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Changing Economics of International Trade in Services .. RAUF GONEN(; Services differ from manufacturing in other ways than the latter differs from agriculture. Many services employ the same technical operations, equip- ment, and skills as manufacturing sectors, but instead of mass-producing standard goods before marketing them, they put their productive resources into use according to the needs and specifications of their customers (tailors' services versus cloth manufacturing, computer services versus software prod- ucts, mechanical engineering services versus heavy machinery production, etc.~. Also, a number of services consist of the shared use of large manu- factured equipment which, in alternative organizational settings, would be produced, marketed, and used as consumer durables or producers' goods (electricity-supply services versus electricity-producing equipment, air and sea cargo services versus private transportation equipment, telecommuni- cations services versus private network supply, movie theater services versus film display equipment, etc.~. Therefore, services are not activities characterized by the use of specific techniques or the servicing of specialized markets the two traditional ways of describing a branch of activity. They would be more appropriately defined as a special way of putting the economy's land, capital, and labor resources to use: not in the form of organizations turning out finalized goods, but in the form of organizations making them directly available, accessible, and usable by customers. Indeed, many services are characterized by (1) the supply of a core land, capital, or labor resource: developed real estate in the case of housing ser- vices, tourist resorts, amusement parks, etc.; (2) a fixed capital stockthe 167

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168 RAUF GONERS telecommunications and railway networks, for example in network services such as telecommunications and railway utilities; or (3) the specific knowl- edge base and skills of professionals in the professional services of physicians, lawyers, etc. Certain services are based on a more diversified combination of land, capital, and labor resources: retail banking services based on facil- ities, equipment, and qualified personnel at a given location; hotel services combining location in privileged sites, specific accommodation facilities, and the know-how of their personnel. What is common to all these activities and distinguishes them from traditional manufacturing is that instead of offering any final product, they supply the productive resources themselves and create value and utility through access to, and interaction with, the customers. Seen in this perspective, the insightful chapters by Duchin and Kutscher in this volume can be interpreted as putting forward three major factors to explain the superior growth of services sectors: 1. technological progress and sophistication in capital goods, some of which have reached a level of complexity and size that makes them largely unusable (too expensive) for average private users (companies and house- holds); 2. increasing specialization of technical skills in many areas of knowledge, making the building of pools of "state-of-the-art" human resources exces- sively costly or impossible for most companies and households (especially for those whose main activity is not in this given area); and 3. higher pressure for efficiency in most sectors, including government, which promotes competitive market procurement of resources as against their internally monopolistic production by users themselves. The growth of international trade in services originates from the same factors. It is the outcome of the growth strategies of services suppliers, first in domestic and then in international markets, which build on the needs and preferences of consumers for productive resource use. It deepens the division of labor in the design and management of these increasingly sophisticated real estate, productive capital, and skilled labor inputs of modern economies. In this chapter, therefore, the growth of international trade in services is considered a natural outcome of trends in their domestic organization. This thesis is substantiated in two sections: The first section presents background statistical information on the growth and structure of international trade in various services areas. The second section treats, in more analytical terms, the new forces and directions affecting this trade and includes some prospects for its future development. The conclusion presents some views about the impact of the wider and freer international access to sophisticated productive resources, as allowed by international trade in services, on the functioning of the global economy.

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ECONOMICS OF INTERNATIONAL TRADE IN SERVICES 169 STATISTICAL SURVEY OF INTERNATIONAL TRADE IN SERVICES The limits of statistical information available on services trade are fre- quently pointed out. It is true that since they are not monitored by customs authorities, services flows are not recorded in the same systematic way as internationally traded goods. This area is certainly a long way from having the wealth of detail and precision found in the famous Organization for Economic Cooperation and Development (OECD) Trade Statistics Se- ries the "Red Books." Nevertheless, to the extent that services trans- actions generate international payments, they are captured in national balance of payment statistics. These are recompiled internationally by the International Monetary Fund (IMP) in its International Balance of Pay- ments Annuals. These statistics cover the so-called invisible trade 'transections. They report mainly (1) the payments corresponding to the cross-the-border provision of services and (2) the factor income payments (capital and labor income) between residents of different countries. The first component covering cross- the-border trade is useful for our purposes. The second is less so, since it includes capital income originated in nonservices items such as foreign direct investment in manufacturing and financial portfolio investment. It also in- cludes remittances of temporarily migrated workers, whatever their area of activity. Cross-the-border trade in services is thus the only component covered systematically and relatively accurately in official statistics. Tables 1 through 4 present information on various aspects of this trade in the OECD area between 1975 and 1985. The major points emerging from this statistical review are the following: Cross-the-border trade in services by 10 major OECD exporters (the United States, Japan, the United Kingdom, Federal Republic of Germany, France, Italy, Canada, the Netherlands, Spain, Switzerland) increased from $120 billion in 1975 to $253 billion in 1985. This amounts to an annual growth rate of ~ percent in nominal terms over the past decade. The bulk of international trade in services takes place inside the OECD area. OECD countries absorbed 95 percent of total exports by other OECD countries in 1985. International services markets are located to a very large extent inside the OECD. The United States, France, the Federal Republic of Germany, the United Kingdom, and Japan are the major services exporters. They account for 9, 6, 6, 5, and 4 percent of total OECD exports, respectively. This group of five countries as a whole realizes 30 percent of total OECD exports. Sectoral breakdown of cross-the-border services trade gives the follow- ing results: 30 percent exports realized in transportation; 24 percent in tourism and travel; 9 percent in government services; 4 percent in intellectual property

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172 TABLE 3 Services Exports by Small OECD Countries, 1985 ($ U.S. billionja RAUF GONEN: Austria 7.5 Norway 7.4 Belgium 13.7 Portugal 2.1 Denmark 7.6 Sweden 5.4 Finland 2.4 Turkey 2.6 Greece 2.7 Australia 4.0 Iceland 0~4 Ireland 1.3 Total 57.1 aSmall countries' exports/total OECD exports = 15%. SOURCE: IMP, OECD. TABLE 4 Services Imports by OECD Countries, 1985 ($ U.S. billionja United States 57.5 (20%) Iceland 0.4 Japan 35.4 (12%) Ireland 1.5 Federal Republic of Netherlands 15.1 Germany 37.3 (13%) Norway 7.6 France 28.5 (10%) Portugal 1.2 United Kingdom 23.7 ( 8%) Spain 5.5 Italy 17.1 Sweden 5.4 Canada 14.7 Switzerland 5.8 Austria 4.8 Turkey 1 . 3 Belgium 11.8 Australia 7.2 Denmark 7.5 New Zealand 1.8 Finland 2.9 Greece 1.5 Total OECD 295.5 aPercent of total OECD services imports are shown for the largest five importers. SOURCE: IMP, OECD. income; 37 percent in "other services." The last is a catch-all category, including various professional services. It has been the most rapidly growing subcategory of international services in the last decade. The share of different services inside the category of other services is not measurable at a global level. This detail is not available in most countries' statistics. If the sectoral distribution of U.S. exports is used as an indicator of the structure of total trade, the following results are obtained: insurance services, 0.4 percent; commissions and brokerage, 0.6 percent; films and television, 0.7 percent; construction and engineering, 3 percent; communi- cations, 3 percent. Each country's services exports are characterized by specific strengths: intellectual property income in U.S. exports (11 percent of total exports); transportation in Japanese exports (52 percent of total exports, related to that country's manufacturing trade); tourism and travel in Spanish exports (60

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ECONOMICS OF INTERNATIONAL TRADE II; SERVICES 173 percent of total exports); insurance in the exports of the United Kingdom (7 percent of total exports); consultancy and technical cooperation in French exports (8 percent of total exports). ~ A major and not widely known point is that the balance of U.S. cross-the-border trade in services is negative. Deficits in subsectors such as tourism/travel, transportation, government services, insurance, communi- cations, ~ and advertising are not balanced by smaller surpluses in intellectual property income, films and television, and construction and engineering. The net balance amounted to minus $3.5 billion in 1985. The major shortcoming of the picture outlined above is that it ignores revenues generated by foreign subsidiaries of services companies. This is the main channel of internationalization in a number of services areas, es- pecially for U.S. corporations. Banking and finance is the major category in which almost all foreign operations are handled by local branches and subsidiaries of U.S. institutions. Offshore banking activities in the United States are not considered domestic activities either and are not included in U.S. exports. The Office of Technology Assessment (OTA) of the U.S. Congress has estimated revenues generated by foreign subsidiaries of U.S. services cor- porations to be approximately 120 percent of their direct exports (OTA, 19864. The OTA has also stated that official U.S. balance of payments statistics could seriously underestimate in some cases by close to 50 per- cent the volume of the U.S. cross-the-border trade. The bias related to foreign direct investment (FDI) is, however, not specific to the services sector. FDI is the major vector of international growth for U.S. manufacturing corporations and has created a similar inconsistency between the competi- tiveness of U.S. manufacturing firms in world markets and their net impact on national trade performance. The same applies equally to services. CHANGING ECONOMICS OF SERVICES TRADE Three Categories of Services Three categories of services can be distinguished with regard to their potential for international trade. All services, possibly various segments of one services sector, can be distributed among these three categories: 1. The supply of capital and labor resources serves as an infrastructure to other international activities, especially trade in goods. International trans- portation, international communications, trade finance, and insurance are such infrastructural services. These must be purchased, practically by defi- nition, by residents of different countries at once. The production of a service is tantamount to its trade, which means that the service is international by

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174 .. RAUF GONERS its very nature and substance. International tourism is included in this cat- egory, because in all cases it involves a transaction between residents of different countries. 2. Some services are traded internationally because of the competitive advantage of suppliers. Professional services such as engineering and con- sultancy, computer services, accounting services, and investment advisory services, fall in this category. Exports occur because the services supplier possesses some kind of technological monopoly, a proprietary service, or a cost advantage, in the same way as for finished- goods in manufacturing trade. 3. No trade can develop in "services areas closed to market competi- tion" be it national or international. Publi~utility services such as railway transportation, electricity distribution, water services, national telecommu- nications (in most countries), and air transportation (in most countries), as well as social services such as education, health services, and retirement insurance systems are often regulated by national governments and, therefore, closed to foreign competition. They are, in any case, not included in "mar- keted services sectors" as defined by OECD National Accounts. The difference in international trade potential for each of these categories helps explain the remarkable asymmetry between the structure of domestic services output and the structure of international services flows. As Tables 1 and 2 show, international trade in services is still dominated by infra- structure-based services (i.e. international transportation, tourism, and com- munications), which accounts for more than 50 percent of total trade in services. In contrast this group represents no more than 5-10 percent of services output and employment at a domestic level. On the other hand, wholesale and retail trade and government services, which together represent approximately 50 percent of domestic services output in most countries, are practically absent from the international trade arena. The major share of "international infrastructure" services in total services flows and the negligible role of government-related services are natural and do not need much explanation. What may be striking, however, is the very limited exposure to international competition of most of the marketed business and household services. Three major factors account for this limited international competition in marketed services: 1. In a number of services areas, needs and demand are structured by local business and household culture, and can be satisfied by hardly anybody except local, long-established services suppliers. Japanese domestic trade systems, German banking, U.S. corporate finance services, and French res- taurant sectors are examples of market areas in which not only cross-the- border trade, but also foreign services supply through local investment and establishment, are very difficult due to the specifics of local demand. Demand

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ECOlIOAIICS OF INTERNATIONAL TRADE IN SERVICES 175 for productive resources (which are often customized) is more qualitatively differentiated at the international level than demand for finished, standard- ized, manufactured goods. 2. International supply of services is often more complicated and costly to design than international manufacturing production. Business organiza- tions in services are "open" systems interacting with customers, and their internationalization involves more sophisticated organizational structures and human resources bases than most manufacturing activities. As a result, the basic investment and organizational design necessary to sell services inter- nationally are often larger, and imply deeper changes for a company, than those necessary for exporting goods or transferring (delocalizing) standard- ized manufacturing techniques. 3. There is the question of incentives. In many sectors, services firms are of very small size, frequently family based, and in most cases private or- ganizations. Their business strategies are rarely rate-of-return maximization or growth oriented; they are rather shaped to maximize private income for owners. This is frequently observed in low-technology, single-shop services activities, as well as in most sophisticated professional services, such as those of physicians, lawyers, and engineering firms. As long as these operations remain personal and private organizations, they have little incentive to con- sider change for beKer valuation and market capitalization of their assets. They rarely have objectives and prospects for widening their output and market share, nationally or internationally. Only exceptional individuals give impetus for organizational growth and change in such "small organization" sectors (Heskett, 19861. These three characteristics of marketed services are currently undergoing important changes that are exposing many sectors to new forces of compe- tition, growth, and internationalization. In the following sections the most significant aspects of this new trend are discussed. More Competition in the Supply Side Many services industries are undergoing deep restructuring in their com- petitive environment: the bulk of new entrepreneurial talent in OECD coun- tries, as well as capital resources in search of good investment opportunities, tends today to seek out services areas as an alternative to saturated manu- facturing activities. Notably, interest from financial investors and entrepre- neurs includes prospects for takeovers, mergers, and acquisitions among private services companies, which leads to new pressure and opportunities for a more active use and market capitalization of the business assets of these companies. At the same time, in traditional manufacturing sectors, competitive rivalry encourages firms to develop services activities such as marketing and retail

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176 MUF GODSEND trade, consumer credit and insurance, consulting, and engineering. This sometimes incites such sectors to compete directly with established services providers (e.g., computer hardware manufacturers diversifying into computer services and software, or car manufacturers diversifying into car credit and insurance). New technological opportunities foster the new competitive environment. In particular, possibilities offered by information technology in retail and wholesale trade, financial and insurance services, engineering, design and consultancy services, etc., offer new channels for productive resource supply, services differentiation, and competitive advantage building, nationally and internationally . The Case of Financial Services Financial and banking services are partic- ularly illustrative of the depth of these changes in the supply-side and com- petitive policies in services industries. Market environment has become much more difficult, following government deregulation policies in practically all OECD countries, which liberalized interest rates and cross-entries between market segments. These policies have also promoted, to a lesser extent, foreign establishment and supply of financial services. The respective roles of government policies and of purely private pressures in increased com- petition are difficult to isolate from each other; the whole process has simply led to a much more competitive environment. In retail banking, the new environment has led to price competition (in- crease in deposit interest rates) and to the marketing of new services (interest- bearing call accounts, credit and cash card services). In stock brokerage, intermediation margins came down in accordance with costs, reflecting no- tably the economies of scale in large-volume transactions, and services di- versified greatly with increased choice in terms of market information and analysis available. In the corporate finance area, price competition reduced underwriting fees, and new services have been introduced to meet the demand for corporate cash management, interest and currency-risk hedging, and merger . . . A. and acqu1s1t1on financing. Banking and financial services are becoming less standardized and more sophisticated throughout this process. Most financial institutions have in- vested huge amounts in information technology applications to reduce costs and diversify services, as in automated teller machine (ATM) networks, back- and front-office automation, electronic fund transfer systems, trading rooms, and global information networks. The capital (equipment) and labor resources put at the disposal of financial services customers are, therefore, undergoing considerable widening and sophistication. Financial institutions are also en- riching their services through internal personnel training and external hiring of rrore highly skilled specialists. Competitive differentiation of resources (services assets) by financial com-

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ECONOMICS OF INTERNATIONAL TRADE IN SERVICES 177 panics has created scope for their wider capitalization at the international level. Most of the services technologies (including organizational know-how and centrally integrated information networks) are hardly transferable among organizations. Internationalization then has to take the form of the multi- nationalization of financial companies, instead of external growth mecha- nisms such as technology transfer agreements or licensing. Measurement of the growth of international activities by financial services firms creates a wealth of technical problems (see OTA, 19861. The OECD is currently in the process of designing a new statistical system for this purpose (OECD, 1987a). In all cases, the growth of international activities and com- petition by these firms has developed tremendously during the 1980s. In one instance, international assets and liabilities of OECD commercial banks evolved as described in Table 5. In cases where financial innovations are easy to reproduce however rad- ical they may be innovator organizations try, though not always very con- vincingly, to protect their innovation on intellectual property grounds (Merrill Lynch trying to patent its cash management account system, for example). However, the national and international market finds ways to respond quickly in imitating and diffusing successful new services (Levich, 19871. Compet- itive innovation is becoming increasingly difficult under these conditions, requiring the building of more and more sophisticated and, as far as possible, "company-specific" physical assets, organizational design, and labor re- sources. Perceived as a quasi bureaucracy ("gray flannel suits") or a gentlemen's club ("borrow at 3 percent, add 3 percent margin, play golf at 3 p.m.") only a decade ago, financial services are today being transformed into the archetype of a relentlessly innovating and fiercely competitive Schumpeterian industry. The growth of their international markets and the rise of global competition in this sector are the outcomes of this transformation. More Sensitive and Responsive Demand Side Services markets are undergoing changes on the demand side as well. Facing a much more aggressive competitive environment, firms from all sectors search to minimize the costs of the services they secure and tend to look at external procurement possibilities as an alternative to the services they produce internally (Ergas, 19831. This is seen in low-technology activ- ities such as office cleaning, cafeteria services, and printing-copying services, as well as in high-technology activities such as computer services, strategic auditing, and research and development. Governments, including local governments, and public agencies also par- ticipate in this movement of rational services procurement. Facing increas- ingly tighter budgetary constraints, they begin to "farm out" a growing share

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178 RAUF GODSEND TABLE 5 Internationalization of Banking Assets and Liabilities (foreign assets and liabilities as percentage of total assets and liabilities) Assets (%) Liabilities (%) Country 1970 1981 1970 1981 Australiaa 0.6 1.1 Austrian 10.7 24.5 9.8 27.8 BelgiumC 33.4 57.8 39.0 68.7 Canadaa 19.8 17.3 14.3 27.1 DenmarkC 6.7 29.1 7.0 28.1 Finlandb 4.4 11.5 5.6 17.5 Franceb 15.9 33.7 17.0 32.3 Federal Republic of Germanyb 8.8 10.2 5.6 8.1 GreeceC 3.5 7.8 4.7 22.0 Icelandb 1.0 2.9 2.7 17.2 IrelandC 36.0 47.1 29.8 49.2 Italyb 12.6 12.6 12.6 15.9 Japanb 3.7 6.6 3.1 7.9 Luxembourg, 84.2 97.5 57.5 90.4 Netherlands 27.0 39.8 25.9 39.2 New Zealanda 7.1 7.0 1.1 2.3 Norwayb 7.4 6.0 5.5 10.9 Portu~alb 5.6 7.7 0.8 27.7 Spain 3.5 8.5 4.2 14.9 SwedenC 7.0 9.7 5.4 18.2 Switzerlandd 33.7 50.1 28.9 42.8 Turkey 4.7 0.3 United Kingdomb 46.1 67.9 50.2 69.9 United StatesC 2.6 15.1 6.2 11.3 Total OECD - 12.1 23.7 11.3 23.4 NOTE: Data are not fully comparable across countries. aChartered or trading banks. ball deposit money banks. C Commercial banks. dAll banks including trust accounts. Balance sheet data include domestic interbank deposits. SOURCE: OECD, Internationalization of Banking Study (1983). of their services activities. Given the size of government expenditures in OECD countries (from 25 to 45 percent of GNP), this movement has, and will continue to have, a major competitive impact on a number of services markets. For example, the role of government procurement in computer services has been an important, yet still not widely known, factor in the growth of the computer services and software industry (OECD, 19851. Internationalization of services markets comes as a direct consequence of this environment. Aggressive firms willing to widen their market share face clients ready to revise their long-term and stable procurement relationships

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ECONOMICS OF INTERNATIONAL TRADE IN SERVICES 179 with their traditional services providers, including their own internal services departments. The Case of Financial Services The procurement of financial services by companies, households, and governments is again a relevant case here. Fac- ing strong and uninterrupted competitive pressures since the 1970s and taking advantage of the structural changes in financial markets, numerous enterprises have renewed their financing patterns in order to reduce capital costs na- tionally and internationally. Direct borrowing from capital markets through security issues and an increase in the number of, and competition between, banking partners of each company have been major trends. Borrowing on Euromarkets by big industrial corporations, where regulatory "shadow costs" as well as underwriting fees are minimal, has been the international outcome of this trend. In retail financial services, negative real interest rates offered by deposit- taking banks in the inflationary environment of the 1970s have led many households to diversify their financial portfolio and savings patterns. A wider use of nonbank financial intermediaries, including new money-market and mutual funds, as well as the use of recently introduced and more rewarding banking services (interest-paying call accounts, individual retirement ac- counts, etc.) have been the major trends. Development of consumer tele- banking (home banking) services is still marginal in most countries, but the emergence of similar telebrokerage services may increase the direct role of individual investors in security markets. Supported by technical analysis and decision-support software offered by telebrokerage companies, such growth would represent a significant shift in private investing, which has been char- acterized by progressive institutionalization over the past decades. Finally, government financing is also characterized by increasing sophis- tication of borrowing techniques and public debt instruments used, as well as by fiercer competition between financial intermediaries serving govern- ment treasury needs. The use of auctionlike (competition) techniques in the fixing of underwriting margins in public issue flotation and the increased recourse to international borrowing by many governments, which often im- plies procurement of services from international financial institutions, are the major trends. In certain countries, governments and big public corpo- rations even play the leading role in the generalization of innovative and competitive borrowing tactics. Trade in other professional services, such as corporate insurance services, accounting and auditing services, and computer services, also develops on this basis. Domestic markets in these services have developed considerably since the 1970s as a result of more active and more assertive corporate redeployment and reorganization policies (among users). Consequently, this group has also been the most rapidly growing services category in interna-

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180 .. RAUF GONERS tional trade. The volume of U.S. exports of professional services increased by more than 100 percent from 1975 to 1985. Their share in total services trade remains limited; they reached approximately 10 percent of U.S. exports in 1985. New Forms of Internationalization Internationalization of formerly local services is taking various organiza- tional forms. In addition to classical cross-the-border trade and sales by local branches or subsidiaries, certain original forms of internationalization are being developed. These new forms represent new and more efficient ways of diffusing services know-how internationally, and some of them are also seen in manufacturing activities. Telecommunications make possible the delivery of certain services (which previously required face-to-face interaction between customers and the ser- vices supplier) through telecommunications lines. This applies especially to cases in which the substance of the services consists of information and messages (numerical, textual, voice, or images). Television broadcasting was an ancestor of this kind of service. Data bases, telesoftware, telebanking for corporations and households, on-line airline and hotel or motel reservation systems all are services that have developed recently through telecom- munications lines (Bruce et al., 19871. They will grow and diversify further in the future, probably into such areas as interactive educational programs and remote health diagnosis. The decrease in telecommunications costs is very relevant, as distance becomes a lesser factor. If international telecommunications tariffs are adapted to the emerging cost structure in telecommunications, teleservices should become more easily available on international markets (OECD, 1986b). On- line data bases have been the pioneer of such international teleservices. Intermediate cases are observed when interaction between parties can be standardized progressively and part of the transactions implemented at a distance. This is seen, for instance, in mail-order retail trade and on-line accounting services. Part of the information necessary for these transactions is standardized and can be exchanged at a distance through telecommuni- . . cations lines. In other cases where face-to-face interaction with local consumers requires experienced local personnel (i.e., where the internationalizing firm cannot develop the necessary skills internally), certain hybrid forms of investment occur. Joint ventures with local firms, mergers and acquisitions, partnerships, etc., are becoming the dominant form of internationalization in such skill- intensive services. Internationalization in investment banking, investment advisory services, venture capital investing, accounting and auditing services,

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ECONOMICS OF INTERNATIOATAL TRADE IN SERVICES 181 management consultancy, and advertising have frequently taken the form of partnerships over the past decade. Also, in several skill-intensive activities, the optimal organization for a competitive firm is one that gives direct incentives to its key personnel (Peters and Waterman, 19851. In services industries, a related organizational inno- vation has been "franchising." This is a technique of licensing proprietary services technology, in which the core firm (franchiser) supplies key inputs to the franchisee through long-te~ contracts and allows use of its brand name under restrictive conditions. Extensively applied in several services industries over the past decade, franchising diffuses quickly at the interna- tional level. It has become the dominant form of international growth in sophisticated consumer services areas such as hotel services, fast-food dis- tribution, and fashion retail shops. The Special Case of Public Utility and Social Services A final category of services may present major internationalization op- portunities for specialized firms: areas that were organized as public mo- nopolies or regulated industries until the 1980s, but are being transformed into competitive "marketed services" sectors as a result of new governmental policies (OECD, 19881. Deregulation, competition, and in many cases privatization constitute a major thrust for new structural policies in OECD countries. Such policies have been designed with a wealth of expectations, and with the goal of making monopolistic and regulated sectors more efficient and more respon- sive to economic needs. These sectors generate a substantial share of OECD gross national product (GNP), and new policies have already been applied to air and road transportation, telecommunications, and gas and water dis- tribution. More controversial organizational reforms are on the way in the area of social services, such as health care, pension insurance, and education and training. Significant experiences concerning market supply of some of these services should develop in a number of countries over the next decade (OECD, 19881. This movement will open new internationalization opportunities in the services industries concerned. First affected will be infrastructural services that are already supplied internationally (category 1, above), yet remain under intermonopoly and cartel arrangements. This movement has already begun in telecommunications trade, air transportation, and sea cargo transportation (Peat Marwick Mitchell and Co., 19861. Penetration of international competition into domestic deregulated sectors (domestic telecommunications, transport, energy production, etc.) will be

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182 .. RA UF GONERS slower. Most governments consider these activities as being of national and social interest, and may be reluctant to "lose control" over them. This had most often been the reason behind the initial nationalization or regulation of these industries. However, even in these cases, international- ization can develop more quickly than foreseen if it takes smoother forms such as joint ventures, technology transfer agreements, franchising, or part- nerships. Rapid technological change in newly deregulated sectors may strengthen the need and scope for internationalization. New air transportation techniques (hub systems), telecommunications services through satellites and fiber op- tics, value-added telecommunications services, highly capital-intensive health care technologies, etc., not only will widen consumer demand for novel services, but also will improve suppliers' ability to compete internationally. Similar developments can be expected in the long run in social services. It is clearly difficult, particularly for a European, to imagine such services becoming subject to international competition. Nevertheless, this is most probably the direction of technological and organizational development in education, health care, and retirement insurance. Expenditures for these ser- vices represent a large market (more than 20 percent of GNP in most coun- tries), and their internationalization would be a major structural challenge for their established suppliers. CONCLUSION What, basically, does the development of trade in services mean? It means that an increasing amount of land, capital, and labor resources in modern economies supplies services through the market, instead of being bought (or hired in the case of labor resources) by single customers and put into action as internal inputs exclusively used by one specific organization. A nonnegligible share of real estate, capital, and labor resources is already accessible through services markets in manufacturing or indeed even in ag- ricultural economies. This has been, for example, the case in hostel services, ship and railway transportation, and physicians' services. The cost of building these resources, as opposed to their low frequency of use by single customers, has already structured the economics of their supply in the form of marketed services for a long time. However, it is with the recent technological sophistication, differentiation, and increase in the size and cost of productive resources that directly marketed services are becoming a wider form of economic organization. In areas where it applies, this represents a reversal of the trend toward the internalization of capital, labor, and real estate resources by companies and households, via purchases of consumer durables and proprietary industrial equipment, hiring

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ECONOMICS OF INTERNATIONAL TRADE IN SERVICES 183 of specialists as members of staff, and building or acquisition of private housing and private office buildings. Obviously, not all productive resources are becoming available on the market, and companies are not being transformed in asset terms into hollow organizations that only coordinate the supply of complementary services by external asset owners. They are, however, concentrating their assets in their core business areas and attempting to build unique, competitive, and company-specific asset bases there, while delegating to the market the supply of more peripheral services for their activities. Along the same lines, in the household sector, not all household assets are being liquidated to be replaced by occasional services procurement, but there are several indicators of a higher reliance on the services of externally owned assets beginning with the housing area. The growth of international trade in services in this context means that business organizations and households in one country are now gaining a larger access to productive resources available in other countries. The fact that a Turkish electronics company can now solicit the engineering services of a California microchip design company, that a Korean shipbuilder can build on the leasing and other financial/marketing services of a British mer- chant banker, or that a Bolivian leather manufacturer can possibly use the international marketing services of a Japanese firm in all instances means that resources previously limited to the use of a single company, region, or nation tend to become available for much wider international access and use when they are supplied as services on markets. The implications of this trend for lowering a number of barriers to entry and mobility in many industries are obvious. This allows potential entrants and various competitors to concentrate their efforts on the essential assets of an industry, and not be handicapped by the possible underdevelopment of their resources, or the resources of their national economy, in related but strategic peripheral areas. The case is especially strong when extremely sophisticated, more and more indispensable, but at the same time noncentral support services are concerned, such as insurance, finance, marketing, en- gineering, and value-added telecommunications services. In all these areas, the development of international trade in services lowers part of the barriers to entry in industrial competition for firms from all countries. The growth of international trade in services is certainly not achieving the ultimate field-leveling role in global competition. It does not affect the core strategic resources of various industries, while it is indeed around the mastery and the differentiation of those very resources (assets) that global competition is being shaped. Moreover, many services markets and firms are still rather regional in character and scope, are not even nationally integrated, and consequently do not yet really guarantee access by international customers

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184 MUF GONERS (OECD, 1987c). Regulatory barriers to trade, where they apply, also con- stitute obstacles in this direction. Nevertheless, increased international trade in services represents a major trend for more global and effective competition in the world economy. This impact should become clearer in the future, especially as more Third World enterprises learn to take advantage of, and build on, the availability of pro- ductive and support resources to which they now have access. ACKNOWLEDGMENTS This chapter presents the personal views of the author and does not commit the OECD. Special thanks are due to Mare-Pierre Faudemay, from the OECD's Trade Directorate, who gave valuable advice. Thanks are also due to colleagues Derek Blades, Sarah Chapman, Henry Ergas, Bruce Guile, Mufit Cinali, Dani Rodr~k, and Barrie Stevens who commented on an earlier draft. NOTE This surprising deficit in communications should be related to the current payment system in international telecommunications. Imbalance between incoming and outgoing calls to and from the United States implies compensating payments to foreign telecommunications monopolies. BIBLIOGRAPHY AND REFERENCES Aronson, J. D., and P. F. Cowhey. 1984. Trade in Services: A Case for Open Markets. Competing in a Changing World Economy Project. Washington, D.C.: American Enterprise Institute for Public Policy Studies. Bank for International Settlements. 1986. Study Group of Ten Countries. Recent Innovations in International Banking. Basel. Bhagwati, J. 1987. Trade in Services and the Multilateral Trade Negotiations. The World Bank Economic Review 4:549-569. Blades, D. 1987. Goods and services OECD countries. OECD Economic Studies (Au- tumn): 160-183. Brender, A., and J. Oliveira-Martins. 1984. Les changes mondiaux d'invisibles: Une mise en perspective statistique. Paris: Economic Prospective Internationale. Bressand, A. 1986. International division of labour in the emerging global information econ- omy: The need for a new paradigm. Promethee (October). Bruce, R. J., J. P. Cunard, and M. D. Director. 1987. Telecommunications and transactional services: A case study of emerging structural and regulatory issues in the financial services sector. London: International Institute of Communications. Commission of the European Communities. 1986. Europe and the future of financial services- Proceedings of a symposium. Brussels. Congressional Budget Office, U.S. Congress. 1987. The GATT Negotiations and U.S. Trade Policy. Washington, D.C.: U.S. Government Printing Office.

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