BUS606: Operations and Supply Chain Management

In this paper, we examine how the development of domestic services sectors may affect the export performance of downstream manufacturing sectors, taking into account the services input intensities of manufacturing sectors. We focus on two types of modern services, i.e., financial services and business services, whose shares in an economy normally increase with the level of a country's development. 

We show that the indirect exports of services are surprisingly high for a number of countries, especially developing or emerging economies, even though most of these countries' direct exports of services are relatively small. We also find that the manufacturing sectors that use these services intensively as inputs benefit more from domestic services development. These findings suggest that policy makers should take into account the linkages among sectors, not look at them in isolation on a single sector basis as can happen with the "silo" approach to trade negotiations. 

Industrial countries have been strong in exporting services, both directly and indirectly. For example, according to Appendix 1B, the U.S. is not only the largest direct exporter of business services in the world, but also the largest indirect exporter of business services (actually twice as large), suggesting an important role of business services in U.S. manufacturing activities. However, developing and emerging economies have significantly lagged, with the only the exception of India in direct exports of business services. Services development in these countries not only strengthens their services sectors but also promotes manufacturing and other goods producing sectors. Countries like China that may be concerned with the sustainability of their manufacturing export success may consider building stronger services sectors as a way to upgrade their manufacturing sectors to an even higher level. According to Appendix 1B, China's business services exports in value added terms, relative to its exports in gross terms, are less impressive compared to the corresponding figure for financial services shown in Appendix 1A. Both its direct and indirect business services exports are only 8-9 percent of the corresponding numbers of the U.S.  Drawing from the firm-level data in ORBIS, Miroudot and Cadestin show that China is the only country in their sample which has a majority of the manufacturing firms (77 percent in 2013) selling only goods, with little bundling of goods and services such as manufacturing and distribution services, as seen with Apple iPhones/iPads and Apple Stores. To strengthen the manufacturing sector, countries need to focus not just on manufacturing production, but also on services upgrading including but not limited to R&D, marketing, advertising, inventory management, quality control, production scheduling, after-sale technical supports, and follow-up customer services. 

With significant improvement in transportation and communication technologies and increasing services outsourcing activities, some developing countries such as India have developed competitive services sectors. For example, Indian services RCA calculated based on DVA in gross exports are either greater than one (financial services) or close to one (business services), much bigger than the corresponding numbers for other developing economies such as China. For countries like India, our paper suggests that the manufacturing sectors that use these services intensively tend to have a comparative advantage. However, different from most of the other WIOD countries, Indian gross exports of business services are actually larger than its total value added exports, suggesting relatively little embodied business services in other sectors, as shown by the direct and indirect ratio of Indian business services exports in Appendix 1B. There is plenty of room left for India and similar countries to take advantage of their competitive services sectors during their industrialization process. This illustrates the importance for policy makers and entrepreneurs to understand the implications of inter-sectoral linkages. 

We also provide evidence for a bypass effect, that is, countries may bypass their inefficient domestic services sectors by relying more on imported services inputs. This suggests that nations with under-developed services may take advantage of globalization in services. Countries that hesitate to liberalize their services sectors in hopes of protecting their inefficient domestic services sectors may hurt the competitiveness of their manufacturing sectors.

Although this paper focuses only on the services-manufacturing linkages, many other important research questions could also be studied using a similar methodology. With the intercountry input-output tables, we have complete information on how countries and sectors are interlinked to each other. We expect to see more and more studies along this line of research.