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OCR for page 119
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
OCR for page 120
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).
OCR for page 121
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
OCR for page 122
122
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OCR for page 123
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.
OCR for page 124
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)
OCR for page 125
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
OCR for page 126
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.
OCR for page 127
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.
OCR for page 128
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.
OCR for page 129
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
OCR for page 149
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).
OCR for page 150
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
OCR for page 151
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OCR for page 152
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 $250. This gap
is overstated because more than 20 percent of all services workers are
employed part-time (less than 30 hours per week); part-time workers consti-
tute less than 5 percent of all manufacturing employees. Hourly wages in
specific industries and current trends paint a more encouraging picture for
services. Although average hourly wages per worker are higherin manufac-
tunng than in some major services industries, notably retailing, over ser-
vices activities enjoy higher average hourly wages than manufacturing, and
the gap is closing in financial and other services (see Table 131.
Job opportunities in He United States have, of course, been growing
most rapidly in He services sector for years. But recent job grown has
been dramatic. From 1948 to 1978, manufacturing jobs grew by 3.6
million, but only 600,000 of these employees were in production jobs.
More recently, 642,000 jobs were lost in manufacturing from February
1981 to February 1985, but services employment grew by 3.1 million.
Since more affluent people spend a higher percentage of their income on
services, this trend is likely to continue for He near future. The Bureau
of Labor Statistics (BLS) also estimates Mat about half of all new man-
ufac~nng jobs created between 1969 and 1979 were white collar. Neal
Rosenthal of BES's Division of Occupational Outlook estimates that the
OCR for page 153
THE IMPACTS OF TECHNOLOGY IN THE SERVICES SECTOR
TABLE 13 Average Hourly Wages per Worker
153
1983 1984 Grc
($) ($) (%)
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.
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Representative terms from entire chapter:
financial services
