Service Industry Dynamics Essay Sample

Type of paper: Essay

Topic: Business, Services, Trade, Commerce, Policy, Countries, Productivity, Time Management

Pages: 8

Words: 2200

Published: 2020/12/11

International Services Trade

The business world has experienced changes and considerable growth and development throughout the years. Traditional aspects of trade have been on the increase, but one aspect that has stood out is the services trade. Its importance to firms’ production has been on the rise prompting stakeholders to take a keen look at this aspect. The importance of services trade has been driven by various factors such as the change in production processes in various firms. Given that the world has also experienced rapid developments in information and communication technologies, services trade has been able to adopt a multinational approach. Here, more trade across borders is taking place, raising further issues that need to be studied and understood. This paper looks at various aspects associated with services trade such as importance of service trade in the global economy, the dynamic nature of service trade, the policies and their impacts on international services trade and the political aspects surrounding international services trade.

Importance of Services Trade

The service sector has experienced growth in recent times and has come out of the shadows of other economic sectors that have dominated global trade over the years Francois and Hoekman et al. prove this point by looking at the economies of the Organization for Economic Cooperation and Development (OECD) members (645). In these countries, services have risen from making up 58% of the nation’s GDP to taking up 75 %. The growth in services can also be felt in other sectors such as Foreign Direct Investment (FDI) and employment. A global trend of services dominating these sectors has been noted over time.
Services in the modern economies have different roles to play. One major facet that has seen growth is that of production services. Here, services are required to facilitate trade deals through offering financial services, offering transport services and even telecommunication services. Services have also become increasingly vital in shaping the inputs necessary for economic activities. Here, the impact is on the issues of labor and capital in service aspects such as health services and educational services which are essential for economic productivity.
The issue of measuring the productivity arising from service industries has been however seen as a challenge. This is because stakeholders report some degree of difficulty in conceptualizing the true gains made from service industries. Efforts have been made to quantify the productivity of specific service industries. One of these is the financial services. Triplett and Bosworth note that in the period of the late 90s, the American economy experienced increased productivity due to the improved financial services injected into the firms (50). This was coupled with various human resource improvements in areas such as the use of information technology and innovations by the managers.
When approached in the global perspective, however, there are differences in productivity improvement due to the service industry in different countries. For example, the total factor productivity (TFP) growth of the OECD countries has not been uniform, and this can be explained by the performance of the service industries in these countries. In nations where the service industry shows growth, total factor productivity (TFP) growth is positive. In others, however, there are factors that hinder the services productivity which in turn affects the total growth. Literature in this area suggests that policy factors such as investment restrictions and trade regulations have an impact on the services performance leading to differences in productivity performance. Research in this area, therefore, has been done, and it reveals that increased adoption of multinational services has positive impacts on productivity

The whole aspect of services trade has a level of dynamism that surrounds it, setting it apart from other components such as trade of goods. Carrying out the international services trade inevitably has implications to the policies in different countries; policies that determine the nature of the trade and the gains got from it (Spopher et al. 244). One major aspect is the proximity issue. The nature of services is that they cannot be stored, and therefore trading in services calls for the interaction between providers and potential customers. The costs involved in such transactions, therefore, are higher compared to other forms of international trade a phenomenon referred to as the proximity burden. This issue raises the need for fragmentation, whereby the nature of trade in services is tailored to meet the geographical demands in specific trade transactions. This kind of fragmentation is observed to bring considerable changes in the trade with increased cases of outsourcing seen.
This calls for the drawing up of policies that cater for international service trade. Most of the policies used, in this case, are adopted from the WTO’s General Agreement on Trade in Services [GATS] and offer four modes through which international trade in services can occur. Mode one applies where the service supplier and the customer do not meet for the transaction while mode two applies where the consumer comes to the supplier’s location to get the service. Mode three applies when suppliers establishes affiliates in the country of the consumer in order to offer the services, while mode 4 refers to situations where the service provider sends people to the consumer to offer the service (Francois and Hoekman 650)
Another aspect of t dynamism is the issue of the relationship between the mode of supply and the service providing firms. For a long time, the policies set up by different countries to govern the international service trade have focused on giving a variety of options through which trade is done. The major platforms thus are investing in the consumer country or restricting the trade to cross-border transactions. Various firms take different stands on the issue with some taking either of the options while others apply a combination of the two. This approach has for long been used by multinational enterprises MNEs that deal with trade in goods but has been increasingly adopted by those in service trade.
The other aspect of the dynamic nature of international service trade is the presence of regulations. Most countries tend to place certain conditions or procedures governing this kind of trade in order to keep tabs on the quality and equity in service provision. The parties in trade mostly have a little impact on the regulations set to govern the trade since this falls under the jurisdiction of the nations. Most of the governments’ concerns circle around equality fears where effort is made to ensure that services are distributed to different regions equally. In international service trade, therefore, the regulation differs from a country to another, and this has a considerable impact on the nature of the trade and the expected results. This calls for extensive research of prospective markets before entry.

Policies and their Impacts

A feature that has been established in international service trade is the presence of policies present to control the nature of trade. The problem, however, arises in trying to figure out the magnitude of the effect of policies on the service trade between countries. The governments, in this case, have the complete freedom do design the policies governing this trade. Due to various bureaucracies associated with the governments, the transparency of the whole process is limited. This leads to a problem in conceptualizing the effect of policies on international trade of service since information about the policies is not available and if available, not sufficient. Another issue that arises is the difficulty associated with observing international trade of services. These transactions are usually not observed hence little knowledge of what really happens.
Many stakeholders tend to pool together different types of service transactions into one broad term referred to as the service sector. This approach according to (Triplett and Bosworth 78) is faulty since different services play different roles in the economy while calling for varied structures and especially modes of supply. It is, therefore, better to understand the interplay between different modes of supply of service and specific aspects of the service industry. This, therefore, leads to an emphasis being laid on the modes of supply used and the resulting policies placed to regulate international service trade. Stakeholders also need to look at the impact that the current cross-border restrictions on service trade while at the same time quantifying the impact that a liberated service sector has had in economic productivity.
In order to learn about the impact of policies on the international service trade, there arises a need of overcoming the problem associated with conceptualizing the interplay between different supply models of different services being traded and the costs that are incurred by foreign providers who supply the services. On the same breathe, identifying the effect that trade liberalization requires the highlighting of two important features. These are the mode of liberalization being put in place in the country and the existing structure of the trade markets in the country. Francois and Hoekman point out that in this kind of quantification, studies have shown that if policies are established to be giving rise to more costs, they should be removed or altered (660). This goes a long way in improving the productivity of the resulting transactions. In other cases, some policies have been observed to impede the application of the most efficient model of supply during international service trade. In this case, it is observed that it leads to losses that could have been avoided by the adoption of a more effective supply modes. In implementing the policies, a balance needs to be established between the local or domestic firms and the foreign firms in order to ensure that income is shared between the suppliers and consumers of the services.
Over time, research on the quantification of the effects of policies on international service trade has been done. From the research, it has been established that that change of policies into ones that support and lead to increased competition in the market are the best way forward. This is because such policies foster a positive growth in the industries that are concerned. Gradually, these policies are observed to positively impact the outcome of the service industry which in turn leads to improved national growth.

Political Aspects

Much effort has been made in understanding the trade of tangible goods across different countries. This has led the realization of a liberal political economy in that specific sector of trade. In international service trade, however, little has been done about the current policies that affect the trade of services across countries. Unlike in other forms of trade, the service sector has not seen representation in regional trade agreements that aim at the markets liberal.
According to Spohler and Maglio, regionally fostered trade agreements are key for any country that seeks to introduce reforms that increase competition in the service markets (241). This is because in most countries those currently have policies that hinder effectiveness of international service trade, political interests by bureaucracies within the government set up cannot allow for the setting up the reforms. By entering into trade agreements, the countries are given an opportunity through which foreign entities can support the push for reforms. The commitment of governments to the reforms is also ensured by entry into multilateral agreements with regional bodies. Here, the governments are bound to follow certain rules and this kind external support improves the credibility of the push for reforms in domestic trade policies.
In the case of international service trade, efforts have been made to make reforms to various domestic policies that affect service markets in different countries. It has however proven to be difficult to put into practice the reforms through regional trade agreements. Francois and Hoekman take the example of the EU to illustrate this point (650). This region had set up a single market initiative which was designed to unify the service markets in the region. Studies however shoe w that this venture has been ineffective since various regulations and policies in different EU member countries bring divisions that cannot allow for an integrated market for services in that block.

Further Research

The international service trade scene has seen a considerable increase in the amount of literature and research done various factors associated to it. Stakeholders, however, point out that there is still a big gap that needs to be filled by more research and studies. The first issue is the role that politics has to play in drawing up of trade policies and programs. Service trade is currently affected by these policies and therefore shedding some light on this issue would greatly improve the nature of the trade. The other aspect is that of looking at the impact of the level to which governments restrict trade. This has a considerable effect in the increasing across border service trade. Lastly, research should be focused towards the changes expected in the global business scene such as changes in technology and liberal policies. The relationship and impact of these changes to service trade should be looked into.


The role played by the service industry has grown considerably over the years. Given that service trade has now crossed into the global scene, policies that guide how this kind of trade is done need to be looked into. This is because the current policies mostly contribute to a disintegrated approach that has a negative impact to the productivity expected from the trade ventures. Achieving efficiency in international service trade is, therefore, important since it has proved to be a viable tool for the growth of national economies.

Works Cited

Francois and Hoekman, Joseph, and Bernard Hoekman. "Services trade and policy." Journal of Economic Literature (2010): 642-692.
Spohrer, Jim, and Paul P. Maglio. "The emergence of service science: Toward systematic service innovations to accelerate co‐creation of value." Production and operations management 17.3 (2008): 238-246.
Triplett, Jack E., and Barry Bosworth. Productivity in the US services sector: New sources of economic growth. Brookings Institution Press, 2004.

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