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    Making the Most of a Services Sector Revolution


    © International Trade Centre, International Trade Forum - Issue 4/2004

    Photo: ITC International networking lies at the heart of successful services exporting. ITC programmes create opportunities for SMEs to make vital global contacts.

    There's growing recognition that "services do matter" to developing countries. The global services sector is undergoing a revolution that enables small firms in these countries to compete in world markets. ITC, reacting to the explosive growth of trade opportunities, has upgraded its programme to equip exporters with all they need to tackle competitive international markets.

    As globalization drives a sea change in trading activities, ITC is working to boost service providers' participation in international business. It is helping to highlight to a wider range of sectors the variety of services they could export. Sector associations and chambers, supported by ITC, are getting the "It's time to export" message out to services companies, particularly small and medium-sized enterprises (SMEs) in non-OECD (Organisation for Economic Co-operation and Development) countries.

    The revolution in services sector exporting has come about despite a traditional misunder-standing of its potential. Governments and business associations have tracked trade in the multifaceted services sector inadequately (see related box on "missing exports"). Further, the intangible nature of services "where promises rather than goods are being sold" has meant that service providers, often small businesses, are not aware of the fact that they are exporting.

    Pivotal role for services

    A growing recognition, however, of the pivotal role services play in all economies and a shift in understanding how services should be packaged, marketed, sold and reported, have sparked interest from exporters and trade development officials worldwide that continues to gain momentum. The changes have been accelerated by the digital revolution of the 1990s, which opened powerful new mechanisms to ease trade in services (see related box). The sector also advanced thanks to the agreement of a definition of trade in services achieved under the Uruguay Round negotiations on the General Agreement on Trade in Services (GATS - see related box on the Uruguay Round). ITC, recognizing the growing potential for developing country firms, moved quickly to integrate trade in services in its global activities.

    An evolving ITC programme

    Traditionally, ITC provided publications and training to support export development for the services sector. Now, with multi-donor support, the organization has developed well-rounded technical assistance programmes to better support the development of cross-industry capacity in services exports, notably for SMEs in the developing world. ITC has developed a six-phase programme to boost the export of services in target countries. The culmination of the programme sees a country joining ITC's ServiceExportNetwork. The programme includes steps to:

    • conduct a capacity study and develop a services association database;
    • establish local champions and conduct association surveys;
    • create web portals to connect the beneficiary countries;
    • deliver "train-the-trainer" workshops to SMEs, services associations, chambers of commerce and governments;
    • organize regional networking meeting for associations; and
    • advise governments on their role in promoting trade in services.
    Feedback from countries implementing the programme around the world has enabled ITC to identify and address specific issues. Targeting women service exporters for assistance is one. Worldwide, 86% of women entrepreneurs are in the services sector. However, very few women originally participated in ITC services export workshops. In response, it made a conscious effort at the country and regional level to invite businesswomen to meetings, mainly through their associations. As a result of this initiative, some 30% to 40% of workshop participants are now female. Additionally, ITC has developed a directory of women entrepreneurs' associations to encourage international networking of businesswomen.

    Reflecting on ITC's new focus and activ-ities to support services exports, Peter Walters, Director of ITC's Division of Product and Market Development, comments: "Even in a limited time period, we have worked with our partners to create an awareness that service exports do matter to developing countries. This is particularly the case in some small island state economies, where service exports - including tourism - are a real 'hope for the future', given the decline of the agricultural sectors and the lack of manufacturing in many of these economies."

    The growing recognition of the importance of services has resulted in a new drive by governments, export promotion bodies and business groups to build national and regional capacity to facilitate trouble-free services exports. The examples below highlight the diversity of services exports on offer:

    • A Malaysian civil engineering consultancy sells computer-aided design services to companies establishing new plants on an Indonesian industrial estate.
    • A Chilean interior design company assists a Costa Rican resort to create a pro-ecology feel for its luxury guest bungalows.
    • An Australian engineering company designs waste-oil catchment systems for petrol stations in Thailand.
    • An Indian data company provides credit card processing for an Italian consumer finance company.

    Capturing benefits of liberalization

    In the developing economies, service firms should begin to benefit from more competitively priced services. For example, in the financial and telecommunication sectors, WTO negotiations have already seen commitments to further liberalization which will drive prices down as competition picks up. The strengthened protection afforded to intellectual property rights under the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPS) should benefit both local and exporting service firms.

    However, liberalization also brings with it increased competition for domestic service firms. The very technology that allows developing country firms to deliver services to distant export markets will also enable distant providers to deliver services to local economies. As such, even domestic service firms will need to begin formulating strategies within a global context.

    The export of services from developing countries is here to stay. Recent research has highlighted that already all developing countries export, on average, more than 60 services to more than 30 different markets. However, most of the countries studied remain unaware of this growing trade. Clearly, the key to capitalizing on these new opportunities is to build awareness and to ensure training for "best practice" approaches through collaboration with service provider associations and governments. ITC's technical assistance programme, formulated to promote this type of approach, will be a critical foundation for services exporting success in many developing countries.

    The powerful growth of the global services sector

    In 2001, international trade in services exceeded US$ 1.4 trillion. In the period from the mid-1980s to the start of the new millennium, the services sector was the fastest growing component of world trade. Services make up a major portion of economies worldwide, including those of developing countries, ranging from 39% of gross domestic product (GDP) in a country like Nigeria to 89% in economies such as Hong Kong, China. Service industries are becoming particularly important in least developed countries and usually contribute to at least 45% of GDP. The rapid expansion of service industries leads to impressive job creation rates that assist in rolling back poverty. Services usually make up one-quarter of inputs for efficient value-added primary industries. This makes strong service growth particularly important for developing countries in which primary sectors, such as forestry and extractive industries, remain dominant.

    "Some analysts predict that by 2020, services will account for 50% of world trade," says ITC's Peter Walters. "One of the main reasons for the exponential growth in services we have witnessed and for that which is predicted is the progress in telecommunications and information technology. These developments have brought a proliferation of new opportunities for the sector and have played a major part in changing the way services are viewed and sold.

    "Another key message from ITC is that 'You are never too small to export services'. You can be a one-person firm and still be a successful exporter," he explains.

    The "missing exports"

    Exports of services are often not captured in developing country trade statistics. Nor are they fully reported in developed economies. This gives a misleading impression of the economic importance of services activities to both global and country-level trade statistics. Under-reporting comes from:

    • the "bundling" of some services linked to export sales of goods (e.g., training, maintenance, finance) in with merchandise;
    • a failure to capture much existing intra-corporate trade in services;
    • a lack of mechanisms to express export activity in the dynamic area of services other than transportation and tourism, especially business services;
    • an inability to capture sales to foreign firms in one's domestic market, primarily because service providers do not realize that they are exporting and there is no infrastructure in place to gather this type of information; and
    • a lack of awareness on the part of services firms that they are actually exporting.

    The Uruguay Round: A new understanding of services

    The Uruguay Round negotiations on the General Agreement on Trade in Services acted in part as the catalyst for the new understanding of trade in services. GATS agreed upon four ways in which services are exported. This enabled countries and business, for the first time, to begin to assess, understand and quantify the economic value of services being exported. A major achievement of GATS was to define when exports of services take place. Any of the "four modes" described below constitute "trade" as long as a local firm is being paid by a foreign firm ("non-resident"), no matter where the service is actually provided. The four types of trade in services include:

    Mode 1: Cross-border supply, where only the service itself crosses the border, for example, e-mailing a translated document or market research report.

    Mode 2: Consumption abroad, where the customer travels to the country where the service is supplied, for example, tourism or a when a visiting businessman or -woman consumes services.
    Mode 3: Commercial presence, where the supplier establishes a commercial presence abroad, for example, a temporary construction project office.

    Mode 4: Presence of "natural persons", where the provider of the service travels from their own country to supply services in another, for example, fashion models or consultants.

    Zambia strives to close its services trade deficit

    From the mid-1980s until very recently, Zambia was an example of a country that focused its export efforts on goods rather than on services. In 2001 Zambia imported US$ 372 million worth of services while exporting just US$ 143 million, a trade deficit situation that the Export Board of Zambia (EBZ) realized had to be addressed.

    The Board therefore identified five Zambian services sectors with export potential: advertising; business consulting; educational services; engineering and construction services; and financial services.

    Photo: Export Board of Zambia
    In late 2003 ITC's Trade in Services Section, as part of its work with several African countries, delivered a series of workshops aimed at SMEs, with the participation of over 20 services sectors in each workshop. The Zambian workshop, organized with EBZ, had over 75 participants. Mirriam Nkunika, Chairperson of the EBZ Board of Directors, told the gathering: "Perhaps what is needed most is to learn about how to market and export services. Although often invisible to policy-makers, services play a vital role in facilitating all aspects of economic activity."

    Immediately following the ITC workshop, EBZ initiated its own awareness-raising programme and began systematically delivering presentations on the importance of service exports, as well as building awareness through the media. Potential export targets for Zambia's services included Angola, Botswana, the Democratic Republic of the Congo, Malawi, Namibia and South Africa.