Serviceudvikling, Internationalisering og kompetenceudvikling

Transcription

1 Serviceudvikling, Internationalisering og kompetenceudvikling Arbejdspapir nr. 9 Working Paper no. 9 June / juni 1999 Anders Henten and Knud Erik Skouby Internationalisation of Services - Implications of Information and Communication Technologies Service development, Internationalisation and Competences

2 Internationalisation of Services - Implications of Information and Communication Technologies Anders Henten and Knud Erik Skouby Center for Tele-Information Technical University of Denmark DK-2800 Lyngby Denmark Tel Fax cti@cti.dtu.dk Abstract The basic proposition in the article is that information and communication technologies (ICTs) increase the tradability of services. Once information intensive services elements are disembodied from human beings and stored on electronic media, they can be transferred on telecommunication lines and traded across borders. Other services also experience an increased tradability when the acts of contacting and contracting become easier with new ICTs. New possibilities for exporting services and for international divisions of labour are created. 1

3 1. Introduction i Services contribute 60-65% to GDP in most developed countries whereas world service trade only constitutes 20% of total world trade. The discrepancy between these figures and the emerging impact of information and communication technologies (ICTs) on this discrepancy is the theme of this paper. Most services have to be consumed where and when they are produced as they cannot be transported. However, this does not imply that the production of services is not internationalised. It is indeed, at an increasing pace. But due to the transport problem, services, to a greater extent than goods, rely on the creation of foreign production sites through foreign direct investment (FDI) which is illustrated by the fact that the world stock of FDI in services makes up c. 55% of the total world FDI stock ii. However, new ICTs bring a qualitative shift to this situation. ICTs enable an increased transportation of information intensive services iii on telecommunication networks and contribute to a general facilitation of transaction procedures associated with trade. ICTs are, thus, strengthening what is termed the tradability of services, i.e., the possibility for trading services. The aim of this paper is to contribute to the establishment of a conceptual framework for an analysis of the impacts of ICTs on trade in services and to present some important perspectives in this area. 2. The concept of tradability The approach chosen in this paper is to discuss the concept of tradability. The tradability concept denotes the theoretical possibilities for realising trade in final services or components (intermediate services) in the service production chains, i.e., whether it within the current technical, economic and institutional framework is possible to trade in specific services. There are two different but complementary conceptualisations of tradability. The first one relates only to trade in a classical sense, comparable to goods, where a product crosses a border. The second one also includes trade where production is performed abroad without settling there or where consumers visit foreign countries in order to consume the services in question. The first conceptualisation is the narrow one that presupposes that services themselves are transported via non-human media. The other conceptualisation is the broader one that also includes services that cannot be transported via non-human media and where transaction problems associated with the act of trading are in focus. The first conceptualisation, therefore, only deals with information intensive services while the other one relates to all kinds of services. In this paper, the broad conceptualisation is used. The basic definition of tradability is conceptualised through three aspects of analysis: a technical, an economic and a political/ cultural aspect. From the technical aspect, tradability refers to the purely technical transportability of intermediate or final services and / or to the implications of technologies on transaction procedures. From the economic level, tradability relates to the economic feasibility and realisation of trade potentials. Seen from the political/ cultural aspect, the main considerations are the legal aspects of trade. Discussing all of these aspects, it is possible to identify a range of factors affecting tradability of services. Table 1 identifies a number of such factors that, although not exhaustive, illustrate the kinds of variables that are likely to be most influential in determining the tradability of services. 2

4 Table 1: Examples of key factors affecting tradability Type of factor Examples of factors Technical Economic Political/ cultural Data processing Telecommunications Transportation costs Transaction costs Internationalisation of markets Strategies of firms Liberalisation Authorisation procedures Trust Language It should be noted that the technical, economic and political/ cultural aspects are interrelated and that none of them constitute any basic level. However, in the tradability analysis, the point of departure will be the technical aspects of tradability. The starting point of the analysis is thus the technical factors affecting the transportability and transaction procedures of services. Transportability, or the technical possibility of delivering a service to a customer located at a distance, is a necessary precondition for trade in the classical and narrow sense of the word, and hence a core concept in the tradability of services. Furthermore, there are services that are traded but not physically transported cross borders via non-human media and where ICTs only facilitate transactions. However, the sheer technical possibility for trading is not sufficient to ensure tradability. The economic and institutional framework must also open for tradability. Economic factors influencing tradability, i.e. the economic feasibility of realising trade in services, are analysed primarily in terms of international transportation and transaction costs. A lowering of such costs allows for differences in factor-costs to be translated into actual divisions of labour. Thus, an analysis of the economic factors promoting tradability will look at the economic feasibility of trade in final services and subcontracting of intermediate services production as well as the trends in international markets generating demand for transborder provision of services. A bullet point on internationalisation of markets is, therefore, included in table 1, and a point on strategies of firms is added in order to emphasise the importance of actual players exploiting existing market possibilities and creating new international markets. Political and cultural factors are also affecting tradability of services. An important political aspect is the ongoing liberalisation that covers various attempts to increase the level of competition by means 3

5 of deregulation of the markets for services. Also important are the legal restrictions that are placed on firms intending to conduct business in services within a particular national or international context. There are also a number of cultural factors that can influence the extent to which services, that are tradable in both a technical, economic and regulatory sense, actually can be traded. The level of confidence or trust that customers associate with their service transactions is particularly important here. Even if all aspects of tradability are met, trade is not automatically happening. At least one of the parties involved must usually benefit in an economic sense and they must be interested and capable of agreeing to trade. The relationships between the different factors defining tradability and affecting trade are outlined in figure 1. For information intensive service elements, the introduction of electronic data processing (EDP) increases the possibilities for dividing the processes of service production into different components. An electronic processing of information presupposes a codification and division of information intensive working procedures that hitherto have been embodied in individuals iv. Once divided into components, the introduction of telecommunication technologies enhances the possibilities for transporting information intensive service elements. Furthermore, having established a transportability of service elements, the next step is to analyse the transaction procedures and legal factors influencing the realisation of the potentials for transport. Finally, the possibilities created by this tradability have to be explored by actors in the actual market place, which in figure 1 is termed "organisation of the market". For other service elements than information intensive service elements, the sequence of events bypasses the division of labour processes and the transportation of service elements enabled by electronic data processing and telecommunications. These service elements cannot be entered on computers and transported on telecommunication networks, but they are, indeed, influenced by changes in transaction procedures created by the application of ICTs and they are also affected by legal factors and market developments. 4

6 Figure 1: Divisibility, transportability and tradability 3. Categories of services and their transportability 5

7 Services typically require a simultaneousness in production and consumption, as services often are intangible and non-transportable. However, these characteristics do not apply to all services. In order to illustrate such differences among services, table 2 presents examples of different types of services. The category comprising services that are both intangible and non-transportable constitutes a narrow definition of services. Examples are person-centred services. If a product, on the other hand, is both tangible and transportable, it cannot be characterised as a service but must be classified among goods. It is, however, possible to find services that are either intangible and transportable or tangible and non-transportable. Examples of the first category are information intensive services. Examples of the second category are physical repairing services. Table 2: Different kinds of services Transportable Non-transportable Tangible Goods Physical services Intangible Information intensive services Person-centred services In terms of transportability in the sense that services themselves are transported over distance and not sold from a foreign affiliate or embodied in a human being services can be grouped in two main categories: The services that can be entered on computers and transported on telecommunication networks, and the services that, for different reasons, cannot. The main dividing line in table 2 is, therefore, the one between transportability and nontransportability. One might argue that information services stored on computers and transported on telecommunication networks, in reality, are examples of "immaterial goods" and no longer should be characterised as services. However, the label "immaterial good" does not in itself contribute much to the clarification of the developments and possibilities enabled by the introduction of new ICTs. But it indicates that the dividing line between transportability and non-transportability is of crucial importance and that a number of information intensive services no longer have to depend on a simultaneousness in production and consumption, i.e., that delivery and consumption can be separated in time and place from production. 4. Actual trade Banking, insurance, advertising, accounting, and management consulting are examples of information intensive services where the impacts of ICTs on transportability are particularly relevant. It is in these business areas that one from the point of view of the classical and narrow conceptualisation of the trade - would expect to find trade in services. However from a balance of payments point of view, international sales of many other services are registered as trade. Trade takes place when a resident from a country A buys goods or services from residents of a country B. In this definition, trade is 6

8 taking place when a tourist visits a foreign country or when an engineering consultant travels abroad to deliver his services. For a number of service areas and for a very small number of countries v, it is possible statistically to calculate the ratios between exports and total foreign revenues (including exports and sales from foreign affiliates). These ratios illustrate the degree of reliance of different services on respectively exports and sales from foreign affiliates. In table 3, US figures are shown. Table 3: Ratio of US exports to total US foreign revenues, 1994 Travel 1.00 Franchising 1.00 Licensing 1.00 Education 0.95 Legal services 0.87 Transportation 0.71 Engineering and architectural services 0.25 Accounting 0.22 Management services 0.16 Insurance 0.09 Advertising 0.07 Note: Travel, franchising and licensing are not calculated on basis of the sources indicated. Foreign revenues in these fields are by definition considered as trade. Sources: US Department of Commerce: US Direct Investment Abroad 1994 Benchmark Survey, Final Results, Washington, US Department of Commerce, 1998, table 6, and U.S. International Sales and Purchases of Private Services, Survey of Current Business, October 1998, p.86. Table 3 shows that there are great differences between services in their reliance on exports and sales from foreign affiliates. For a number of services, e.g. travel, franchising, and licensing, foreign revenues are by definition exports. Other services such as education also rely heavily on exports. Usually, students have to go to the country providing educational services. At the other end of the spectrum, management services, advertising and insurance are much more dependent on sales from foreign affiliates. It, therefore, seems that some of the services that are less likely to be affected by the impacts of ICTs, in reality, are the most tradable services. However, this is primarily due to definitional questions relating to international trade. 5. Modes of delivery In connection with the service negotiations in the last GATT/ WTO vi round of trade negotiations (Uruguay Round, ), four different modes of delivery were singled out: Trade where a service crosses a border, as in the case of on-line information database services Movement of the consumer, as in the case of tourism 7

9 Temporary movement of the producer, as in the case of consultants travelling abroad to service their customers Delivery from affiliates in foreign countries From a balance of payments point of view, the three first modes of delivery are all considered as trade. The first mode is obvious: it resembles trade in goods. The second mode involves the movement of the consumer, but it is still a transaction between residents of a country (e.g. the persons servicing a tourist) and non-residents (e.g. tourists). The third mode involves movement of the service provider, but only for a limited period - a protracted movement of the service provider is considered to be a movement of the labour power production factor and falls outside the concept of trade. A temporary movement of the service provider can be looked upon as an extension of the firm providing the service. The last and fourth mode of delivery is not trade. It may involve trade between the parent firm and the affiliate, but affiliate sales do not necessarily involve international trade. Establishment of affiliates is a movement of the factor of production capital. The fact that the three first modes of delivery all are considered as trade explains the results in table 3 where a number of services that are either non-transportable or only slightly transportable have the highest score in realised trade. These services do not actually cross the borders themselves. Their producers or consumers do the crossing. The kinds of service trade that mostly resemble trade in goods are the kinds where services themselves cross the borders. These are the information intensive services that can be transported via non-human media. 6. Trade and FDI in services In comparison with goods, the volume of international trade in services is still limited. Although services, especially in developed economies, constitute by far the largest share of GDP (see table 4), international trade in services only makes up about one fifth of the total international trade, as shown in table 5. A major reason for the relatively low ratio of services in international trade is the non-transportability of most services. However, there are also some statistical problems that lead to an underestimation of service trade vii. First, some service exports are registered as goods exports because they are tied to exported goods. This applies, for instance, to control and maintenance. Secondly, service exports in the form of service support for foreign affiliates of transnational corporations are not always accounted for because service exports are not calculated on the basis of customs registrations but on balance of payments statistics. Therefore, much intra-firm trade is not registered. Thirdly, goods are not only exported but often re-exported which leads to an overestimation of trade in goods, while services are delivered directly to the customer that consumes the product. We are, however, here close to the real difference between goods and services, namely that the delivery of services most often relies on a simultaneousness of production and consumption. Table 4: Sectoral composition of GDP in different country groups, 1970 and 1995, % 8

10 Agriculture Industry Services Agriculture Industry Services Low income Lower middle income Upper middle income Upper income Sources: The World Bank: World Development Report 1994 (pp ) and World Development Report 1997, table 12, Table 5: Share of world exports of merchandise and commercial services in total world exports, , % Merchandise Commercial services Sources: GATT: "International Trade 88-89", vol.1, p.39, and WTO: Focus, 28 March 1998, p.2. Despite the development of ICT, the tradability of services is still limited and this explains the importance of foreign settlement in the internationalisation of services. The world stock of foreign direct investment (FDI) in services constitutes more than half of the total world stock of FDI (see table 6). Table 6 shows that the stock of outward service FDI has increased from approximately 31% in 1970 to approximately 56% in 1994 and that the stock of inward service FDI has experienced a similar development. This growth of FDI in services has taken place despite, e.g., the obstacle that strategic services (such as banking, insurance and telecommunications) have often been protected through national restrictions on FDI. Table 6: Sectoral distribution of FDI stock for the largest developed countries, , % Outward stock (a) Primary Secondary Tertiary Total

11 Inward stock (b) Primary Secondary Tertiary Total Source: UNCTAD: "World Investment Report 1993", New York, UN, page 62 and OECD: International Direct Investment, Statistical Yearbook 1997, Paris, OECD, tables 5 and Tradability and FDI The lack of tradability of a number of services is also illustrated by the relatively low level of intrafirm trade in the service area compared to goods which is an expression of the low level of trade in intermediate services in general. There are two main reasons for establishing production sites in foreign countries. Either you want to service the local/ regional markets constituted by local customers and/ or companies that you have followed abroad or you want to establish a division of labour between different production sites in order to take advantage of differences in factor-costs. In the case of services, the overriding motivation for establishing abroad is to service local markets. 85% of total sales of foreign service-affiliates of US companies in 1993 were destined to local national markets while the similar figure for manufacturing was 60%. Only 3% of total sales of foreign service-affiliates of US companies were performed in the US while 14% of total sales of foreign manufacturing-affiliates of US companies went to the US viii. US figures also show that intra-firm trade is more pronounced in the manufacturing area than in services (see table 7). Table 7: Intra-firm trade sales by foreign affiliates of US companies to affiliated persons, 1994, % All destinations US All foreign countries Local foreign country Other foreign countries Petroleum Manufacturing Wholesale Finance (ex. banking) Services All Source: US Department of Commerce: US Direct Investment Abroad 1994 Benchmark Survey, Final Results, Washington, Department of Commerce, 1998, table III.F.3 10

12 Table 7 shows that of all sales of foreign affiliates of US companies in 1994, 33.6% in manufacturing were destined to other affiliates of the same companies while the similar figure in services was 12.3%. Of the sales of US foreign affiliates back to the US, in average 81.9% went to the parent company. Of the sales to all foreign countries, 24.6% in manufacturing and 9.8% in services went to affiliated firms. Sales to affiliated firms in the host country of the affiliate were generally very low (5.0% in average) while 67.5% of sales to other foreign countries in the manufacturing area went to other affiliates of the same companies and the figure for services was 43.8%. 8. ICTs and FDI The increased tradability of services based on the implications of ICTs on the transportability of information intensive service elements and on improved transaction procedures could lead to the assumption that the cross-border trade mode of delivery will grow relatively compared to sales from foreign affiliates in the service area. However at present, statistics do not confirm such an assumption. US exports of services, for instance, and sales from US-owned service affiliates in foreign countries follow much the same increasing development trend. Since the mid-1990s, sales from US-owned foreign affiliates have even grown at a slightly faster pace than trade in US exports of services ix. In table 8, the ratios between US exports of a selection of information intensive services and total US foreign revenues in these sectors are shown for 1989 and Except for legal services and maybe engineering and architectural services, the trend in these figures is uncertain. Table 8: Ratios of US exports to total foreign revenues, 1989 and Legal services Engineering and architectural services Accounting Insurance Advertising Source: US Department of Commerce: U.S. Direct Investment Abroad 1989 Benchmark Survey, Final Results, Washington DC, US Department of Commerce, 1992, table 6, U.S. Direct Investment Abroad 1994 Benchmark Survey, Final Results, Washington DC, US Department of Commerce, 1998, table 6, and U.S. International Sales and Purchases of Private Services, Survey of Current Business, October 1998, p.96. One reason may be that the potentials raised by ICTs are not yet realised. However, another and just as plausible explanation may be that ICTs not only enable trade but also facilitate the operation of transnational corporations - for two main reasons. The first one is that it is easier to manage a transnational firm when the appropriate communication means are at your disposal. This applies both to situations where the foreign affiliates are mere replica of the parent firm and do not participate in any international exchange of intermediate service elements, and to situations where such exchanges are important. The second reason, in the case of international exchanges of intermediate services, is that ICTs are, furthermore, important conveyers of such intermediate information intensive service elements. It can, therefore, be concluded that ICTs enable both increased trade and international settlement in services. These two modes of delivery are not exclusive. They rather supplement and even 11

13 strengthen each other. Exports from a company to a foreign country may lead to a settlement of this company in the foreign country in order better to service customers. But presence in terms of affiliates in a foreign market may also lead to increased sales from the home base depending on the nature of the services delivered. 9. Summary and perspectives The basic proposition in the present article is that ICTs will increase the tradability of services because of the possibilities created for transporting information intensive service elements and for improving transaction procedures. Once information intensive services elements are disembodied from human beings and stored on electronic media, they can be transferred on telecommunication lines and traded across borders as manufactured goods have been for centuries. Other services also experience an increased tradability when the acts of contacting and contracting become easier with new ICTs. New possibilities for exporting services and for establishing new modes of international divisions of labour are, thus, created. Lately, there has been much focus on the globalisation of the economy and on transnational corporations establishing themselves all over the world. The term internationalisation is, by some, considered as outdated as it apparently signals trade the mode of international delivery that has existed for so long. However in the case of services, cross-border trade is the new mode of delivery. Real cross-border trade in services is in qualitative terms a new development, as services, hitherto, have had to rely primarily on establishment abroad or on delivery via producers going abroad or consumers travelling to the sites of production when internationalising. In order to establish a framework for an analysis of this new development, we have discussed the term tradability and described the potentials raised by the application of new ICTs. However, if these potentials are to be realised, economic and political/ cultural preconditions also have to be met. And even then, we are still only dealing with potentials. The real realisation of trading potentials involves economic actors actually taking advantage of differences in factor-costs in different countries and starting to trade. In this paper, we have only dealt with distribution problems and have not approached questions relating to production and consumption. But, improvements in the possibilities for distributing goods and services are also preconditions for country specific comparative and absolute advantages to come into play. In the service area, production, distribution and consumption are mostly closely intertwined. However, in the area of information intensive services, ICTs provide a possibility for a splitting up of these elements. ICTs potentially remove the necessity of simultaneousness in production and consumption and create a room for separate distribution processes. In this sense, information intensive services that can be digitised have the qualities of manufactured goods which changes the product character of such services. The inter-personal character of services where services are relations among people is no longer a general characteristic of services. For some services, new possibilities for changing the face-to-face character of traditional service production and consumption have appeared. For other services, such possibilities are not at hand. They cannot be digitised and transported via non-human media. They still rely on production and 12

14 consumption to take place at the same time and/ or in the same place. In the present paper, we have also included these services under a broad conceptualisation of the term tradability. The term tradability has also been made to encompass a facilitation of trade procedures. This has not only been done in order to accommodate existing statistics on service trade that also include movement of producer and movement of customer. It has also been done to reflect the realities of services that such statistics actually cover. Our concept of tradability is not synonymous with transport on electronic media. We assume that there is a certain tradability of services, often limited, and that ICTs can increase this tradability either by being a means of transportation of the services themselves or by improving transaction procedures. However, even among information intensive services, that can be digitised, there are great differences in the prevalent modes of internationalisation, including cross-border trade, foreign establishment, foreign presence of producers and consumption abroad. Banks, to a large extent, offer their services by means of affiliates, though a growing number of banking services are delivered via telecommunication networks. In engineering design consulting services, the internationalisation mostly takes place by engineering consultants travelling abroad. However, intermediary services are increasingly delivered via telecommunication links. In the management consulting and accountancy areas, the internationalisation, first and foremost, takes the form of mergers and acquisitions. All in all, a mixed picture of diversified modes of internationalisation even in information intensive service sectors emerges. Therefore, even though an important purpose of this paper has been to draw attention to the ongoing internationalisation of services and to illustrate the increasing possibilities for trading services across borders, the differences between goods and services and between services themselves should be kept in mind. There will never, in general, be corresponding possibilities for trading all services across borders and for dividing up labour processes in services as in goods. A major part of services will also in the future be non-digital and dependent on a simultaneousness in production and consumption, and the diversity in modes of delivery of services will continue to exist. References Bhagwati, Jagdish (1984), Splintering and Disembodyment of Services and Developing Countries, World Economy, vol.7, no.2, Department of Commerce (1992 and 1998), U.S. Direct Investment Abroad Benchmark Survey, Final Results. Washington DC: Department of Commerce. Department of Commerce (1998), U.S. International Sales and Purchases of Private Services, Survey of Current Business, October 1998, Dunning, John (1989), Trade and Foreign-Owned Production in Services: Some Conceptual and Theoretical Issues, in Herbert Gierch (ed.), Services in World Economic Growth. J.C.B Mohr: Tübingen. 13

15 Henten, Anders (1994), Impacts of Information and Communication Technologies on Trade in Services. DTU: Lyngby. Henten, Anders (1997), Implications of Information and Communication Technologies for the international Distribution of Labour, Communications & Strategies, issue 26, Sauvant, Karl (1990), The Tradability of Services, in: Patrick Messerlin and Karl Sauvant (eds.), The Uruguay Round Services in the World Economy. World Bank and UNCTC: Washington DC and New York. UNCTAD (various years), World Investment Report. UN: New York. UNCTAD (1994), The Tradability of Banking Services Impact and Implications. UN: Geneva. World Bank (various years), World Development Report. World Bank: Washington DC. i This article is based on research for the United Nations Conference on Trade and Development (UNCTAD) and for the programme on development of human resources in working life of the Danish Research Councils. Research has been conducted in co-operation with Erik Baark and Morten Falch both from the Technical University of Denmark. ii Figures from World Bank (World Development Report 1997), WTO (Focus Newsletter March 1998), and OECD (International Direct Investment, Statistical Yearbook 1997). iii Data, information and knowledge based services, for instance, data processing, financial and consulting services. iv Jagdish Bhagwati discusses the process of disembodiment of services in a well-known article: "Splintering and Disembodiment of Services and Developing Countries", The World Economy, Vol.7, no.2, 1984, pp It is true that electronic data processing allows for many functions to be joined together. However, this presupposes a division of production processes as in goods production where equipment/ machinery can integrate different processes, but where a prior disintegration is the basis. v Very few countries have statistics that support such calculations. vi GATT (General Agreement on Tariffs and Trade) adopted the name World Trade Organisation (WTO) at the conclusion of the Uruguay Round. vii In the publication International Trade 88-89, GATT writes on page 28: current statistics almost certainly understate, by a substantial margin, the actual level of world trade in services. It should also be mentioned that a comparison between service exports and the GDP-contribution of market services may be more reasonable than a comparison between service exports and the GDP- 14

16 contribution of total services, including non-market services. The export of non-market services is by nature low, though it does exist (e.g. payments from abroad to foreign diplomatic missions and offices of international organisations). The GDP-contribution of market services is generally approximately 40% of total value added in developed economies. viii Figures from US Department of Commerce: US Direct Investment Abroad 1994 Benchmark Survey, Final Results, Washington, Department of Commerce, 1998, table III.F.3. ix See US Department of Commerce: Survey of Current Business, October 1998: US International Sales and Purchases of Private Services, p