling, minerals exploration, civil engineering, banking, communications, or transportation, can be readily exported or are necessary purchases an outsider must make to made in the economy. Certain technologies can be exported through licensing agreements. However, most such agreements pertain to manufacturing or product technologies. Without significant production inside the parent county (for example, the United States), a nation's ability to generate intemational services revenues Trough royalties or technology payments may be senously impaired. How serious this impairment could be is unknown. Many experts believe that, unless manufacturing reverts to advanced countries through mechanisms like those suggested, increasingly services-onented economies of advanced counties could lead to a serious and continuing weakening in their world trade positions, their strategic capabilities, and the value of their currency in world trade. What the net effect might be as all affluent countries move toward services economies needs serious research. Growth arm Distribution of Wealth What are the effects of a services economy on distribution of grown and wealth, domestically and internationally? How does technology affect He process? For nonsupervisory workers, weekly average wages in manufac- tunug are about $373, whereas wages in services are about $250. This gap is overstated because more than 20 percent of all services workers are employed part-time (less than 30 hours per week); part-time workers consti- tute less than 5 percent of all manufacturing employees. Hourly wages in specific industries and current trends paint a more encouraging picture for services. Although average hourly wages per worker are higherin manufac- tunng than in some major services industries, notably retailing, over ser- vices activities enjoy higher average hourly wages than manufacturing, and the gap is closing in financial and other services (see Table 131. Job opportunities in He United States have, of course, been growing most rapidly in He services sector for years. But recent job grown has been dramatic. From 1948 to 1978, manufacturing jobs grew by 3.6 million, but only 600,000 of these employees were in production jobs. More recently, 642,000 jobs were lost in manufacturing from February 1981 to February 1985, but services employment grew by 3.1 million. Since more affluent people spend a higher percentage of their income on services, this trend is likely to continue for He near future. The Bureau of Labor Statistics (BLS) also estimates Mat about half of all new man- ufac~nng jobs created between 1969 and 1979 were white collar. Neal Rosenthal of BES's Division of Occupational Outlook estimates that the

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THE IMPACTS OF TECHNOLOGY IN THE SERVICES SECTOR TABLE 13 Average Hourly Wages per Worker 153 1983 1984 Grc ($) ($) (%) Average nonagricultural 8.02 8.33 3.9 Manufactunng 8.83 9.18 3.9 Durable 9.38 9.74 3.6 Nondurable 8.08 8.37 3.6 Transportadon and utilities 10.80 11.11 3.2 Wholesale trades 8.54 8.96 4.7 Retail 5.74 5.88 2.6 Finance, insurance, real estate 7.29 7.62 4.5 Over services 7.30 7.64 4.3 SOURCE: Survey of Current Business, June 1985, Table S12. shift to services employment in the last decade has actually decreased the percentage of workers holding low-paying jobs (Kirkland, 19851. BLS forecasts to 1990 suggest Mat low-paying services jobs will keep pace with, but not exceed, total grown in employment. But some service areas win high-paying jobs (such as computer services and investment banking) are expected to have high growth (see Figure 11~. More than 60 percent of U.S. employment is now in He information industnes, and virtually all of He 20 highest-growth occupations in the 1980s, as forecast by BLS, are in information handing. The Fishman-Davidson Center (University of Pennsylvania) showed that dose states with He highest proportions of services employment also had the highest real income averages (see Figure 121. However, which is the cause and which is the effect is not clear. Although some observers have suspected that the strife from manufac- tunng to services was a pie cause of the productivity slowdown in the United States in He 1970s, Kutcher and Mark (1983) found Mae such changes accounted for less than 0.1 percent of He change in productivity grown from 1959 to 1979. A real cuipnt, however, was He shift from high to low productivity goods-producing industries, accounting for up to 0.6 percent of He slowdown per year. Since many services jobs must be close to the point at which the services are usecl' services employment tends to become more geographically dispersed, following people's pref- erences for suburban and rural living. The quality of employment thus improves on two scales. Many physically difficult or hazardous jobs in production disappear in favor of "white collar" jobs in services, and He location of jobs is generally more pleasant and convenient. Services allow more part-time jobs for multiple-income families, and there is evidence that the family income for those employed in services may Bus be higher Han for those in manufacturing.

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154 JAMES BRIAN QUINN 100 80 60 -20 40 ~ 1 1 . ~ 0~. ~O ~ ~g I':- . 1 . . l ,,`0~ 0~0' ',9~' FIGURE 11 Projected job grown by 1995. From Bureau of Labor Statistics. SOME ULTIMATE QUESTIONS '~ ,~,~~G This discussion may lead to several ultimate questions about seduces economies. Can a services economy remain wealthier in Be long run than more manufacturing-onented economies? How far can an economy move toward a services base before it can no longer maintain its relative wealth? Can a services economy support the R&D necessary to maintain intellectual leadership and a high level of productivity grown? Can Services Allow Greater Wealth? As productivity increases in various manufacturing sectors, a large coun- try such as the United States can reach self-sufficiency in a wide variety of products, employing only a small percentage of its population in manufac- turing just as less Man 4 percent of the U.S. population now in agriculture produces a surfeit of food. Once reasonable self-sufficiency is obtained in a modest range of production, We definition of "wealthier" becomes more subjective. It depends on He relative value placed on different goods or

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THE IMPACTS OF TECHNOLOGYIN THE SERVICES SECTOR 155 services by the society. A more stable, safer, healthier society with fewer goods could be considered wealthier than one with more goods. Although some observers claim that services industries are inherently Incapable of creating "wealth" that can be transferred to future generations, even this argument fails. Better education, art, literature, heal care, cultural capabilities, convenience in transportation, communication ca- pabilities, recreational availability, and personal security can be transferred to future generations. These services have been the true measures of wealth throughout history. Thus, services societies can easily be wealthier Man production-oriented economies especially if the latter must pay a high premium in environmental degradation. In fact, some observers believe a . . services-< riven economy may represent the most advanced level of ecm noetic development. 9000 8000 oh a: o n 70OO ~ 1979 _. 1 982 6000 _ L . _ 3 , , below 60% 6005% . 65-70 ~above 70~ FIGURE 12 Average state real per capita income by percent of total private nonf~n employment in services in states. From Fishman-Davidson Center (1985).

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156 JAMES BRIAN QUIN7t What Is the Basis of Worm Power? We often equate manufacturing power win economic wealth and world power. We forget Hat in the past the wealthy and great nations tended to be the Baling nations, the educated nations, and the money centers of the world. Commerce, not manufacturing, led to wealth and power. Has the world changed fundamentally In the last 100 years? Perhaps so. Military power recently seems to depend on production power. But today selected intellectual and research capabilities in high technologies may be more important militanly than massive production potential, especially if a war is short. Nevertheless, it seems unlikely that a large modern country could maintain its strategic viability without world competitive aerospace, steel, chemicals, transportation, electronics, communications, and related sum port industries. Some of these industries may need significant government support to be strong enough to meet the needs of defense, but fortunately most do sell extensively to the services sector. This sector could, if properly stun- ulated, provide the basic technological demands to maintain an important level of defense preparedness. Industries such as airlines, communications, information systems, financial services, and rental cars already hold such potential. Careful analysis is needed to explore the strategic issues raised by an economy increasingly oriented toward services. OVERALL IMPACTS: TECHNOLOGY IN SERVICES Technological advance is rapidly revolutionizing modern economies Trough services and presenting entirely new opportunities and challenges for corporate and national policymakers. The old "mom and pop store" and "hand laundry" analogies are anachronistic. Technology has created services indusmes of a scale, sophistication, complexity, and value-added potential to match close of any manufacturing industry. In fact, services and mamlfac~ng are inextricably intertwined. Services industries are among He most important customers and suppliers for manufacturing. They buy many of manufacturing's highest-technology products and they provide important inputs for manufacturers, offenog tile latter opportunities to have lower cost Han foreign competitors in critical areas. Services substitute so broadly and directly for manufacturing functions Hat no manufacturer's strategy is complete without a thorough consideration of how services (or services technologies) can contribute to the company's productivity, value added, grown, flexibility, and output quality. In international trade, services create strong relationships between a foreign company and its host countnes. Most of the benefits of services

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THE lAlPACTS OF TECHNOLOGY IN THE SERVICES SECTOR 157 industries Me "product" as well as jobs and facilities accrue to the host country, thus developing a strong mutuality of interests between parent companies and host countnes. At present some U.S. services companies enjoy economies of scale and scope Heir international competitors cannot equal except In banking and communications. And We deregulated U.S. marketplace provides them a unique stimulus for innovation. If U.S. services companies move aggressively to develop Heir own proprietary technology systems, Hey can maintain a 1- to 2-year competitive edge in most services areas. Any slowdown or delay in such innovations win be sure to attract competitive incursions In He U.S. and world services mar- kets as has already occurred win Japanese banking, tounst, hotel, and airline expansions and significant European acquisitions in U.S. distri- bution and tourist made activities. National sovereignty may be challenged in new and sigruficant ways by He emergence of modern technologies in the services sector. An individual country will undoubtedly find it harder to control some of its most important resources; for example, information, monetary flows, and intellectual prop- erty. Interdependence and diffusion in these areas, however, could lead to greater world stability and less disparity among nations. As capital and information increasingly flow electronically across borders, a real question exists whether traditional comparative advantages are possible, in the long run, and if not whether He very basis for Bade decreases. If nations or corporations cannot capture the benefits of their research, will they continue to perform it? Or win they be forced to even more frantic efforts to maintain at least a short-term edge Hat makes profits possible? The long-term structural shift to services raises intellectual questions and important policy issues but, while there are certainly some problems, it seems inappropriate to be afraid of a greater services economy or to deride it. A greater fear should be that nations misunderstand He services sector, underdevelop or mismanage it, and overlook its great opportunities while shoring up manufacturing industries at great national and corporate costs. ACKNOWLEDGMENTS The author gratefully acknowledges He generous contributions of Bell and Howell Company, Bankers Trust, and the Royal Bank of Canada in supporting He research for this chapter. NOTES 1. Note that even here He product (cloning) has value only in relation to the service (protection) it provides its possessor.

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158 JAAIES BR1A~ QUINN 2. Annual reports, Sears Roebuck and Co., and J. C. Penney, K mart, WAL~t, and Zayre Corporations. 3. This conclusion is based on die PITS data, which are self-repor~d by relatively large companies, and like other date bases on service industries have some inherent definitional problems. 4. London banks, for example, reported handling 128 percent more cleanugs in 1982 than in 1973 wide only a 33 percent increase in personnel (The Economist, July 6, 1985). 5. Studies of productivity in manufacturing also indicate that a typical product is worked on dunag only about 8-10 percent of its production cycle; some 90 percent of its cycle is consumed in movement, waiting, inspection, and over support activities. REdf:ERENCES American Bankers Association. 1984. Statistical loformation on the Financial Sentences Industry. 3rd Edition. Washington, D.C. Business and Health. 1986a. Insurer provider networks: A mari~etplace response. (January- February):20-22. Business and Health. 1986b. The world of insurance: What will the future bring? Oanuary- February):5-9. Collier, D. 1983. The services sector revolution: The automation of services. Long Range Planing 16(December):1~20. Collier, D. 1984. Managing a service fiml: A different game. National Productivity Review (Winter). Cooper, K., and D. Fraser. 1984. The changing structure of the financial services industry. In the Banking Deregulation and He New Competition in Financial Services. Cambridge, Mass.: Ballinger Publishing Company. Credit Suisse-Firsa Boston Bank. 1983. Section 1.3 in Eummoney Yearbook 1983. Boston, Mass. Deardorff, A., and R. Jones. 1985. Comparative advantage and international trade and investment in services. Fishman-Davidson Center discussion paper. Philadelphia, Pa.: The Wharton School, We University of Pennsylvania. DeYoung, G. 1985. Heals care looks beyond He hospital. High Technology (September). The Economist. July 6, 1985. The other dimension: Technology and the City of London. A survey. 296(7401):50. The Economist. March 16, 1985. International investment banking: The world is Heir oyster. A survey. 294(7385):58. The Economist. June 29, 1985. A threatening telephone call from the computer company. 295(7400):69 The Economist. November 29, 1985. Telecommunications: The world on die line. A survey. 297(7421):62. Financial Times. October 4, 1985. Into He era of specialization, special Financial Times survey on computing services. Financial Times. October 4, 1985. Keeping ahead through sophistication. Fishman-Davidson Center. 1985. The Service Bulletin (summer). Philadelphia, Pa.: The Wharton School, The University of Pennsylvania. Gardiner, R. 1985. Sears' role in consumer banking. The Banicers Magazine (January- February):~10. Grimm, W. T. 1984. Mergerstat Reviews. Chicago, Bl. W. T. Grimm Co. Grossman, G., and C. Shapiro. 1985. Normative issues raised by international trade in

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