A services environment facilitating manufacturing and agriculture

30 April 2014
ITC News
Breaking down how services contribute to overall product value illustrates their importance and points up the need for an enabling business environment, experts from Sweden’s National Board of Trade contend.

Efficient services markets are essential for manufacturing and agricultural production and trade. Governments wanting to increase competitiveness in these areas work towards creating them.

Services now make up an increasingly large component of the final value of goods, a process often referred to as servicification. Manufacturing and agricultural companies buy, produce, sell, and export more services than before. Servicification is driven by increasing geographical dispersion of supply chains, the need to cut costs and improve efficiency, emergence of new technologies, and the desire to deepen customer relationships.

The National Board of Trade has mapped the services needs of one manufacturer and one agri-food company in Sweden. Both needed more than 40 different services to sell and ship their products. They relied especially on business, communication, financial and transport services. Additionally, the companies themselves offered services to their customers. 

Click on the image to view full size

Servicification is closely related to global value chains (GVCs). Services are enablers used to move production forward and are becoming separate tasks in value chains. For GVCs to be economically viable, firms must have access to price-competitive, high-quality services. Breaking down GVC production costs highlights the importance of services, which often amounts to four-fifths of total value.

Services, like manufacturing, can be broken down into tasks, spread geographically and constitute value chains in their own right.

To participate in international trade and in GVCs, businesses also rely on moving people and data. They need movement of people to gain access to markets, access skills, deliver services to customers, establish new offices, and manage the company. Data movement is required as part of their business processes and internal workings. Barriers to data movement might, among other things, hamper the ability to trade and to boost efficiency.

Services in developing country value chains

Companies in developing countries are also dependent on services. A study from 1999 on ’Inter-industry linkages of services in the Bangladesh economy (with a case study of the ready-made garments industry) and potential service trade’ by A.K. Azad showed external services exceeded 20% of total output for the Bangladeshi garment industry.

However, it is not clear how much non-services industries in developing countries are also using and selling more services, i.e. if the servicification process is global. If it is not, developing-country manufacturers are likely losing out in terms of international competitiveness.

The key role of services in facilitating production, GVCs and trade calls for governments to work towards creating a services-friendly business environment. This includes enabling firms to develop services supply capabilities and ensuring effective services are available locally. Efficient logistics services and reliable infrastructure are linked to effective movement of goods and the ability to coordinate production and GVC participation.

Information and communications technology services (ICTs) make services tradable and allow them to be exchanged as separate tasks. ICTs have great impact on the ability of services to uphold value chains. Financial services, particularly insurance, are also essential to that process.

Unfortunately, many developing countries tend to restrict the movement of services, people and data, thereby limiting the ability of their companies to become competitive and participate in global trade and value chains. For example, landlocked developing countries have a habit of restricting the very services needed to connect to the world, such as telecommunications and air transport (see Borchart et al. (2012) ‘Landlocked or Policy Locked? How Services Trade Protection Deepens Economic Isolation’).

Services: 45% of world trade

One way to understand the importance of services is by using value-added trade statistics, measuring the actual worth created in each stage of production. This data makes it possible to understand how countries rely on services as production inputs as part of their exports. When seen in value-added terms, some 45% of the value of global exports comes from services. The highest contribution of services is found in developed countries and some emerging economies.
Unfortunately, statistics are only available for a limited number of countries and are aggregated numbers. Ideally, data showing how developing country firms use and sell services should be gathered to help influence national strategies on how to assist their companies.

This article is based on the following studies by the National Board of Trade:

  • Servicification: ‘At your service’ (2010), ‘Everybody is in services’ (2012) and ‘Just add services’ (2013).
  • Services in global value chains: ‘Minecraft brick by brick’ (2013) and ‘Global value chains and services – an introduction’ (2013).
  • Movement of people: ’Making trade happen’ (2013).
  • Movement of data: ‘No transfer, no trade’ (2014).

Some of these studies are available via http://www.kommers.se/In-English/Global-value-chains/.