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January 8, 2014

The global services economy: An untapped frontier for growth

If the late 20th Century was marked by an explosion in goods trade following the elimination of barriers between East and West, then could the early 21st Century could well be positioned to give rise to an equally explosive rate of trade in knowledge-intensive services across national borders? Perhaps. But only if entrepreneurs and policymakers work together to seize the opportunity now.

Services already represent the largest share of the global economy, accounting for nearly 71 per cent of global GDP, and the global services sector is growing faster than manufacturing.[i] And yet, research by Georgetown University’s Brad Jensen shows that service businesses in general are far less globally engaged than manufacturing firms (see his talk on YouTube). In fact, the share of output that US-based service businesses export stands at 5%, whereas manufacturing firms export an average of 20% of their output. By boosting this ratio by even a few percentage, firms in sectors ranging from health care, architecture and engineering to business and financial services could grow their output substantially – and hence the high-skill, high-wage jobs they create.

The dearth of service exports is somewhat surprising (although trade and regulatory barriers don’t help as mentioned below). Unlike physical goods, services are intangible economic offerings—a property that makes them infinitely malleable and, in many cases, easily tradable. Services don’t require costly manufacturing, warehousing or transport. They are highly customizable. And thanks to the Internet, a large variety of services can be digitally enhanced and/or delivered using digital platforms, which creates new opportunities for service innovation and new possibilities to export innovative services to consumers in distant markets. In fact, the current growth trajectory in services may pale in comparison to future potential as thriving commercial enterprises, significant public infrastructure investments and a rapidly growing population of middle class consumers in emerging nations create significant new pockets of demand.

The array of exportable health-care related services, for example, is vast, ranging from health-related social networks and personal health and fitness apps, to medical research platforms and hospital administration systems, to remote health monitoring and diagnostic services that can be delivered to patients over the Web. In December 2012, for example, the FDA approved AliveCor’s smartphone-enabled heart monitor, a single-lead electrocardiogram reader that attaches to the back of a smartphone and displays heart rate info via an app. The $100 device enables an EKG to be done anywhere a smartphone goes, which in turn allows for rapid assessments of cardiac problems in the field and real-time consultations with cardiologists. This relatively low cost device could also enable mass screening in developing countries where cardiologists are comparatively scarce.

The shift to more online education heralds another significant opportunity to scale-up educational service exports by taking advantage of America’s leading educational brands to capture a larger share of the global market for higher learning. In fact, the market for higher learning is just one piece in bigger puzzle. There is also a much broader array of professional and quasi-professional training services catering to a growing global cohort of people seeking to boost or reinvent their careers—from IT workers looking to upgrade their skills to downsized corporate executives seeking new pastures. Udacity, for example, is now moving away from college classes in favor of vocational training in partnerships with corporations that would pay a fee. And Coursera – the largest MOOC company – is experimenting with using its courses, along with a facilitator, in small discussion classes at some United States consulates in emerging nations.

Smart investments in technology and marketing could also help firms scale-up their professional service offerings and enter new markets more readily than in the days when international expansion entailed setting up a regional headquarters, hiring a local sales force and building a capable service delivery network. A US-based firm supplying architectural services to Asia, Europe or South America today could reasonably do away with much of this physical infrastructure – along with the layers of tracing paper and unwieldy blueprints – by building a multi-lingual website and collaborating with clients via email, Skype and a suite of 3D design tools. Using a popular Internet-enabled 3D modeling program called SketchUp, for example, an architect can mock-up a design for a new corporate headquarters in Sao Paolo and share an interactive 3D model with their clients using Google Earth. With small firms (and even individuals) empowered to export their services using specialized marketplaces and platforms such as Google Helpouts, a growing share of professional services could be delivered this way.

With lucrative opportunities awaiting in the fast growing economies in Asia and Latin America, existing multinational service providers can ill afford to fall back on traditional export channels and strategies that target familiar markets in the West. Nor should small and medium sized enterprises that currently confine their operations to the relative comforts of the domestic market allow complacency or a lack of management capacity to dampen their growth potential. Firms operating in sectors undergoing significant digital transformation, in particular, should seize the opportunity to reinvent the way they do business.

Harnessing the Internet and mobile computing, for example, could allow savvy firms to package and deliver their services to a population of billions of consumers in distant markets, thereby unlocking significant growth and innovation. In 2013, the population of mobile users downloaded an estimated 70 billion apps and spent $11.5 billion on mobile games alone.[ii] Nobody knows for certain how this market will evolve and what monetization models will prevail in emerging markets. But the fact that everything from music to financial planning to health care services can be delivered over mobile devices makes it impossible to ignore this opportunity.

Capturing the proceeds of the growth of cross-border commercial and consumer services will not be easy. There are many regulatory and trade barriers that stand in the way. But given the long-term decline in North American manufacturing, it would be foolish to underestimate the potential to unleash job creation and economic growth by increasing the internationalization and competitiveness of service-focused SMEs. Entrepreneurs and policymakers must work together to develop new intermediary organizations that can facilitate internationalization through a bundle of export support services that include management training, export assistance, and export financing. Just as public policy and export development programs have boosted manufacturing exports over the years with considerable success, it seems reasonable to hypothesize that some combination of public and private intermediaries offering a menu of support services could materially increase the likelihood that SMEs will export their services successfully.

[i] World Trade Organization (WTO), “World Trade Report 2013: Factors Shaping the Future of the World,” Geneva, 2013.

[ii] http://venturebeat.com/2013/03/04/we-will-download-70-billion-mobile-apps-in-2013-50-android-41-ios/

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