More Qs than As: Thinking aloud about v alue chains in services

1. More Qs than As:Thinking aloud about value chains in services Pierre Sauvé World Trade Institute, Bern pierre.sauve@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 facilitation:the 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 Bank’s 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 world’s 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

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 R&D expenditures are often employed as a proxy for innovation, although they measure just one input into the innovation process Even in manufacturing, R&D 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* *: 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

20. Thank you! Pierre Sauvé pierre.sauve@wti.org www.wti.org www.nccr-trade-org