Life after industrialisation – Servicification?

Traditionally, developing societies progressed to a developed economy through industrialisation. Increasingly, attention is being paid to the role of services and whether nations can leapfrog much of the industrialisation, or manufacturing phase to achieve developed status through a service- based economy.

Research shows this is possible and that the subsequent export of services promotes economic growth by accelerating the adoption of technologies, upskilling workers and incentivising innovation.¹ It is also linked to boosting manufacturing capabilities.²

Many goods are now bundled with services (think mobile phones or the role of advertising to promote products) to increase their competitiveness and value for customers. This process is known as servicification. Statistics show that around one third of the ‘value-added’ in manufacturing sales and exports is attributable to services,³ predominantly those in distribution and business.

As part of the Economist Impact Trade in Transition research project, supported by global logistics business DP World, Stuart Harbinson, an independent trade policy adviser at UNCTAD, commented that developing countries need to “get up the value-added ladder”. They cannot just rely on a low cost, low wage manufacturing economy. Mary Hallward-Driemeier, a senior economist at the World Bank, has previously commented that countries are able to exploit the opportunities in services regardless of their level of development.⁴

In general, if a service can be performed remotely, it can be traded. This includes business processing outsourcing, research and development, after-sales services such as predictive maintenance analytics, design and engineering, and marketing, among others.

On average, executives surveyed as part of the Trade in Transition report stated that their companies outsource a little more than a third of the services by value (36%). This creates vast potential for trade in services, particularly for those small- and medium-sized businesses that can offer digital services just as easily as large firms.

Critical impediments remain and include restrictions on cross-border data flows and mandates for a local representative office in some markets. Digital trade agreements, or digital trade chapters of trade agreements, have an important role to play here. They need to offer a clear framework for enabling engagement, including harmonising digital IDs and data privacy rules. (Read more about enabling digital trade in our relevant article.⁵)

Beyond these challenges, there are other cracks in the system that need urgent attention. Our survey finds that companies tend to outsource services within their own regions more than to those outside. (see Figure 1 ). This is particularly true in developed regions, where the intra-regional trade in services is the highest (52% in North America and Europe).

This is a concern for those developing countries that intend to integrate into global value chains by leapfrogging manufacturing and moving directly into high-value services. As servicification expands rapidly, this home bias in developed markets implies that more of the growth or economic benefit is likely to stay within these regions.

Policymakers and businesses in regions with less developed service-centric economies who are keen to integrate companies into global value chains, need to be mindful of this bias when creating digital trade strategies. To drive competitiveness, countries planning to increase their services trade will have to focus on the fundamentals, such as reliable internet connectivity and strong cross-border data flow regulation.