Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter.
Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 167
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 stock—the
167
OCR for page 168
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.
OCR for page 169
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
OCR for page 170
170
-
~,
Ct
C)
-
3
._
Ct
~ V,
o
._ ~
_ ~
Ct
As:
z
V:
of
an
._
o
~ .=
O ~
._
m
ID
U)
o
x
00 00 00 ~ ~ ~ 00
Us ~ ~ Cal
_
_ ~ ~ O
00 ~ O a ~
_ ~ ~ 00
. . . .
O _ O ~
_ _
~ ~ ~ ~ ~ << ~ ~ ~
. . . . . . . .
O ~ _ O ~
z _
_ C<) ~ Cal =~ ~ _
. . . . . . . . .
'] _ 00 0 ~ O 00 0
_
Ct
Ct
C)
~ ~ ~ ~ _
. . . . .
_ ~ ~ O ~
;^ ~ of O - cr.
_ . .
Ct ~ 00 U~ 0 00
.~
C~
C~
-= C<
~ ~ O V
C~
._
~ S~
~ _)
X .O C~
~ ~ U)
C~
c~
m
Z ~ O
_ ~
-
O _ ~ 00
. . . .
_ ~ _ t_
-
~ ~ O ~ O ~ ~ ~ _
. . . . . . . . .
O O O O _
C~
0
L~
O ~ O0 00 0 _ <( ~
. . . . . . .
_ - ] _ 00 =\
_ ~ z
U~
. . . . . . . .
~ ~ 00 ~ ~ O ~ ~
~ _ _
~t _ _ ~ ~ ~ _ ,<
. . . . . . .
~ ~ ~ ~ ~ O ~
c`) _ ~ z
_ ~ O ~ ~ 00 0 ~
. . . . . . . .
~ _ ~ Ch ~ ~ O O
') _ _ _
~q
C)
CY
C~
E~ ~
U,
.
~ C~
O
~ ~
Ce C)
O
cn
;>
O
~ V
U,
. ~
O
~4
o
C~
., —
>. D
_ ~
-
C~
~ O
C~ C)
._ ~
;> _
a~ s~
C~ O
_ C)
o
_
C)
X
U, ,=
C) Ct
'- 'Ct
~ O
Ct
C)
5
;^
s~
Ct
~:
o
-
C;S
~:
o
._
Ct
~i'
11
< 0
OCR for page 171
171
o
._
A
._
A:
o
._
. -
U)
._
Cal
as
Cal
Cal
Ct
-
o
.
V)
o
C~
o
· _
._
m
00
C~
~i
U)
._
S~
a~
V)
o
~n
m
C)
C~
o
C~
.
-
5
_ ~
C~ Ct
; -
C)
LL ~
~:
e~
_`
_`
o
._
-
._
1 (f3
~ g
~
'_
O
_
_
_`
s~
O
_
~ ~ r~ ~ _
C~ ~
_ o ~ ~ O C~ oo
. . . . . . .
_ ~ oo ~ — O O
_ ~ ~ _ ~ ~ oo
C~
0 v~
a~ ~ 0 —
O ~ ~ U~ ~ oo _ ~
-
') C~ (-l ~ ~S) ~ U,.t <(
. . . . . . .
Ir) ~ 00 — O C~ O
C~ Z
~ g
~ _
_`
0=
._
_
<~:
~ ~ - ~
- ~ o c~ -
~ - o ~ ~
vO
o
.~ -
- ~
M
Z. . .
˘- ~ ~
. . .
7 7 7
. . .
OZZ
O _ ~ (~) <<
_ .
_ r~ O ~ 00 ~ ~ ~
. . . . . . .
t _ ~ O ~ — ~
_ _ Z
0c
.S::
' E ~ ~ 9 ~ '9-
~ o
._
,
Ct
o ~
11
.
z
. .
o
CQ
OCR for page 172
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
OCR for page 173
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
OCR for page 174
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
OCR for page 175
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
OCR for page 176
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-
OCR for page 177
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
OCR for page 178
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
OCR for page 179
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-
OCR for page 180
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,
OCR for page 181
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
OCR for page 182
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
OCR for page 183
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
OCR for page 184
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.
OCR for page 185
ECONOMICS OF INTERNA TIONAL TRADE IN SER VICES
185
Duchin, F. 1988. Role of services in the U.S. economy. In Technology in Services: Policies
for Growth, Trade, and Employment. Washington, D.C.: National Academy Press.
Ergas, H. 1983. Corporate strategies in transition. In Industrial Policies in Europe, A. Jac-
quemin, ed. New York: Oxford University Press.
Gonenc>, R. 1986. Changing Investment Structure and Capital Markets. Brussels: Center for
European Policy Studies.
Heskett, J. L. 1986. Managing in the Services Economy. Cambridge, Mass.: Harvard Business
School Press.
Inman R. P., ed. 1985. Managing the Service Economy Prospects and Problems. Cambridge,
England: Cambridge University Press.
Kakabadse, M. A. 1987. International Trade in Services Prospects for Liberalization in the
1990s. Paris: Atlantic Institute for International Affairs.
Kravis, I. B. 1985. Services in world transactions. Pp. 135-160 in Managing the Service
Economy Prospects and Problems, R.P. Inman, ed. Cambridge, England: Cambridge
University Press.
Krommenacker, R. J. 1986. The impact of information technology on trade interdependence.
Journal of World Trade Law (July-August):381-400.
Kutscher, R. E. 1988. Growth of services employment in the United States. In Technology
in Services: Policies for Growth, Trade, and Employment. Washington, D.C.: National
Academy Press.
Levich, R. M. 1987. Financial innovations in international financial markets. National Bureau
of Economic Research, Working Paper No. 2277 (June).
McCulloch, R. 1987. International competition in services. National Bureau of Economic
Research, Working Paper No. 2235 (May).
Office of Technology Assessment, U.S. Congress. 1986. Trade in Services: Exports and
Foreign Resources—Special Report. Washington, D.C.: U.S. Government Printing Office.
Organization for Economic Cooperation and Development. 1983. Internationalization of Bank-
ing: The Policy Issues. Paris.
Organization for Economic Cooperation and Development. 1984. International Trade in Ser-
vices: Banking. Paris.
Organization for Economic Cooperation and Development. 1985. Software: An Emerging
Industry. Paris.
Organization for Economic Cooperation and Development, Center for Educational Research
and Innovation. 1986a. The Evolution of New Technology, Work and Skills in the Service
Sector. Paris.
Organization for Economic Cooperation and Development. 1986b. Changing market structures
in telecommunications services. Proceedings of an OECD Symposium. Amsterdam: North
Holland Press.
Organization for Economic Cooperation and Development. 1986c. Venture Capital in Infor-
mation Technology. Paris.
Organization for Economic Cooperation and Development. 1987a. Elements of a Conceptual
Framework for Trade in Services. Paris.
Organization for Economic Cooperation and Development. 1987b. International Trade in Ser-
vices: Securities. Paris.
Organization for Economic Cooperation and Development. 1987c. Internationalization of Soft-
ware and Computer Services. [restricted]. Paris.
Organization for Economic Cooperation and Development. 1987d. Member Countries' Data
on Trade in Services. [restricted]. Paris.
Organization for Economic Cooperation and Development. 1987e. Ownership Linkages in
Financial Services. [restricted]. Paris.
OCR for page 186
186
RA UF CONEN:
Organization for Economic Cooperation and Development. 1987f. Tables on International
Trade in Financial Services. [restricted]. Paris.
Organization for Economic Cooperation and Development, Center for Educational Research
and Innovation. 1987g. Changing Technology, Skills and Skill Formation in the Service
Sector A Report on the Experience in Financial Service Firms in Five OECD Countries.
[restricted]. Paris.
Organization for Economic Cooperation and Development. 1988. Structural Adjustment and
Economic Performance. Paris.
Peat Marwick Mitchell and Co. 1986. A Typology of Barriers to Trade in Services. Brussels:
Commission of the European Communities.
Peters, T. J., and R. H. Waterman. 1982. In Search of Excellence: Lessons from America's
Best Run Companies. New York: Harper & Row.
Quinn, J. B. 1987. The impacts of technology in the services sector. Pp. 119- 159 in Technology
and Global Industry, B. R. Guile and H. Brooks, eds. Washington, D.C.: National Academy
Press.
Sapir, A. 1986. Trade in investment-related technological services. World Development 14(5).
Saxonhouse, G. 1985. Services in the Japanese economy. Pp. 53-83 in Managing the Service
Economy Prospects and Problems, R. P. Inman, ed. Cambridge, England: Cambridge
University Press.
Shelp, R. 1981. Beyond Industrialization: Ascendancy of the Global Service Economy. New
York: Praeger.
Stalson, H. 1985. U.S. Trade policy and international service transactions. Pp. 161-178 in
Managing the Service Economy Prospects and Problems, R. P. Inman, ed. Cambridge,
England: Cambridge University Press.
Thomas, D. R. 1978. Strategy is different in service businesses. Harvard Business Review,
56(4): 158-165.
Representative terms from entire chapter:
services versus
