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OCR for page 211
Key Policy Issues
Posed by Services
JAMES BRIAN QUINN AND THOMAS L. DOORLEY
Other chapters in this volume document the scale and importance of ser-
vices in the U.S. economy and the role of technology in improving the
productivity of, and the value added by, the services sector. Given the
dominance of services activities in the U.S. economy, policies supporting
technology in services should be an important component of the ongoing
debate about the government's proper role in supporting technology for both
public and selected private purposes, particularly policies for improving U. S.
industrial competitiveness. This chapter focuses on a few themes of particular
relevance to the "national competitiveness" debate. Two issues are of special
importance:
1. The effectiveness of U.S. services industries and U.S. manufacturing
are mutually intertwined. Attempting to strengthen one without strengthening
the other would be a misguided policy. Unfortunately, to date there has been
a tendency to focus competitiveness policy discussions almost exclusively
on manufacturing issues. Effective services activities actually create new
markets for manufactured goods, result in lower costs for manufacturers,
and are central to increasing the value added by manufactured products.
Similarly, manufacturers are important suppliers, customers, and innovators
for services activities.
Not only are services and manufacturing mutually reinforcing, the same
policy approaches that stimulate or retard one sector will generally affect the
other in similar ways. However, the impact of policy actions will tend to be
proportionally greater on services because of the larger scale of the services
industries, which provide 75 percent of all employment and 71 percent of
211
OCR for page 212
212
JAMES BRIAN QUINN AND THOMAS L. DOORLEY
all U.S. gross national product (GNP). Critical factors affecting both include
the high relative cost of U.S. capital (which may benefit from a general
leveling of such costs worldwide induced by the global integration of capital
markets), the skill and literacy levels of the work force, and the development
and application of frontier technologies (particularly those related to com-
munications, health care, information handling, and public transport).
2. Technologies in the services sector are restructuring many manufac-
tur~ng and services industries as well as the entire U.S. economy and its
international trade patterns in ways that make past "industry-focused"
approaches to regulation or trade relations even more inappropriate. The
dynamics of technology, combined with deregulation, have broken down
barriers among industries such as transportation, communications, finance,
distribution, education, and health care, and have created a degree of cross-
industry interaction and competition that calls for new regulatory philosophies
and institutions across a wide spectrum.
Later sections of this chapter attempt to coalesce many of the significant
policy themes developed by other chapters in this volume and to make specific
recommendations concerning these major focal points.
BACKGROUND ASSUMPTIONS
Services are central to employment, economic growth, and quality of life
in an advanced industrial nation such as the United States. However, unlike
manufacturing, services have lacked a coordinated advocacy in policy circles.
The chapters in this volume strongly suggest the following as essential back-
ground assumptions for a balanced U.S. policy discussion:
· This nation's strong services sector is a natural and desirable outgrowth of a highly
productive industrial economy and the sophisticated application of technology to services
activities. Services growth has not led to a decline in the overall manufacturing base;
rather it has both created new markets for manufactured goods and supported increased
manufacturing competitiveness. Despite the serious concerns expressed about declines in
specific manufacturing industries in the United States (and in other major developed
countries), total employment in U.S. manufacturing has fluctuated around a zero trend
line for a long while, and real manufacturing output and value added have continued to
grow (see Figures 1-3 in Quinn, this volume). On the other hand, services have been-
and will continue to be the nation's driving economic force in both arenas in the near
future. A large majority of the most successful new ventures of the last two decades
(1960-1980) were in services (see Table 1), and many of the most successful new
manufacturing ventures (such as Apple, DEC, and Wang) sold products largely to the
services sector (see Roach, this volume). Productivity statistics suggest that there is no
inherent reason why large services industries cannot improve their productivity as rapidly
and as much as manufacturing. In many services industries, technology can also be
effectively leveraged to create competitive advantage and higher margins. In other services
industries, productivity and quality improvements must be rapidly passed through to
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KEYPOLICYISSUES POSED BYSER VICES
TABLE 1 Examples of Most Successful New Enterprises, 1960s and
1970s
213
Service, 56% Service-Product, 9% Product, 35%
H & R Block Mary Kay Cosmetics Intel
People Express Computervision Honda
Hospital Corp. of America Pizza Hut Sony
Microsoft Mrs. Fields' Cookies Apple
Hambrecht & Quist Damon Nike
LucasFilms, MCI McDonald's DEC
Wal-Mart Tandem
EDS, Tandy Apollo
Federal Express Wang
Holiday Inns
SOURCE: Compiled from various publications' listings of most successful new companies.
customers, adding great complexity to the interpretation of output and productivity mea-
sures.
· Services enterprises, such as banks, communications companies, airlines, and health
care providers, are now among the most significant initiators, users, and managers of
technological systems. Various chapters in this volume and its companion volume, Man-
aging Innovation: Cases from the Services Industries (Guile and Quinn, 1988), illustrate
how technologies developed or implemented by such enterprises are revolutionizing long-
established economic and trade relationships within and among nations, thus raising
profound new policy issues for both business and government.
· Services are an increasingly important component of international commerce. The
fact that countries have begun to recognize the importance of services in economic
development (Faulhaber et al., 1986; Shelp, 1986) and the focus on services in the Uruguay
round of the General Agreement on Tariffs and Trade (GATT) are indicators of this trend.
As Wright and Pauli make clear in their chapter, foreign governments' targeting of specific
services for trade development is becoming a high-profile concern, particularly as the
services companies of those nations begin to take over attractive U.S. services enterprises
and aggressively expand their influence in U.S. and world services markets.
Unfortunately, greater understanding of the importance and potentials of
the services industries is often obfuscated by mistaken attitudes about ser-
vices, limitations in available data, and the misleading measures used for
important policy determinations. ~
In particular, difficulties in measuring services productivity (especially the
amount and quality of services outputs) and structural problems in utilizing
technology within some services activities (particularly personal and profes-
sional services) often obscure the importance of technology in services—
and of services in the economy (Mark, 1982, 19861. Serious funding and
administrative support are needed to modernize and upgrade both domestic
and international trade data concerning services.
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214
JAMES BRIAN QUINN AND THOMAS L. DOORLEY
THE SERVICES-MANUFACTURING INTERFACE
The services- and goods-producing sectors are so intertwined that it is
counterproductive to think of policy mechanisms for one without carefully
considering the impact on the other. The interactions between services and
manufacturing cover a broad, and often unrecognized, spectrum of activities
and profoundly affect the performance and competitiveness of U.S. manu-
factur~ng enterprises (see Figure 11. Although a chapter in the companion to
this volume (Guile and Quinn, 1988) makes this point in greater detail, it is
important enough to highlight for policy purposes here. Many have noted
that U.S. services industries are often dependent on relationships with man-
ufactured goods, i.e., their businesses exist largely by providing transpor-
tation, finance, advertising, repair, distribution, or communications supporting
transfers of manufactured goods. Interestingly, however, many of these ser-
vices would still be provided in the United States, regardless of where the
product was manufactured. Although some design support functions and
supplier interlinkages could move overseas if manufacturing were not per-
formed here, even these functions are increasingly being performed remote
from manufacturing sites. Because of technological economies of scale and
technological innovations, services industries both upstream and down-
stream from manufacturing" appear to be actually increasing their leverage
versus manufacturing.
SERVICES INDUSTRIES
E.g., Communications,
Transportation,
Utilities, Health Care,
Banking
R&D
EXTERNAL SERVICES
DIRECTLY EMBODIED
IN PRODUCTS
I PRODUCT - _
| DESIGN l
MANUFACTURING
Services Inside the
Company - Design,
Legal, Accounting,
Advertising
_
PRIVATE BUSINESS SERVICES
Supporting Manufacturing -
Accounting, Legal, Consulting,
Software, Maintenance
=~
l
COMMERCIAL
SERVICES USER
(Self Service)
DISTRIBUTION
SERVICES
Wholesaling
__ Retailing
Re~ nng
I l
1 1
1
SERVICES
_ _ I NTERMEDIARY
CONSUMER
(Self Service)
GOVERNMENT SUPPORT SERVICES
E.g., Waste Disposal, Road Maintenance,
Education, Health Support, Standards,
Police and Fire Protection
1—
FIGURE 1 Some mutual interactions among manufacturing and services activities.
Double-headed arrows indicate that each party benefits from the presence of the
other in trade.
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KEY POLICY ISSUES POSED BY SERVICES
215
Less recognized is the dependency of manufacturing on services. Some
70-85 percent of all high-technology (information) products are sold to the
services sector. In addition, manufacturing success today often requires more
rapid feedback from the marketplace, better customized products, and more
accurate delivery in shorter cycle times all of which are dependent on
downstream services integration. Proper integration of these technologies
throughout manufacturing and distribution could significantly increase the
number and range of goods that it pays to produce in the United States,
rather than overseas.
· "Quick response" reordering systems can allow U.S. textile mills significant com-
petitive advantages. They make it possible to deliver fabric in one-third the time it takes
from Taiwan, and computer-assisted design and manufacturing links between cutters on
Seventh Avenue and southeastern mills can halve the time it takes from design to goods
delivery (Business Month, 1987~. Well-managed retailers and distributors increasingly
know what customers want better than manufacturers possibly can. Many are using their
market knowledge and electronic point-of-sale fEPOS) data systems to actively participate
in designing products and guiding manufacturers' sales strategy through the improved
marketing data they provide.
U.S.-based manufacturers able to link flexible production systems directly
to their customers' market intelligence networks should have sustainable
competitive advantages (both in timing and in transportation costs) over
foreign producers. As foreign firs invest in U.S.-based manufacturing ca-
pacity to get closer to the country's huge, increasingly customized market-
place, this is leading to a substantial "remanufacturing" of the United States.
The Japanese automobile companies' recent moves into the United States
provide interesting examples of the potential impacts on both producing and
supplier industries.
In addition, services technologies offer a rich new array of channels through
which manufacturers can reach specialized segments of their markets. Elec-
tronic home shopping and interactive video terminals located in banks, air-
ports, hotels, airplanes, and shopping malls allow manufacturers to make
contact with whole new groupings of customers in psychological situations
in which they are likely to buy.
Manufacturers Becoming Services Providers
Increasingly, the profitability of manufacturers depends upon their use of
services technologies and their extensions of these technologies as "prod-
ucts" for exploitation.
The competitive positions of large companies are now largely determined
by their capacities to manage information worldwide about suppliers, new
technologies, exchange rates, swap potentials, or the changing political or
market sensitivities in key countries. For example, with crude oil resources
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216
JAItIES BRIAN QUINN AND THOMAS L. DOORLEY
primarily in the hands of sovereign nations, Exxon's profits depend ever
more on its ability to find, track, deploy, trade, transport, finance, and
distribute energy efficiently. All of these activities are "services" and are
technology driven. In addition to such logistics activities (especially in world-
wide sourcing), General Motors (through its Acceptance Corporation, GMAC)
has found financial services to be an indispensable competitive weapon in
the marketplace and a source of over half of its profits in recent years.
In many companies such as IBM, services technologies (e.g., software)
have always been a key to success, often being "bundled" integrally into
product and rental strategies. Now, with the hardware aspects of many elec-
tronic products becoming extremely low cost and competitive, these "man-
ufacturing companies" are increasingly shifting their focus toward software,
networks, and communications linkages (services) as their bases for im-
proving value added and profits. Others, such as Caterpillar Company, have
found new growth through providing logistics and transportation services
(utilizing their own extensive world networks) for other manufacturers in-
terested in efficient warehousing or parts delivery worldwide.
Lowering Internal Manufacturing Costs
Many aspects of a manufacturer's cost competitiveness depend intimately
on services activities, either within the firm or purchased from vendors.
Greater efficiencies in communications, transportation, financing, distribu-
tion, health care, or waste handling (services industries) can markedly affect
a manufacturer's direct costs. To the extent that these services are more
efficiently provided, they lower living costs for workers and improve the
quality of life they can enjoy at any given wage level.
In addition to the 75 percent of U.S. employment directly in the services
industries, within manufacturing businesses an astonishingly large proportion
(estimated to average some 75 percent) of all costs—and a much higher
percentage of value added are generally due to services activities (Office
of the U.S. Trade Representative, 1983; Vollmann, 1986~. Aggressively
managing services activities within manufacturing enterprises can provide a
major attack point for improving competitiveness in the future. As advanced
technologies provide new economies of scale or scope to specialized services
providers, manufacturers are increasingly finding that they can substantially
improve their costs and effectiveness by "outsourcing" staff services such
as accounting, personnel, legal, marketing, and even research and design
functions.
Services and International Manufacturing Operations
One of the areas in which services technologies affect manufacturing most
significantly is international operations. Telecommunications, air transport,
OCR for page 217
KEYPOLICYISSUES POSED BYSERVICES
217
and surface cargo handling technologies have forced virtually all manufac-
turers to consider their supply sources, markets, and competition on a world-
wide scale or lose their competitive position. Although the figures do not
show up in merchandise trade balance statistics, the greatest impact of U.S.
manufacturing technology on world markets is probably through the opera-
tions of multinational companies' inside host countries (Sauvant, 1986~.
About one-fifth of the total capital invested in U.S. manufacturing firms is
in facilities outside the United States, with a similar proportion of output
produced there. Some of the largest continuing favorable net balance of trade
accounts for the United States have been the profits, royalties, and inter-
corporate sales benefits remixed by these multinationals to the United States
(see Table 21.
Effective coordination of the international operations of large manufac-
turing enterprises and of many much smaller companies depends heavily on
services technologies and efficiencies. Also, economies of scale in interna-
tional operations are very often due to the corporation's services capabilities
(i.e., technology transfer, marketing skills, financial services, or logistics)
rather than its plant scale economies. A significant component of a multi-
national company's competitive edge comes from its capacity to handle cross-
border data and services flows. Consequently, maintaining the freedom of
these flows is a very sensitive and critical point in maintaining the interna-
tional competitiveness of U. S . manufacturing enterprises. International man-
ufacturing operations and services technology management are inseparable
for producers seeking competitive advantages in today's global marketplace.
ManufacturZng's Changing Strategic Environment
As has been noted, perhaps the most important structural change in in-
ternational manufacturing competition stems from the continuing integration
(through electronics) of the world's financial centers into a single world
financial marketplace. World financial flows have already become largely
disconnected from trade flows (Bell and Kettell, 19831.2 Differences in na-
tional economic policies can disturb interest rates only slightly but still call
TABLE 2 Manufacturing-Related Trade Balances ($ Billion)
Preliminary
Category 1970 1975 1982 1985 1987
Royalties and fees, net 2.1 3.8 4.6 5.3 6.8
Direct investments, net 2.6 14.4 18.2 26.6 35.3
Merchandise, neta 2.6 8.9 (36.4) (122.1) (159.2)
aExcluding military.
SOURCE: Bureau of Economic Analysis, U.S. International Transactions.
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218
JAMES BRIAN QUINN AND THOMAS L. DOORLEY
forth huge transfers of assets from one country to another. The U.S. dollar
rose 34 percent against the currencies of its major trading partners between
1983 and 1985, then plummeted by 42 percent to recent lows principally
because of fiscal and monetary not trade or management decisions (see
Figure 2) (The Economist, 19881.
Thus, comparative costs for producing or sourcing in particular locations
have often become more a function of exchange rates than of productivity
or competitive managerial decisions. This argues for new geographical plant-
50 40 30 20 10 - 0 + 10 20 30 40 50
I I 1 1 1 ! 1 1 1 1
:~
~,,,,,,,,,,,,,,,,,,,,,,,,,,,.
~,,,,,,,,,,,,,,,,,,,,,,/
~//////i//////////////
At:
Greece
Saudi Arabia
Philippines
Indonesia
Israel
Mexico
Brazil
Switzerland
Federal Republic of Germany
Japan
France
Italy
United Kingdom
Spain
Sweden
Taiwan
Kuwait
Singapore
Canada
Republic of Korea
South Africa
Australia
Hongkong
_
/~//////////////////////////3
~Y////////////////////{ ~ 1 1 0
:////////////// ~ ~7
////////////////, ~/////~ 1,224
FIGURE 2 Exchange rate fluctuations. Percent change in the dollar (February 26,
1985-October 12, 1987) against national currencies. SOURCE: The Economist (1987a).
OCR for page 219
KEYPOLICYISSUES POSED BYSERVICES
219
deployment tactics, market portfolios, and levels of organizational and lo-
gistics flexibility not commonly found in past U.S. manufacturing strategies.
Recently, the lower cost U.S. dollar has undoubtedly encouraged more man-
ufacturing by Japanese firms in the United States. If the European Economic
Community integrates in 1992 and maintains internal exchange rate parities,
it could become a most attractive location for long-term investment, to the
detriment of the United States. The entire power relationship between man-
ufacturing and services groups is also changing profoundly in other areas.
· For example, many manufacturers now find that their medical care or insurance
outlays for employees are higher than their own profits. Hence, new strategies creating
"coalitions" with providers and insurers have emerged as key elements in cost control.3
Deregulation has created more powerful transportation companies with interrnodal han-
dling capabilities that improve shipping efficiencies enormously, but also increase these
carriers' bargaining power against manufacturers and other shippers (Cook, 1987~. In
addition, large money center banks now offer information, instant capital access, and
worldwide connection advantages that few manufacturers can duplicate internally for
managing their financial assets.
All "services" or "products" are really just means for providing satis-
faction to customers. Thus, the boundary between services and manufactures
is very fluid and varies widely over time. It is imperative that U.S. domestic
economic and international trade policies recognize the extreme fluidity,
substitutability, and mutual interrelatedness between manufacturing and ser-
v~ces.
GOVERNMENT POLICY ISSUES
Recognizing these important facts as context, what are the central policy
initiatives needed to support the effective use of technology in services? A
basic presumption behind sound policy in the United States is that a com-
petitive marketplace will allocate resources optimally among producing sec-
tors, markets, and technologies. In most instances, market forces are quite
sufficient in services. Government intervention would seem justified only in
those situations where market imperfections or externalities make it unlikely
that private initiatives can meet the challenge.
Within this general framework, an attempt has been made to identify a
few major points where government interventions would have high leverage.
Five basic policy directions would appear to be most productive:
1. macroeconomic and tax policies focused on improved capital formation
rates, lower cost of capital, and lengthened time horizons for return on
investment;
2. increased and better-targeted national investments in both hard and soft
infrastructures supporting services;
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220
JAMES BRIAN QUINN AND THOMAS L. DOORLEY
3. restructured regulatory practices to improve the efficiency and inno-
vativeness of the services sector;
4. a refocus on employment and human resources development policies
more appropriate to the mobility and intellectual skills required for a services-
dominated society; and
5. stronger recognition and exploitation of services-manufacturing inter-
face potentials in international trade measurements and in trade negotiations.
Macroeconomic and Tax Policies: Capital Formation and
Technology Investment
.
The basic macroeconomic and tax policies to support a strong services
sector are quite compatible with those desirable for a healthy manufacturing
sector not surprising when one understands the substitutability and inter-
relatedness of the two sectors. High among the policies that would be most
productive are measures to enhance capital formation and encourage long-
term investment in research and technology.
In the past, national growth in productivity has tended to correlate highly
with national capital formation rates and investments in technology and pro-
ducing assets (Bares, 1986; Kendrick, this volume). Because of the high
capital intensiveness in services (Quinn, this volume), this should be equally
true for larger companies in both services and manufacturing. Capital for-
mation is stimulated by policies that selectively encourage savings and in-
vestment over consumption. Decreasing taxes on earned interest or the double
taxation on dividends would, of course, assist such a reemphasis, as would
increasing the relative percentage of government tax revenues from con-
sumption taxes as opposed to those based on income production (Landau
and Hatsopoulos, 19861. Although the economic benefits and political costs
of these measures have been debated extensively, the substantial leverage of
the benefits for and from the services sector has rarely been considered.
Because of the long time frames they involve, the development and ap-
plication of major new technologies are especially sensitive to high capital
costs or tax laws that bias decisions toward short-term investments. U.S.
capital costs have been estimated to be significantly higher than those in
Japan (Hatsopoulos et al., 1988~. A simple calculation will show that a
company investing $1 million at the recent U.S. average cost of capital
(approximately 15 percent) can only afford to wait 4.7 years to recover an
expected income of $500,000, whereas a Japanese company investing at its
6 percent capital cost can wait for 11.9 years. This goes a long way toward
explaining the more "patient" Japanese outlook. The cycle for invention,
development, and successful implementation of technological innovations in
services is quite comparable to that in manufacturing: 3-5 years is a typical
time frame for most major innovations to be effectively incorporated in
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KEY POLICY ISSUES POSED BY SERVICES
221
production processes or to breach a new market as a "services" product
(Guile and Quinn, 19881.
Radical innovations tend to take significantly longer than this. Federal
Express's COSMOS II tracking system took 8 years, Citicorp's development
of automated teller machine systems spanned more than 10 years, and the
cellular mobile telephone waited 11 years from AT&T's public filing to
market implementation. Currently, the U.S. tax law is among the industrial
world's least attractive for long-te~m investors. Only those of Australia and
Britain are worse (see Table 31. Return to a 6-month holding period for
capital gains status would be of little benefit in stimulating needed long-term
investments, but a minimum holding period of at least 3 years (with a sig-
nificantly graduated tax reduction for longer-term gains) could help encourage
both start-up enterprises and longer time horizons for corporate shareholders,
whose short-term outlook is a constant complaint of corporate managers.
Any capital gains tax reduction should, of course, be related to expected
rates of inflation.
The electronic integration of world capital markets will make a national
policy of arbitrarily low capital costs much more difficult to maintain, even
for Japan. Nevertheless, selectively lowering capital costs for longer term
investments (through something like a 3-year capital gains benefit) could be
a viable strategy, especially if combined with less inflationary fiscal policies.
Most notable among these would be decreasing national deficits to lower
pressures on available capital sources as well as to ameliorate investors'
uncertainties and inflationary expectations. Lower and more predictable cap-
TABLE 3 Capital Gains Taxes on Share Investments,a 1987
Annual
Long-Term Tax-Free
Maximum Short- Maximum Long- Qualifying Allowance
Term Rate (%) Term Rate (%) Period (dollars)
Australia 50.25 50.25 1 year
West Germany 56 Exempt 6 months 543
Sweden 45 18 2 years
Britain 30 30 10,679
United States 38.50 28 6 months
Canada 17.51 17.51 22,650
France 16 16 44,336
Belgium Exempt Exempt
Italy Exempt Exempt
Japan Exempt Exempt
Holland Exempt Exempt
aRates exclude local taxes.
SOURCE: Arthur Andersen.
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224
JAAIES BRIAN QUINN AND THOMAS L. DOORLEY
TABLE 4 Status of Software Protection in Selected Countries: 1986
Trade Secret
Country Copyright Unfair Comp. Trademark Patent
~ _
Brazil Unclean Very Limited No
France Yesb Unclear — Perhaps
Federal Republic of Germany Yesb Yes NoC
Indonesia No
Japan Yesb Limited — Sometimes
South Korea d Limited Yes Sometimes
Taiwan Yesb Pending
United Kingdom Yesb Yes Yes Sometimes
United States Yesb Yes Yes Sometimes
aLegislation proposed.
bSpecial legislation passed or decree issued.
CPerhaps, if included in process.
dLegislation pending.
SOURCE: Nusbaumer, 1987b, pp. 216-217.
and suggests that international coordination is badly needed. Lack of adequate
protection mitigates against innovation and wastes the valuable resources of
innovators in seeking tricks to keep others from stealing and exploiting their
efforts .
Another complex problem is posed by vertical integrations through infor-
mation networks that enable retailers, distributors, manufacturers, and sup-
pliers to tightly coordinate their efforts. While lowering costs for consumers
and increasing U.S. competitiveness, such systems also contain potentials
for anticompetitive behavior (Business Month, 1987; Wall Street Journal,
1987a). Developing appropriate competition-inducing guidelines for antitrust
and fair practices interpretations will be a significant challenge; yet it could
have a high payoff in competitiveness and also, as Kendrick states, in terms
of productivity. By encouraging distribution efficiencies through restructur-
ing and such technological developments, even Britain's somewhat archaic
distribution system has improved to the point where many Japanese-made
products can be delivered to U.K. customers at lower prices than those
charged in Japanese retail outlets (The Economist, 1987c).
A final and very important aspect of regulation in services has to do with
financial markets, economic risk, and control. Technological advances in
communications and computing have increased the scale and speed of trans-
actions and the interdependence of world economies in ways that can have
profoundly favorable but also potentially sudden and disastrous conse-
quences. The debate is just beginning on how to prevent large-scale inter-
national interventions or computer-based trading systems from overwhelming
securities markets in the short run.
The Presidential Task Force on Market Mechanisms (the Brady Commis-
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KEYPOLICYISSUES POSED BYSERVICES
225
sign), appointed by President Reagan after the market crash of October 19,
1987, suggested oversight of all markets by one competent body, a more
unified clearing system, consistent margins requirements for all major play-
ers, and expanded emergency techniques to slow or halt trading so that all
players have more equitable access to the system (Presidential Task Force
on Market Mechanisms, 19881. Other recommendations have focused on
institutional corrections, such as changing specialists' roles and rules (The
Economist, 1987b). Private groups such as the stock exchanges have often
not needed government intervention to implement many of these reforms in
their own self-interest, but others may require international coordination
through government agreements.
The Bank for International Settlements is also setting forth proposals for
banks in the Group of Ten industrial countries to have identical, well-defined,
minimum standards for both core and secondary reserves. Such standards
would mean that banks compete internationally under similar rules and are
less likely to drastically stress the world financial system with costly, cas-
cading failures (The Economist, 1987d). Yet they could also seriously affect
the capacity of less developed countries to obtain needed loans. More atten-
tion to the interests of less developed countries and the implications for their
international trade balances will be a core policy issue to ensure a more stable
and continuously growing world economy.
Many maintain that the present complex of insurance mechanisms, hedging
instruments, and open markets is sufficient to avert real disasters and that
those who invest should bear their own risks (Norton, 19881. Government
regulations in anticipation of unknown events always carry with them inef-
ficiencies and risks. These must be weighed against potentials of massive
losses for the United States or the entire world economy if matters go awry.
This probably argues for some combination of increasing the technological
capacities of major markets to handle peak trading loads and some carefully
constituted mechanisms for limiting the nation's total economic risk, not
complete nonregulation, however efficient that might seem in the short run.
However, any proposals to selectively regulate U.S. markets should recall
that in an integrated world marketplace, any inefficiencies introduced by
U.S. regulation will quickly cause customers to seek more efficient solutions
in the markets of other nations.
Human Resource Policies for a Services-Dominated Economy
As in other major policy areas, sound national human resources policies
are not substantially affected by the national mix of services and manufac-
turing industries. At a specific level, worker adjustment programs are an
important ongoing activity in any dynamic economy, and the requirements
for good basic skills training for new labor force entrants are high but not
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JAMES BRIAN QUINN AND THOMAS L. DOORLEY
substantially changed by recent technical advances or growth of services
industries. A recent comprehensive review of the impacts of technology on
employment (Cyert and Mowery, 1987, p. 169) concludes
New technologies by themselves are not likely to change the level of job related skills
required for the labor force as a whole. We do not project a uniform upgrading or
downgrading of job skill requirements in the U.S. economy as a result of technological
change. This does not deny the need, however, for continued investment and improvement
in job related skills of the U.S. work force to support the rapid adoption of new tech-
nologies that will contribute to U.S. competitiveness.
One important concern is a more sophisticated treatment of the issue of
services wages in public policy debates. Comparing average wages in man-
ufacturing versus those in the services sector is particularly misguided. Be-
cause great variations exist among specific job categories and industries, a
more relevant focal point would be on the wage levels and opportunities in
particular services industries or occupations versus those in individual man-
ufacturing categories. Even then certain important adjustments should be
made.
Today, services not blue-collar jobs provide the most available entry
point for new, secondary, or part-time workers, as well as for high school
students, females, and retirees entering or reentering the work force (see
Table 51. When analyzing the wages in services, one should adjust for these
entry conditions, the greater convenience and better working conditions, the
lower experience requirements, and the more flexible hours offered by many
services jobs. Such jobs are essential for multiple-earner families and for
developing the attitudes, skills, and disciplines needed for more permanent
job holding (Levy, 19871.
The safety net provided by widely distributed services jobs has undoubtedly
helped by absorbing displacements from manufacturing into local jobs in the
services sector. The economy has benefited if the wage levels in growing
services areas and the value added which is presumably necessary to sup-
port them—are higher than those that displaced blue-collar workers would
have had to accept to keep their companies from going overseas. Further,
as services company outputs become more substitutable for manufacturing
tasks (notably in design, quality assurance, maintenance, accounting, mar-
keting, or other support tasks), wages should progressively equilibrate be-
tween the two sectors, as data indicate they have begun to over the past five
years.
Disparaging services wages in policy conversations seems singularly un-
productive. Instead, an emphasis on retraining, adapting, and cushioning the
personal costs for those displaced because of the loss of certain manufacturing
jobs or because of changes in occupational mix would be more appropriate.
At the most fundamental level, a more literate and numerate work force will
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KEY POLICYISSUES POSED BYSER VICES
TABLE 5 Secondary Workers in the Labor Supply, 1980 Census Data
227
Total
Employed Work Less
(numbers in than 35 Hours 19 Years Old
Industry thousands) per Week (%) and Under (%) Female (%)
All manufacturing 21,194 9.1 4.3 31.9
Selected services
Food and bakery stores 2,502 38.3 22.8 45.8
Gasoline service stations 627 25.8 22.5 16.7
Apparel and accessory
stores 896 40.2 17.7 69.7
Eating and drinking
places 4,181 49.8 30.8 59.6
Drug stores 490 39.2 20.2 60.6
Other retail trade 2,217 34.0 10.0 54.6
Private households 701 58.6 9.7 90.9
Hotels and lodging 1,052 29.6 9.7 62.3
Laundry, cleaning, and
garment services 399 30.3 7.8 58.9
Entertainment and
recreation services 1,007 39.9 16.6 40 4
SOURCE: O'Neill (1987, p.22).
be more adaptive to changing economic conditions. Therefore, basic edu-
cation remains a high priority, especially if the basic education offered can
prepare people for lifetime learning in connection with constantly changing
job demands. In his chapter in this volume Kendrick also concludes that it
is most important to stress education appropriate for services jobs, especially
vocational training and in such programs as the Job Training Partnership
Act.
Many studies have emphasized that education and human skills develop-
ment are the foundations of value-added in many industries and provisions
for lifelong education are critical for individuals to obtain and upgrade the
skills called for in today's rapidly restructuring economy. Whereas job-
specific training by companies is often the most appropriate type of training
for economic adjustment, there are situations in which the benefits an em-
ployer can capture are significantly less than the social benefits of an enhanced
skill base. In those cases public support of training and education is crucial.
One particularly important concern is that between 20 and 30 percent of
displaced workers with job experience lack basic skills (Cyert and Mowery,
19871. These individuals, with less formal education, are also the least likely
to derive benefit from on-thejob training provided by employers and should
be a primary target for public training and retraining initiatives. This priority
is reinforced by Kutscher's observation (this volume) that job growth in the
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228
JAAlES BRIAN QUINIV AND THOMAS L. DOORLEY
near future is likely to be mostly in those jobs currently held by those with
higher levels of educational attainment.
Finally, at the college and university level, there are a host of initiatives
that could strengthen the technology base of the nation with as much benefit
to services industries as to manufacturing. The 1985 Report of the President's
Commission on Industrial Competitiveness recommended greater funding for
engineering education and expansion of the National Science Foundation's
engineering research centers. The increasing technological intensity of ser-
vices industries argues for sustained support of engineering education as
much as does the need to keep U.S. manufacturing technologically dynamic.
Sectoral Risks and Diversification
Another key policy issue is the extent to which government should attempt
to lower the country's economic and political risks by maintaining sectoral
diversification between the goods and services sectors. In an increasingly
global economy, and one in which the United States is more of an equal
participant than an overwhelmingly dominant force, national security con-
cerns with the industrial base may require special interventions. Critical issues
include whether the growth of services threatens U. S . capabilities to maintain
(1) a sufficient presence in international trade, (2) its desired military or
defense posture, and (3) its strategic flexibility to obtain vital resources
abroad. The latter two points may require special interventions by consciously
diversifying national strategic alliances, stockpiling critical materials, or di-
rectly subsidizing specialized defense needs. The cost of dealing with these
issues through general economic supports for various manufacturing indus-
tries would be extraordinarily high; asking consumers to subsidize noncom-
petitive industries for the sole purpose of maintaining a production surge
capacity for certain defense contingencies is a very inefficient and wasteful
way of maintaining our defense industrial base.
In the realm of commercial trade, services already account for a high
percentage of U.S. and other developed countries' exports (see Figure 41.
Yet there is general agreement that these figures are vastly understated. Data
concerning services trade measure only a few categories of services activities.
Many services are often embodied, but not separately accounted for, in
product or technology transfers across borders. However, the most interesting
point is generally overlooked: trade figures measure the benefits of products
versus services sold in trade in quite different ways. When a product, say a
mined raw material, is sold, the selling country registers the wholesale price
of the product as its gain or inflow. Yet all the resources embodied in the
product are lost to that country for further use. The real net gain on the sale
is actually the profit on the sale, perhaps one-tenth of the sale price. On the
other hand, when a services company completes a transaction abroad (e.g.,
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KEY POLICY ISSUES POSED BY SERVICES
UNITED KINGDOM
AUSTRIA
BELGIUM/
LUXEMBOURG
UNITED STATES
SWITZERLAND
NETHERLANDS
ITALY
FEDERAL REPUBLIC
OF GERMANY
SWEDEN
lA"tA~I
CANADA
,,,,,, ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,/,=
, ,
0 ~ 10 15 20 25 30
PERCENT
229
~3 1976
· 1 986
35 40
, 1 1
45 50 55
FIGURE 4 Exports of services as percentage of total exports. SOURCE: The Econ-
omist (1987b).
a banking deal or a bridge design in situ), only the net profit or fee is credited
to the selling country. Yet no nonrenewable resources have left the country,
and those who handled the transaction (and return to their parent country)
may actually have increased value as human assets. Thus, international trade
accounting conventions probably overstate the relative net value of products
versus services sold in trade by at least an order of magnitude.
Some have suggested that it may be impossible for a country to establish
meaningful competitive or comparative advantages in services (Deardorff,
19851. Given the capital intensity, economies of scale, and scope of some
of the major services industries, some companies and industries can de-
monstrably achieve international competitive advantages in cost, quality, or
flexibility. The more interesting question is comparative advantage. Because
traded services depend so much on costs in the receiving country, do the
relative factor endowments of the parent country really determine what is
exported? Also, if a country had a factor advantage that favored particular
services industries, could that shift trade patterns dangerously (Nusbaumer,
1987a)? Wright and Pauli (this volume) warn that the Japanese may be using
such a factor advantage (availability of inexpensive money in Japan) in
penetrating U.S. financial services markets. Because exploitation of this
advantage will require substantial Japanese investments in their customers'
countries (like the United States), there are grounds for negotiating fair access
to Japanese services markets in return.
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230
JAMES BRIAN QUINN AND THOMAS L. DOORLEY
Despite U.S. strengths in many other services areas, there are significant
foreign barriers to trade. Gonen~c, in his chapter, identifies three other factors
that may limit the growth of trade in marketed services: (1) the existence of
culturally bound services demands, (2) the complexity and cost of interna-
tionalization in services businesses, and (3) the lack of incentive to engage
in international trade or operations on the part of the many privately held,
smaller services establishments. And in fact, the measured world market
share of manufactured goods produced by U. S.-based companies has hovered
around the 20 percent level since the 1960s, and manufacturing has enjoyed
a strong recent export resurgence (Fortune, 19871. Given these and the high
degree of interactive support and mutual substitution possible between ser-
vices and manufacturing, it seems unlikely that U.S. trade as currently mea-
sured will shift dramatically toward services in the near future.
However, it is appropriate to focus more attention on the $700 billion
international services trade, which is virtually all outside GATT (Shelp,
19871. Because so much of the services sector of most nations is typically
government owned or managed, it will take years for a general agreement
such as GATT to substantially ameliorate each country's unique constraints.
Specific bilateral or limited multilateral negotiations seem the most likely
road to progress in the near future. Open access for foreigners to the huge
U.S. services markets will normally be a desirable quid pro quo in such
negotiations. Federal Express has often been hampered in pursuing Fred
Smith's vision of a global just-in-time economy (Smith, this volume) by
Japanese government protectionist actions. An effective transportation and
logistics system linking U.S. production and distribution units with world-
wide sources will demand extensive modification of outdated world air cargo
regulations and treaties, but the benefits of less regulation could be great for
all parties.
The threat of tariff barriers is rarely effective in services trade, but selec-
tively being able to deny takeovers of U.S. companies by foreign enterprises
whose countries do not offer reciprocal access may be a valuable bargaining
tool in obtaining "level-playing-field" conditions with our major competi-
tors. The international airlines industry provides an interesting and timely
case in point. Successive administrations awarded foreign airlines access to
the richest U.S. travel cities, while settling for access to fewer cities abroad
and heavy restrictions on U.S. airline operations there (Wall Street Journal,
1987b). Foreign airlines are now asking for cabotage- the right to fly do-
mestic U.S. routes and permission to own some U.S. airlines, so a pos-
sibility for redress appears to exist.
Services trade and merchandise trade are inseparable in many instances.
Gonen~c (this volume) points out the way in which Japanese services exports
in transportation derive naturally from Japan's large merchandise export
activity. Leverage can be brought against countries with strong product trade
OCR for page 231
KEY POLICY ISSUES POSED BY SERVICES
231
balances to allow U.S. manufacturing companies to operate under equivalent
rules, including provision of U.S. services in support of their product sales
in those countnes. To do otherwise is to allow competitor nations to exploit
their advantages in manufactunng, while denying the United States the right
to benefit from its relative strengths in services.
.
.
Because most of the employment and benefits from providing services in
international trade tend to be captured in the receiving country with the
exception of some services industries such as water transport or communi-
cations there is serious doubt that direct services trade can make up the
enormous product trade deficits which the United States has incurred recently.
In the near future, services are most likely to help U.S. trade by lowering
U.S. infrastructure costs and increasing the value added in exported manu-
factures through mechanisms described above. This area, along with ag-
gressive efforts to break barriers to services trade and to U.S. services
investments abroad, is where much of our strategic focus should be placed.
CONCLUSIONS
Policy discussions have generally deeded, misunderstood, or underem-
phasized the role of services in the U. S . economy. This volume has attempted
to systematically address certain important policy areas, by using the most
up-to-date data available. These include the issues of productivity, invest-
ment, employment, regulation, and trade in services. This chapter attempts
to integrate these analyses and set forth some explicit recommendations
addressed to those major policy communities that can most dramatically
enhance the effective development and use of technology in services. A1-
though market forces are generally reasonably efficient in allocating research
resources among services-producing sectors, markets, and technologies, a
major reordering and refocusing of national priorities and attitudes toward
the following could pay high dividends:
· Developing a strong services sector is an extremely desirable goal for the United
States, which will support and enhance U.S. manufacturing competitiveness nationally
and internationally. Manufacturing and services effectiveness are so intertwined that any
attempt to enhance one at the expense of the other will be actively counterproductive.
· Macroeconomic and tax policies should focus on improving capital formation rates,
lowering capital costs, increasing investments versus current consumption, and length-
ening investment time horizons. Crucial, and feasible, elements include fiscal constraints
on government expenditures to lower anticipated inflation rates and pressure on capital
funds available, institution of a 3-year minimum holding period (and perhaps progressively
higher incentives for longer term holdings) to obtain significant capital gains tax advan-
tages, and a shift in government expenditures toward infrastructure investments including
education and training and other "intangible" investments in social infrastructures.
· Because services technologies have created a much wider and more complex range
of direct and cross-industry competition, new regulatory approaches and institutions are
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232
JAMES BRIAN QUINN AND THOMAS L. DOORLEY
needed which intervene at a transactional or functional level, rather than on an industry
or institutional basis (i.e., regulating sales transactions or safety functions, rather than
banks or airlines as individual industries). Other new modes of intervention may be
needed to protect proprietary knowledge and to enforce or enhance competitiveness in
the new integrated information environments and cooperative structures permitted by
modern services technologies.
· Human resources policies should be redirected to foster the mobility and intellectual
skills required for a services-dominated society. Basic educational, job training, and wage
policies should reflect the fact that services, not blue-collar, jobs now provide the primary
entry point for new workers, secondary workers, minorities, and other less advantaged
people entering or reentering the work force. A particular focus for public initiatives
should be continuing education, including on-thejob-training for those with less than
average formal education.
~ Further attention to, and leveraging of, the strong U.S. services position in inter-
national trade should become a central element in U.S. trade policy. Intense pressures
can be brought on selected foreign countries to break down barriers to services trade (and
even product trade) by refusing to allow their companies to consummate takeovers of
U.S. services enterprises or have access to desirable U.S. services infrastructures such
as our major air routes or airports. Pressures should be brought to create level-playing-
field access not just for product trade but also especially for the services accompanying
that trade, where the United States is likely to have distinct competitive advantages. To
do otherwise is to allow other nations to exploit their advantages in manufacturing, while
denying the United States the benefit of its relative strengths in services.
Although there is no single new "program" or identifiable R&D "agenda"
that calls for a special government action on behalf of services, the above
recommendations do provide a catalogue of priority shifts that can make an
enormous difference in the effective development of this most crucial sector
of economic activity. With proper policy support for technology and trade
development, services can continue to be the main engine for U.S. growth
in jobs, GNP, and value added through the end of the century. Government's
main task is to nurture the attitudes, infrastructures, and skills development
that will make this possible.
ACKNOWLEDGMENTS
The authors gratefully acknowledge the important contributions of Dr.
Jordan J. Baruch and Penny C. Paquette in developing this chapter, as well
as the generosity of Bankers Trust Company, Bell & Howell, The Royal
Bank of Canada, Braxton Associates, Bell Atlanticom Co., and American
Express in supporting this research.
NOTES
Unfortunately, national economic data bases (as they are now compiled) are of limited use
in understanding the services economy (Quinn, 1987). There are many problems of defi-
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KEY POLICYISSUES POSED BYSERVICES
233
nition. Categories for collecting data still reflect the dominance of manufacturing concerns
in an earlier period. Domestic categories do not capture many new services areas (such as
software or health spas) until they become more mature industries. Also, data are not refined
enough to sort out critical relationships. Step by step, as opportunities present themselves,
new categories reflecting services activities should be substituted for the less relevant
manufacturing details now collected.
Data showing services transactions between industries and in international trade are
particularly weak. U.S. input-output tables are not available until 5-10 years after data
collection. Various responsible federal groups have formed task forces to improve data and
methodologies for analyzing productivity, wage, trade, unemployment, and output data for
services. However, they have been hampered both by budgetary constraints and by the cost
and difficulty of getting businesses to report in more detail.
2. Bell and Kettell (1983, p. 3) estimate that 95 percent of the daily volume in foreign exchange
markets in 1983 was not direct commercial business but trading between the foreign ex-
change dealers of the world's international banks.
3. At the national level, the Washington Business Group on Health has been attempting to
coordinate provider, payer, and government agency groups that need to cooperate on this
issue and has started publishing Business and Health to bring the views of both private and
public authorities to the fore.
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Representative terms from entire chapter:
services sector
