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More Qs than As: Thinking aloud about value chains in services

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Title: More Qs than As: Thinking aloud about value chains in services


1
More Qs than As Thinking aloud about value
chains in services
  • Pierre Sauvé
  • World Trade Institute, Bern
  • pierre.sauve_at_wti.org
  • Deslocalización de servicios y cadenas globales
    de valor
  • Nuevos factores de cambios estructurales en
    América Latina y el Caribe?
  • CEPAL, Santiago
  • 18 October 2012

2
Framing the issues
  • The political economy of novelty mostly known
    unknowns, trade theory always comes late to
    services bravo to ECLAC and UC for encouraging
    more scholarly work in this area
  • The duality of services, as intermediates and
    final products, has been with us for a while
  • We need to distinguish the role that services
    fragmentation can play as a facilitator of
    production and trade in goods from the IT-enabled
    ability to fragment the production and
    cross-boder sale of services themselves

3
From trade costs to trade facilitationthe
services in goods value chain story
  • The focus on trade costs as a potential
    impediment to development and its trade policy
    corollary the trade facilitation agenda have
    been instrumental in highlighting the central
    enabling role of services
  • Logistics a continuum of transport,
    warehousing, border management and
    business/professional services, express delivery
    and distribution - is perhaps the poster child of
    how services enhance the efficiency with which
    goods are brought to market
  • Still, surprisignly, we have yet to see, whether
    in the DDA or in PTAs, the emergence of more
    coherent negotiating architectures breaking down
    the artificial divide between goods and services.
    For the most part, these remain two solitudes
    beating to separate, if increasingly parallel,
    policy drums.

4
What could be done to promote greater coherence?
  • Breaking down products along input-output
    servicification lines?
  • We need better metrics of just how
    service-intensive agriculture, extractive
    industries and manufacturing actually are
  • A focus on trade data expressed in value-added
    terms would likely generate very different
    political economy perspectives, domestically,
    regionally and globally on the opportunity costs
    of liberalization and protection in key input and
    user industries
  • Institutions such ECLAC, IDB, WTO, OECD and the
    UN must help tackle this empirical challenge, and
    are indeed doing so
  • Needed patience. Data gatering shifts of such a
    magnitude are costly and slow to effect

5
How does LAC fare?
  • Only one LAC member Chile - ranks (39th) in the
    World Banks top 40 countries under its Logistics
    Performance Index (LPI)
  • Only three other LAC countries Brazil (45),
    Mexico (47) and Argentina (49), make the 2012
    list of the worlds top 50 performers
  • Is this just the tyranny of geography or could it
    also be policy-induced? Look no further than the
    Mexico-US trucking border for an answer
  • LAC needs to embrace a TF/physical connectivity
    agenda spanning goods and services if it wishes
    to insert itself more fully into regional and
    global manufacturing supply chains, overcome the
    constraints of geography and market size and/or
    reduce dependance on primary commodity exports
  • This in turn heightens the need for deeper forms
    of regional cooperation and the concomitant
    supply (and funding) of regional public goods

6
World Bank Logistics Performance Index Rankings,
Selected LAC Member Countries, 2012
LAC Member Country World Ranking
Chile 39
Brazil 45
Mexico 47
Argentina 49
Uruguay 56
Peru 60
Panama 61
Colombia 64
Guatemala 74
Ecuador 79
Bahamas 80
Costa Rica 82
Bolivia 90
El Salvador 94
Honduras 105
Venezuela 111
Paraguay 113
Jamaica 124
Guyana 133
Cuba 144
Haiti 153
7
Fragmenting services production
  • Much ado about the digital revolution and how
    governments align policies that speed up its
    adoption and diffusion
  • Services differ from manufacturing in significant
    ways that matter for insertion into supply
    chains
  • Unlike manufacturing, technological leap frogging
    is relatively easy in IT infrastructure, markets
    are mature and globally contestable, efficiency
    is easy to import and often less politically
    sensitive as it almost inherently takes place via
    job creating, technology diffusing and export
    enabling Mode 3 trade (ie FDI inflows)
  • The minimum efficient scale of operation in
    services is significanty smaller, offering
    innovative SMEs greater scope for speedier
    internationalization
  • IT enabled services suply chains are largely
    indifferent to time and space there is little
    gravity at play so long as remote (cross-border)
    supply is possible
  • The relative irrelevance of geography allows
    countries with sub-optimal locations or scale
    constraints to have tangible developmental
    aspirations in services trade (Mauritius, Rwanda,
    Barbados, Costa Rica, Chile)
  • Service industries typically employ women
    intensively social intelligence and open
    communication skills are in high demand, little
    need for physical force, significant poverty
    alleviation and education enhancing benefits from
    raising the ratio of women in the labour force

8
Services supply chains
  • In many respects, they have also been around for
    a while, predominantly in telecommunicatons (call
    centers) and finance (back office banking and
    insurance)
  • The scale of IT enabled fragmentation today spans
    every major service industry, from transport (all
    modes), to retailing, professional services,
    advertizing, health care, education , tourism and
    human resource management.
  • Much remotely supplied trade continues to take
    place within firms and organizations, and is
    usually poorly measured but a growing volume of
    such trade involves externalization as services
    firms face similar pressures to focus on their
    core competencies.
  • The spectacular rise in the share of other
    commercial services in aggregate services trade
    flows in recent decades attests to this ongoing
    structural shift.

9
Nurturing the emergence of services supply chains
  • Hardware Digital infrastructure
  • Software Human capital
  • Policy framework Innovation

10
Hardware IT infrastructure
  • Considerable scope for trade and FDI policy in
    telecoms, IT goods and services and rules for
    digital trade
  • Key influence of pro-competitive regulatory
    policy and competition policy more broadly
  • As noted earlier, leap frogging is easier in
    mobile technologies
  • Need for greater transactional security
    requires cross-border collective action on issues
    such as cyber-security, digital signatures,
    privacy protection
  • Deeper and more sophisticated financial markets
    able to supply risk capital, especially to small
    service firms with little tangible capital as
    collateral

11
Software human capital
  • Key is not only physical harware but the social
    software and skills to use it productively and
    innovatingly
  • Governments have a significant role to play in
    providing basic education and in increasing the
    share of national population with tertiary
    education, but co-operation with the private
    sector may also be necessary to ensure that
    education programs remain relevant to industry
    needs and keep pace with developments in
    fast-moving fields
  • Limited (but growing) role for trade and
    investment policy. The challenge of raising
    educational standards is primarily a domestic
    (and public) one that starts in kindergarden
    you need to be literate before you can aspire to
    computer literacy. It also extends to math,
    science, engineering and business studies
  • Speaking the main languages of globalization
    never hurts
  • Trade and FDI in education can bring important
    benefits in terms of enhanced access to and
    exports of - remotely supplied knowledge
    (including, critically, for vocational training)
    as well as through competition with local
    suppliers
  • Key role for the managed mobility of skills, very
    much a regional cooperation challenge as labour
    mobility is hard to effect on a global, MFN,
    basis

12
A policy framework for innovation
  • The service sector has traditionally been seen as
    less innovative than manufacturing and as playing
    only a supportive role in the innovation system
  • As a result, national innovation policies have
    paid scant attention to services, and
    service-sector firms have rarely been active
    participants in government-sponsored innovation
    programs
  •  
  • However, recent work confirms that services are
    far more innovative than previously thought. And
    examples abound of strong agglomeration effects
    in innovation-rich environments that bring out
    the mutuality of linkages between services and
    manufacturing activities

12
13
The role of service-sector innovation has long
been underestimated
  • This is due to some extent to the difficulty of
    measuring innovation in the service sector, a
    patchwork of different industries with
    significantly different innovation processes
  • Measurement problems are legion in services,
    feeding excessive precaution in policy as the
    predictive robustness of economic models is so
    much weaker than in goods trade/manufacturing
  •  
  • RD expenditures are often employed as a proxy
    for innovation, although they measure just one
    input into the innovation process
  • Even in manufacturing, RD generally amounts to
    only about half of total investment in
    innovation in services the share is generally
    considered smaller, in part due to the small
    average size of service firms
  •  
  • Other components of innovation appear more
    important for services, where most innovation is
    linked to changes in processes, firm-specific
    organizational features and market structures

13
14
Designing an innovation strategy for services
  • The magic hand of markets works pretty well in
    this sector, entry barriers are often low, many
    services operate under light regulatory
    strictures, but market failures justifying
    targeted public policy support measures are still
    present
  • Several countries have begun to implement
    policies to encourage innovation in specific
    service industries. Most concentrate on the
    development and use of ICTs
  • Some focus on the establishment and maintenance
    of an ICT-related business environment, such as
    developing standards for e-commerce and
    encouraging public procurement and public service
    delivery over digital networks
  •  
  • Policy measures for human resource development in
    the service sector are also generally aimed at
    ICT-related sub-sectors
  •  
  • Agglomeration externalities some countries focus
    on encouraging clustering and networking because
    knowledge acquisition through contact with
    clients and rival firms is a major source of
    innovation in service sectors (Putrajaya in
    Malaysia Cybercity in Mauritius)
  •  
  • Supporting small and medium-sized enterprises
    (SMEs) and encouraging entrepreneurship are also
    targets of government policy measures, most of
    which again focus on IT industries

15
What role for trade and investment policy?
  • Indirectly, trade and investment policy can
    enhance the business climate and help nurture
    innovation-rich environments
  • Directly, there is much that engagement in trade
    and investment negotiations can do to complement
    domestic efforts at building an innovation
    strategy
  • Market opening in agriculture, mining, fisheries
    or manufacturing can generate incentives for
    greater service sector innovation (intermediation
    function)
  • Investment rules are typically treated
    comprehensively in bilateral investment treaties
    (BITs) and preferential trade agreements (PTAs)
  • In both PTAs and the WTO, specific commitments
    are possible on all key services centrally
    concerned by an innovation agenda, both
    intermediates and final products
  • TRIPS-like disciplines may also address the IPR
    dimension of the services-innovation interface

16
Situating LAC peut mieux faire?
17
Innovation indicators top ranking of selected
LAC members, 2012
Innovation Indicators Top LAC Ranking (out of 141)
Institutions Chile (29)
Government effectiveness Chile (26)
Regulatory environment Chile (25)
Business environment Mexico (35)
Human capital and research Chile (75)
Tertiary education Colombia (59)
Knowledge workers Chile (37)
RD Brazil (47)
ICT Chile (33)
Trade and transport infrastructure Brazil (36)
Intensity of local competition Chile (34)
Online creativity Argentina (34)
Creative goods and services Panama (29)
Global innovation index Chile (39)
Country sample Argentina, Brazil, Chile,
Colombia, Costa Rica, Jamaica, Mexico, Panama,
Peru Source WIPO World Innovation Report 2012
18
Innovation-Related Indicators in Selected LAC
Countries, 2012
LAC Country Indicator Argentina Argentina Brazil Brazil Chile Chile Colombia Colombia Costa Rica Costa Rica Jamaica Jamaica Mexico Mexico Panama Panama Peru Peru
  Score (1-100) World Rank (1-141)   Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141)
Institutions 44.9 101 50.4 84 73.1 29 55.3 73 56.6 67 63.8 54 55.9 72 56-5 68 56.2 70
Government Effectiveness 35.4 82 42.8 65 72.0 26 44.7 57 49.4 51 45.8 55 45.4 56 44-6 58 35.5 81
Regulatory Environment 44.6 125 71.0 48 84.4 25 66.0 71 70.8 49 67.5 68 59.1 96 65.7 73 70.3 55
Business Environment 28.8 111 20.6 127 59.7 44 59.2 49 23.9 122 58.4 53 63.5 35 46.2 78 52.0 65
Human capital and research 39.1 58 31.5 83 32.8 75 30.4 87 32.2 78 34.5 68 31.8 81 30.4 88 21.9 117
Education 59.7 38 49.6 73 47.6 83 39.3 110 52.1 68 54.7 56 47.8 82 42.0 102 34.7 120
Tertiary Education 31.9 72 16.4 115 29.6 77 35.3 59 19.4 104 25.6 88 27.6 83 32.7 69 19.3 106
Knowledge workers 52.5 50 52.6 48 61.4 37 49.0 59 49.2 56 40.9 86 51.1 53 23.4 127 53.7 46
RD 25.8 54 28.4 47 21.3 72 16.6 95 25.0 59 23.2 64 20.0 76 16.4 98 11.9 121
Infrastructure 37.3 57 39.1 49 42.7 44 46.3 34 37.5 56 23.9 109 38.4 50 37.0 59 38.0 53
ICT 39.0 58 46.1 47 53.9 33 53.6 34 36.2 64 20.6 103 47.3 44 36.3 62 35.7 65
General infrastructure   34.3 82 34.4 81 35.8 74 31.5 94 29.8 103 26.2 119 37.1 64 35.0 78 32.5 90
Trade and transport infrastructure 43.8 50 52.5 36 46.5 49 39.8 62 39.0 65 26.8 115 48.8 43 40.8 59 41.5 55
Investment 19.3 84 35.4 42 38.3 34 38.5 33 1.2 139 16.1 97 26.7 65 11.1 112 37.1 37
19
LAC Country Indicator Argentina Argentina Brazil Brazil Chile Chile Colombia Colombia Costa Rica Costa Rica Jamaica Jamaica Mexico Mexico Panama Panama Peru Peru
  Score (1-100) World Rank (1-141)   Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141) Score (1-100) World Rank (1-141)
Ease of protecting investors 29.4 91 46.7 60 76.2 27 94.4 5 3.5 131 46.7 60 66.9 35 29.4 91 82.0 20
                                     
Trade and competition 57.0 104 56.1 108 68.1 39 55.0 113 70.2 28 61.6 78 61.8 76 46.5 128 66.1 58
Imports of goods and services, GDP 18.4 136 12.1 141 31.8 99 18.0 137 41.2 70 43.3 63 31.8 100 69.2 23 22.2 129
Exports of goods and services, GDP 21.7 118 11.2 139 38.7 68 15.8 129 38.1 70 25.6 105 30.3 86 65.2 22 25.1 110
Intensity of local competition 54.3 101 69.3 46 72.7 34 60.1 81 65.8 63 62.8 68 60.3 80 70.0 41 68.2 53
Global Innovation Index 34.4 70 36.6 58 42.7 39 35.5 65 36.3 60 30.2 91 32.9 79 30.9 87 34.1 75
Innovation linkages 25.6 122 38.0 57 31.1 96 28.4 106 41.3 50 42.9 44 28.0 110 60.0 7 35.9 65
Creative goods and services 22.9 65 29.7 47 14.9 84 22.0 67 17.9 77 10-9 94 16.3 81 36.5 29 5.8 119
Online creativity 41.3 34 29-7 49 35.0 40 30.7 46 22.9 64 21.1 72 24.1 58 23.4 61 21.7 69
20
Thank you!
  • Pierre Sauvé
  • pierre.sauve_at_wti.org
  • www.wti.org
  • www.nccr-trade-org
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