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Technological Innovation and Services JORDAN I. BARUCH Jordan ]. Baruch Associates The growth in recent years of services as a component of national economies has drawn more than a passing glance from the World Bank and other institutions concerned with Third World development. Indeed, the extent of this interest in services is evident in a 1994 Bank publication, Liberalizing International Trans- actions in Services: A Handbook. In the services area, technological changes are producing impacts as important as those they have produced in mining, manufac- turing, and agriculture. Not only are the changes important, but they also are blurring (if not obliterating) the distinctions between services and the other eco- nomic sectors. James Brian Quinn et al. have pointed out that today in the developed na- tions, services are large, technology- and capital-intensive industries that are virtually inseparable from manufacturing. Elsewhere, the National Research Council has described information technology and its impact on the performance of services in developed countries.2 In looking at services, these publications have analyzed, in terms relevant to the Bank's mission, the impacts of the tradi- tional service sectors finance, real estate, insurance, retail and wholesale trade, transportation, communications, and sometimes construction-under the forces of technological change, on the overall economy, including manufacturing. While these analyses have focused on the developed world, there is little reason to expect significant differences in the developing countries. But rather than review the implications for the developing countries of what already has been written, this paper will focus on the technologies of information- based services and their implications for developing countries. The first section, on embodied services (a term borrowed from the concept of embodied technolo 210
JORDAN J. BARUCH 211 gies), focuses on the transborder trade in goods that are, in essence, indistinguish- able from services. The second section, which addresses transborder services, focuses on information-based services in the developing countries that serve both . . . . as Import and export activities. While there may be many questions about the predictions made at the Sym- posium on Marshaling Technology for Development, one thing is clear: the grow- ing technological, managerial, and political sophistication of the developing coun- tries will produce a strong force for the vertical integration of their industries and their services. Indeed, they will exploit every opportunity to secure added value by moving up the input scale while developing capital goods and using them to fill in the lower levels. Does this sound familiar? EMBODIED SERVICES Some important technological changes taking place in the Third World de- pend heavily on information technology, but they have become evident in more material ways. For example, a women's clothing company called The Limited gathers copious data at its point-of-sale terminals which are analyzed almost continuously at its central office. Based on these analyses, the firm predicts when it must reorder a particular item. The transaction order is then automatically generated and, once approved, is transmitted electronically to China or wherever that item is to be fabricated. When the order is received, it is filled and the garments are shipped by air back to drop points in the United States. Thus within days of the order, the goods are in The Limited's retail outlets. Certainly, the data gathering, computing, transmission, transportation, distri- bution, and retailing are services. But how about the actual fabrication of the garments? Under the influence of today's drive by the industrialized countries to outsource anything in which a firm does not excel,3 fabrication also must be considered a service. A closer look at the potential positive and negative impacts of technology on services in the developing countries may reveal that this kind of fabrication is one of the more important services. Research and development services performed in the industrial nations may, under the right conditions, be particularly amenable to embodiment in goods generated in developing countries. Such a transfer has been seen in electronic fabrication, agriculture, and food processing, but it is far from simple. For ex- ample, recent discussions among the National Mariculture Center in Israel, the government of Jordan, and representatives of the World Bank have highlighted an interesting question that is likely to have ongoing implications for services in the developing countries. In Elat, Israel, adjacent to Aqaba, Jordan, the National Mariculture Center has developed exquisite technologies for the genetic manipu- lation, culture, and care of several fish species that are in great demand. For the gilt-head bream, an expensive saltwater fish marketed in France as dorade, the center has succeeded in producing a continual flow of bream fingerlings through
212 Marshaling Technology for Development out the year. Jordanians recently expressed a strong interest in forming some kind of partnership to share in this activity, although the two countries differ widely in their levels of technological sophistication in this field. Yet conversion of the fingerlings into marketable, edible fish requires a large land area for ponds and access to saltwater both of which Jordan has. It also requires careful feeding, control of disease, and good harvesting practices skills that Israel knows how to teach. The conversion of fingerlings to fish is a kind of farming. Indeed, the Israelis now doing the conversion are not highly trained technologists or skilled biologists or ichthyologists; they are farmers. They, in fact, are the service branch of a partnership that converts the center's R&D output into an economic product. And clearly these fish farmers could work in Jordan or Egypt as easily as in Israel. While the technical barriers to a partnership between Israel and Jordan are small, the organizational ones require attention. For example, such partnerships help to shrink the developmental gap between the developing country and the industrialized partner only if both countries benefit. Thus the flow of skills to the developing countries must be encouraged, but the economic position of the more developed partner must not suffer. Under this paradigm, the Jordanians might well start out as fish farmers, but it would be in the partners' joint interest for the Jordanians to move up the technological scale. They would learn to culture, rather than import, Rotifera for feeding the young fish. They also would learn to compound fish food for the mature fish, induce spawning, inoculate fish, and gradually take over the whole gilt-head bream culture process. The Israeli center would share in the profits and remain available for consultation and process improvement. It also would extend the process to other fish such as the grey mullet, which is in demand in the Arab world. The partners, to both of their benefits, might well choose to extend their partnership to include Egypt. There, a copious supply of fresh water would permit the raising of various freshwater species, including ornamentals. Such two-level partnerships are possible in other areas as well. Some orga- nizations in the developed countries will find it profitable to share their design and marketing skills with partners in the developing countries. Why partner- ships? The fact is that the developing countries will tend increasingly to use their scarce natural resources to secure a developmental advantage in bilateral agree- ments. For example, in Indonesia or Thailand skilled contract furniture makers with access to exotic trees might set up two-level partnerships with developed country design and marketing firms. If access to those trees is restricted (by law or pricing), such partnerships can become a significant force in the furniture field and advance the technological level of the junior country. Similar potentials exist in the field of pharmaceuticals, where developed country firms are constantly seeking botanicals that can form the basis for new drugs. To this end, skilled botanical observers could collect and tabulate the thousands of individual species in untouched forests in the developing countries. Once these samples have been
JORDAN J. BARUCH 213 identified and their potential verified by scientists and technologists in the devel- oped world, developing countries could assume the task of farming and even converting those natural materials. The "upper-level" partner would, of course, be responsible for proof of effectiveness, regulatory compliance, and marketing. The growth of such partnerships will require the establishment of legal bod- ies and agreements that can enforceably adjudicate disputes between such part- ners and between them and their clients. That, however, must be the subject of a later discussion, but one in which the World Bank could play an important role. TRANSBORDER SERVICES: DATA EXPORTING The very concept of transborder services is a child of modern technology. Today, however, communication technology, computer technology, and dynamic entrepreneurship have combined to make certain transborder services barely no- ticeable within the developed nations they serve. Consider the following predic- tions: 1. The cost of digital electronic communication is becoming independent of distance, and its price will, because of growing competition, drop accordingly. 2. The cost of electronic communication bandwidth is dropping faster than a factor of two per year and its price will follow. 3. The price of digital memory of all kinds is dropping even faster than that of bandwidth. 4. Manufacturers, including software creators, will continue to see the dis- placement of service providers by products as a profitable strategy. The massive drops in communication costs predicted above will have major implications for developing countries. The plummeting prices for both distance and bandwidth in communication would seem to foretell a rosy future for the growth of transborder services. Such long-distance services as data entry and 800 number response already have grown, and, as the costs of computation and com- munication decrease, it seems reasonable to expect that those kinds of services will grow and flourish. Indeed, in some developing countries the costs of commu- nication services and locally networked desktop computers have become low enough to permit the growth of communication or data-processing zones, where moderately trained and educated service providers perform such data services far from the source of the raw material. When services once performed in developed countries are shifted to the developing countries, they become a significant source of both income and technological familiarization. But the same kind of techno- logical developments that have made those services possible will act to change them in the future. Prediction 4 the urge to replace service providers with "things" that can do the same jo~implies, however, that growth is only part of the story. Consider just two recent trends and events: scanner technology and voice-input technology
214 Marshaling Technology for Development are improving rapidly, and the Microsoft Corporation is in the process of absorb- ing Intuit. What do those developments have to do with long-distance services? The acquisition of Intuit by Microsoft signals a major potential change in the check- and credit slip-clearing processes. Intuit currently offers its subscribers, as part of its accounting package (over 5 million in use), a program element called Billpayer. For 15 cents (less than half the price of a first-class stamp) the user can enter a transaction and have it paid automatically. Because there is no check, no clearance (and thus no overseas clearance service) is needed. Intuit also offers a register system for recording credit purchases. Soon that register may be checked electronically (if not entered directly) against the card issuer's records, eliminat- ing the need for overseas credit-slip transcription. These developments are not unlike the shift made earlier in this century by the telephone system from opera- tors to dials. In both cases, hardware and software products were used to shift the provision of services from some outside provider to the user. But this process will not stop there. Customers in the industrialized countries will increasingly use the digital dial network along with scanners and voice recognition systems for entering all kinds of data now being processed by people here and abroad. As scanners become able to read less-disciplined inputs, and when the corrections to misinterpretation can be made by voice, the need for a large labor force to interpret written documents will be markedly reduced. In light of these developments, it can be reasonably expected that the use of developing country data-entry facilities will grow as the price of long-distance communica- tion drops, but then will shrink rapidly as the need for that service declines, much like the development of the home permanent displaced many hairdressers (ser- vice providers) and the advent of permanent-press fabrics, along with the devel- opment of new washers, dryers, and detergents, eliminated whole sections of the commercial laundry business. What, then, will happen in developing countries with the demise of commu- nication zones? What will replace them? One possibility may stem from the impact of catalog shopping in the United States, where it has been an important development in retail sales. On-line catalogs are starting to make their appear- ance on the Internet, and the televised Home Shopping Network has been valued at over a billion dollars. It is reasonable to predict, then, that a direct product export business will grow in developing countries, where, at the moment, some of the enormous variety of crafts available in the local markets-carved wooden flowers from Bali, gold jewelry from India, sculptures, blankets, and even furni- ture is sold abroad through multiple transactions and multiple price hikes to the eventual consumer. Skilled entrepreneurs in the developing countries will form local cooperatives, corporations, kibbutzim, or centers that will prepare and trans- mit on-line catalogs of local products directly to potential customers in the indus- trialized world. They, in turn, will then place their orders from home using secure credit card readers. Fund transfers will take place electronically as will customs collections (if any).
JORDAN J. BARUCH 215 But how will U.S. businesses respond? It seems clear that domestic catalog dealers will try to compete by outsourcing as much of their business as possible. They may start by sending detailed manufacturing specifications to the develop- ing world (as does The Limited), but soon they will realize that the added value to their product lines is consisting primarily of quality control. If they can arrange to transfer that function to the developing country, the goods can be drop-shipped. New overseas shipping arrangements probably will be created to meet the de- mands for rapid delivery from single overseas points to multiple consumer loca- tions in the developed countries. The dramatic, ongoing drop in local information storage costs will continue to stimulate new developments, some of which also will have significant implica- tions for the developing countries. The actual nature of those developments is hard to predict because they depend so heavily on user preferences. As an ex- ample, for many information applications, memory (prediction 3) and bandwidth (prediction 2) are interchangeable. Economically, whether data are stored locally or remotely depends in large measure on the relative cost of memory and data transfer. But despite that interchangeability, many users prefer the privacy of local memory to central storage Just as telephone customers continue to prefer local telephone answering machines over central answering services). In developing countries, literacy is currently a significant barrier to the use of such stored communication modes as electronic mail, facsimile transmission, and even written instructions. Yet stored (time-shifted) communications are essential for instructions, record keeping, and general reference. In the near future, at least, illiteracy will continue to pose problems, especially among the adult population, but because of both the demand and the technology, "voice fax," in which the voice provides both the address and the data to be transmitted, will grow to fill that gulf. And illiterates will not be the only ones to benefit. Any telephone, wired or cellular, will then become a "voice fax" machine, and stored communication, because of its new convenience, will spread rapidly and significantly among the mobile and isolated members of developing country populations. One significant form of stored-data communication presently used in devel- oped countries is the electronic bulletin board, in which users post inquiries and other users post responses. While many bulletin boards are quite informal (such as computer user groups), others are more structured, even to the point of identi- fying all respondents to provide for the authentication of their responses. The growth of that technology and the continuing drop in memory and bandwidth prices offer the opportunity for the development of a new aspect of transborder information services. TRANSBORDER SERVICES: INFORMATION IMPORTING While the electronic export of data services is profitable to the developing countries now and will be in the foreseeable future, the electronic import of
216 Marshaling Technology for Development information will be far more important. The critical factor leading to the potential for importing information is the explosive growth and availability of the Internet. From 1984 to 1994, the number of computers linked via the Internet grew from just over 1,000 to over 3.8 million. Consider what an inquiry service on the Internet could do for the Third World. Questions of the "How do I . . . ?" type could originate in the developing countries and be answered anywhere in the world by volunteer organizations such as the International Executive Service Corps, professional consultants, or others. The answers might start as simple text but would soon range from drawings through voice messages to full-scale video demonstrations. Yet a one-question/one-answer system would represent a terrible waste of intellectual effort and knowledge. The answers must be useful to others besides the original inquirer and their persistence in time must be ensured. This could be accomplished by the creation of a Third World application- oriented inquiry and library system on the Internet, described in Figure 1. The subscripts included in the figure indicate that users, inquiries, experts, and so forth, are all identified so that they can be tied together for future reference and quality control. Note that the user not only gets his or her inquiry answered but has an opportunity to evaluate the response. "Did it work?" "What were its limitations?" "What other questions does it raise?" iterative query. Indexers note the application to which the responses are relevant, but they do more than simply index the response by the one application. Chosen for their experience, they are able to envision other potentially relevant applications. A question about distributing water to a row crop, for example, may well generate responses appli- cable to drinking-water distribution or evaporative cooling. Without application indexing, the direct and extended intellectual links would be lost. Subsequent inquiries about those applications would be unable to draw on what the system already "knows." Unlike the inquiry-driven system described in Figure 1, a publication-driven system is featured in Figure 2. Both systems, however, are aimed at making world knowledge easy to access and use in developing countries. Published sci- entific and technical papers are generally classified by the technology with which they deal, and authors and publishers alike are, rightly, concerned with making the papers accessible to the authors' peers and others who will build on the new knowledge contained in them. Eventually, the knowledge embodied in such pa- pers is put to use-often in fields far removed from those of either the publishers or the original authors. If those users also publish, citation trails can lead back to the original articles. But even that publication process is most likely to occur in the developed world. Figure 2 depicts a situation in which two people a user and a special kind of reader, an annotator interact with the information in the published paper. Both participate, separately or in tandem, in creating "electronic marginalia" describ- ing an application to which the information has been, or might be, put to use in the Third World. Initially both the user and the annotator may be in a developed
217 Indexer Indexer Indexer \ UserN with Iterative InquiryM Index by Application / \ InquiryNM ResponseBNM EvaluationNBNM FIGURE 1 Application inquiry, response, and index system. Application Indexers Application Note ExpertA ExpertB Expertc ExpertD l l l l l l l l Index by | Application t Actual User _ ~ Annc~3 FIGURE 2 Application annotation and indexing system for published material.
218 Marshaling Technology for Development country, but with time, as was the case in the inquiry-driven system, Third World users will add their experience. The annotated document can now be indexed as a . . . single unit. At this point the two systems come together. The application notes of Figure 2 and the evaluated responses of Figure 1 are directly useful material. Via the application-indexing process, they will be listed in a single index. Got a problem? Welcome to one-stop answer shopping! Depending on the degree of use of the system and on demand, the material can be gathered by application for wider distribution via compact disks (CDs) or other means. Such off-line use can save communication costs for distant users and provide services to isolated ones. The resulting collection, regardless of its form, will have been stored, catalogued by application, and organized into the kind of user-focused technological library that will accelerate the development of any developing nation that has access to it. CONCLUSION Any other author asked to deal with the subject of technological innovation and services might well have adopted a wider perspective than the one used here. But the organizers of this symposium have asked, "How can technology be marshaled for development?" This attempt to answer that question has come back to information services and this is no accident. Indeed, one might say that the rule of the future will be: among the so-called services, a country's ability to manage and use information will be the greatest single determinant of its rate of development. NOTES 1. James Brian Quinn, Penny C. Paquette, and Jordan J. Baruch, "Exploiting the Manufacturing Services Interface," Sloan Management Review (summer 1988). 2. National Research Council, Information Technology in the Service Society: A Twenty-First Century Lever (Washington, D.C.: National Academy Press, 1994). 3. See, for example, James Brian Quinn, Intelligent Enterprise (New York: Free Press, 1992), and the end notes for chaps. 2-4.
