COURSES 4B & 5

INTERNATIONAL TRANSACTIONS WITH SERVICESINTERNATIONALIZATION OF SERVICES

INTERNATIONAL TRANSACTIONS WITH SERVICES

Rapid globalization of economic activities in recent years has largely expanded the opportunities for marketing services abroad. Also the decline of trade barriers and the emergence of modern communications and information technologies have brought fundamental changes to the international marketing of services (Knight, 1999). The ability to process and analyze data efficiently, as well as the widespread diffusion of the Internet, e-mail, cable, satellite, fax and other telecommunications technologies have made going international a highly viable and cost-effective option for various types of service providers (Economist, 1995). World exports of services account for just under 20 per cent of the world’s total exports. The value of global trade in services has been growing at double-digit rates and the contribution of the service sector to international trade is expected to grow further. As an increasing number of services companies offer services in foreign markets, important questions are being raised concerning internationalization of services. Research on internationalization of services,

The growth in service trade has been driven by a number of factors, including: Growth in goods trade — increased goods trade stemming from falling trade barriers and the closer integration of global economies has stimulated demand for commercial services such as transport and insurance. Also, firms that have expanded their international operations have pressured service providers to support these operations either by exporting their services, or through the establishment of a presence in foreign markets (OECD, 1999). Technological advances in information technology, electronic commerce and telecommunications have resulted in a number of financial, business, education and health services which were traditionally ‘non-traded’ now being traded internationally. Technology has also enhanced the ability of service providers to interface with foreign clients in a time-sensitive, highly cost-effective manner. Development of a greater variety of discrete ‘service-oriented’ products (such as software and interactive databases that can be easily accessed) has also been important as it has created an effective medium for packaging and distributing storable knowledge and information (OECD, 1999). Rising per capita incomes have increased demand for some income elastic services such as tourism and education (Kang, 2001). For example, increasing per capita incomes associated with the rapid industrialization of a number of Asian countries has resulted in strong growth in Australian exports of education services. Micro-economic reforms such as the deregulation of many markets for goods and services and the privatization of many public utilities have created new opportunities for FDI (Binder, 2001 and UNCTAD, 1996).

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Classifying international services

The ``... heterogeneous nature of (international) services ... has led many to question whether the same ... theory can apply ... equally to all service sectors'' (Richardson, 1987). However, numerous scholars have attempted to rationalize this heterogeneity in various classification efforts, developed to suit different purposes. What these schemes have in common is the implicit concern of how, or in what form, services cross national boundaries (Clark et al., 1996). A. Deliberation of what crosses an international boundary in a transaction suggests a meta-classification of international services. A perusal of previous classification schemes reveals four idealized types (Clark, 1996):(1) contact-based services, where people (producers or consumers) cross borders to engage in transactions (for example, consultancy services and temporary labor);(2) vehicle-based services, where communications are directed into and out of nations via radio, television and satellite transmissions, wires and/or other facilitating ``vehicles'';(3) asset-based where commercial service ideas tied to foreign direct investment cross borders to establish an operating platform (e.g. banks);(4) object-based services, physical objects impregnated with services move into a nation (e.g. computer software and video cassettes, repairs to machinery, etc.).Thus, a service becomes international when it crosses national boundaries using one of these modes.While international products also do this, the crossing of national boundaries is both more varied and much more complex for services.

Bearing in mind these critical points, Clark proposed the following general definition: international services are deeds, performances, efforts, conducted across national boundaries in critical contact with foreign cultures. Based on this, he derives definitions for each of the four international service types mentioned above:(1) International contact-based services are acts, deeds or performances by service actors (producers or consumers), who cross national boundaries to conduct transactions in direct contact with counterpart service actors.(2) International vehicle-based services are acts, deeds or performances with location joining properties (allowing service producers to create the effects of their presence without being present) transacted across national boundaries via an instrumental framework.(3) International asset-based services are acts, deeds or performances transacted across national boundaries in the context of physical assets substantially owned or controlled from the home country, critically reflective of home-country commercial service ideas.(4) International object-based services are contact-based services fixed or embedded in physical objects which cross national boundaries.

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B. Gary Sampson and Richard Snape concentrated on the producer-consumer interaction in their intention to classify ITS. Their matrix

- type A - „separable” or „transportable” services (can be traded over the border) – information or services embodied in goods.

- type B – tourism, education, medical services - type C – imply the movement of traditional production factors such as

labor or capital. FDI or temporary presence of natural persons is typical supply modes for this type of service

- type D – transactions with footloose services (tourist from country X that uses hotel services in country Y that are owned by a TNC in country Z)

C. The General Agreement on Trade in Services (GATS) defines four modes of supply for services based on how producers and consumers of services interactThis four-part taxonomy is based on Bhagwati (1984) and Sampson and Snape (1985).

Cross-border trade. This is the most straightforward form of trade in services. It closely resembles goods trade by maintaining a clear geographical separation between the seller and buyer — only the service itself crosses national frontiers. The supplier either mails, electronically transmits, or otherwise transports a service. Examples include an architect sending design drawings to a consumer in a foreign country, or freight and insurance services.

Consumption abroad. This typically involves the movement of consumers across borders, perhaps for tourism or to attend an educational establishment. Another example is the repair of a ship or aircraft outside its home country. This form of trade does not require the service supplier to be admitted to the consuming country.

Commercial presence. A permanent presence in another country is frequently required to trade some services. This involves a service supplier establishing a foreign-based corporation, joint venture, partnership, or other arrangement to supply services to people in the host country. Examples include the establishment of branch offices or agencies to deliver services such as banking, insurance, legal advice or communications.

Presence of natural persons. This involves an individual, functioning alone or in the employ of a service provider, temporarily traveling abroad to provide a service. For example, consultancy services provided by an individual.

Consequently, the concept of international transactions with services refers to cross-border trade (movement of services, goods incorporating services and people – as consumers or individual suppliers over the border) and various forms of commercial presence.

Evolution of trade in servicesServices have been the fastest growing component of cross-border trade and investment activity for the better part of the last decade and a half.This evolution was determined especially by:

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- technological progress- efforts towards deregulating services sectors

While more than half of the world’s trade in services is made up of travel and transportation services, the highest growth areas in recent years have been in financial services, construction and computer and information services.

Commercial services exports slipped slightly by 1.5% to US$ 1.4 trillion, the first year-to-year decline for world exports in commercial services since 1983. The export value of certain commercial services — for example, communications, insurance, financial services, royalties and license fees — rose, but not enough to compensate for the fall in transportation and travel services exports.

INTERNATIONALIZATION OF SERVICES

Ways/Channels for the internationalization of services

A. Based on the in extenso definition of international transactions with services and the four-tier taxonomy defined by GATS, we will examine the two major internationalization methods for services: 1) international trade şi 2) various degrees of commercial presence:

1. Types of international trade in services International trade is the obvious part of the internationalization process

and the easiest to quantify, despite the statistical constraints. The traditional situation of goods trade, the merchandise crossing the

border is seldom relevant to international trade in services, due to the impossibility to:- separate production and consumption;- identify, physically or economically (through price), the production units

that cross the border, even when it is supply on a long-distance basis

Thus, by reconsidering the mechanism of international trade with goods, we have the following types of international trade in services:

a) corresponds to the international trade in goods logic: P & C do not move for the supply of services.

a. This type of long distance supply grew substantially in the last years due to information and communication technology development

b. What makes the difference with respect to trade in goods is the fact that “the reality” that crosses the border is linked to a tangible support or it is a flow of information, images, symbols, that rarely forms units easily distinguishable and quantifiable from an economic point of view.

b) International passenger transport – what facilitates the identification of “the reality” that crosses the border is not the person or the activity in itself, but the support – means of transport (R = C + means of transport);

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c) (C) moves to country p for the supply of the service by (P). a. Corresponds to the situation of tourism services. In order to benefit

from specialized offers, associated to information non-transferable long distance, P and C have to interact.

d) (P) moves towards (C) for the supply of the service (transformation of R), in country c

a. Corresponds to the situation where R is either an non-transportable object that belongs to C or the person herself (C) (ex: temporary movement of professional services suppliers);

2. Types of commercial presence

There are also 4 types of commercial presence:a) FDI through the creation of an economic unit – affiliate - subsidiary.

a. Entry - ex nihilo or through merger or acquisition and restructuring of an incumbent

b. The inputs necessary for the supply of services might be imported (including labor). Company A is generally a multinational network company.

b) Local presence limited to the production of a part of the service (generally, its distribution, when it is the case – when production and distribution can be separated) ownership and control of the commercial presence entity by the foreign investor: FDI through opening a branch, representative office, commercial bureau.

a. A can produce the service (actually, the artifact) in the home country, the interaction supplier-consumer being necessary only for the actual supply and adaptation of the offer (information services, especially), but considers important to own or control the local unit (insurance companies, travel agencies, air transport companies etc)

c) production and trade in the host country of an important part of the service offering, by a company owned or controlled by a local provider: partnership, franchise, joint-venture.

a. This situation does not correspond to a market entry situation or to a form of commercial presence unless company A concluded an agreement with company B according to which company B is dependant on A with respect to information, quality control, know-how, technology, organization etc.

b. Investment is justifiable, for example, through the advantages obtained as a result of a global presence (scale economies). It is the case of professional and personal services, especially.

d) Local production of a small part of the service, minimum ownership and control: agents and other intermediaries or licensees.

a. It is also the case of services for which production and distribution can be separated (for example a local travel agency that can distribute the offer of a foreign tour operator, an insurance company that distributes the products of a foreign insurer etc.).

b. In many cases, this situation evolves towards opening a commercial bureau or a representative office (case b) for

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institutional or financial reasons or to better control the quality of the supply.

Internationalization strategies for service firms

In the literature it has been suggested that the choice of entry mode for service firms when going abroad is either to follow existing clients (client-following) when they internationalize or to look actively for new markets (market-seeking) (Erramilli and Rao, 1990). Today, however, the technological advancements, as far as for example the Internet and satellite and digital television are concerned, have created totally new forms of internationalization. In many cases going abroad is not a choice of the service firm any more. Potential customers on foreign markets pick up service offers for a domestic market and require the firm to deliver internationally as well. Satellite television and especially the Internet have internationalization opened up services for consumers wherever these have access to those technologies. Of course the firm can choose to ignore foreign interest in its offerings, and perhaps lose new markets of considerable size, or it can sometimes unexpectedly find itself an international service provider. Specialty retailing, such as book stores and fitness equipment, are examples of services that in this way have become international.

Hence, we can identify three general entry modes for service firms going into foreign markets:(1) client-following mode;(2) market-seeking mode; and(3) electronic-marketing mode.

Of course, the three types of entry modes are not totally mutually exclusive. A firm using the Internet as a form of electronic marketing mode can do this deliberately to get access to international markets. This entry mode is, thus, at the same time market seeking. Also, a firm following a client abroad may have decided to take this opportunity to seek new markets actively.

Erramilli (1990) has divided services for foreign markets into hard services (e.g. architectural design, education, life insurance and music) and soft services (e.g. food service, health care, laundry and lodging). Hard services require limited or no local presence by the exporter and consumption can, to a major extent, be separated from production. Conversely, soft services production and consumption are to a major extent simultaneous processes, and such services require major local presence by the service firm or a representative that acts on its behalf. Following Erramilli's typology, Ekeledo and Sivakumar (1998) propose that the foreign market entry mode does not differ significantly between hard services and manufactured goods,

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whereas it differs significantly between hard services and soft services.

A service firm that plans to start to market its services internationally has to find a way of making its services accessible in the chosen foreign market. Once this has been done, a local service offering has to be developed in the new market (Gronroos, 1990b). Regardless of how much of the service can be produced in a back office on the home market, some of the service offering is always produced locally. This is true even for electronically marketed services. If nothing else, the local postal system becomes the final local link in the service system.

Five main strategies for internationalizing services can be distinguished.These are not mutually exclusive, and in some cases some of them will work well for manufactured goods as well:(1) direct export;(2) systems export;(3) direct entry;(4) indirect entry; and(5) electronic marketing.

Export strategiesDirect export of services may basically take place on industrial markets. Consultants and firms repairing and maintaining valuable equipment may have their base on the domestic market and whenever needed move the resources and system required to produce the service to the client abroad. Repair services on valuable equipment are often exported in this way. Some consultants work in a similar fashion. No step-by-step learning can take place as the service has to be produced immediately. Because of this, the risk of making mistakes can be substantial.

Systems export is a joint export effort by two or more firms whose solutions complement each others. A service firm may support a goods-exporting firm or another service firm. For example, when a manufacturer delivers equipment or turn-key factories to international buyers, a need for engineering services, distribution, cleaning, security and other services is often present. This gives service firms an opportunity to expand their markets abroad. As the literature suggests, systems export is the traditional mode for service export. For example, advertising agencies and banks have extended their accessibility abroad because of their clients' activities on international markets. In systems export the services are mainly marketed in industrial markets abroad.

Entry strategiesDirect entry means that the service firm establishes a service-producing organization of its own on the foreign market. For manufactured goods in the first stage of a learning process, a sales office can be such an organization. For a service firm, a local organization normally has to be able to produce and deliver the service from the beginning. The time for learning

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becomes short. Almost from day one the firm has to be able to cope with problems with production, human resource management and consumer behavior. In addition, the local government may consider the new, international service provider a threat to local firms and even to national pride. In order to decrease the potential problems with a direct entry strategy, instead of establishing a new organization of its own the internationalizing firm can acquire a local firm operating on the same service market. Another option is to form a joint venture with a local firm, which offers the local partner new growth opportunities at the same time as it gives the international partner much-needed local know-how. Direct entry can be used for internationalizing consumer services as well as services for industrial markets. The same goes for the rest of the internationalizing strategies discussed in this article.

Indirect entry is used when the service firm wants to avoid establishing a local operation that is totally or partly owned by itself. Nevertheless, the firm wants to establish a permanent operation in the foreign market. A consulting firm can, for example, through a licensing agreement give a local firm exclusive rights to use the professional concept of the firm. This of course requires that exclusive rights can be guaranteed. In the lodging business and in the restaurant and food service industries; franchising is an often used concept for indirect entry into a foreign market. Local service firms get the exclusive right to a marketing concept, which also may include rights to a certain operational mode, and in this way the concept can be replicated as much as existing demand allows all over the foreign market. The internationalizing firm as the franchisor gets the local knowledge which the franchisees possess, whereas franchisees get an opportunity to grow with a new and perhaps well-established concept. In a sense, franchising resembles indirect export of manufactured goods, where the exporter makes use of middlemen on the local market who have the local knowledge needed to penetrate the market. Another form of indirect entry is management contracts, which often are used, for example, in the lodging business.As far as the need for market knowledge is concerned, indirect entry is probably the least risky of the internationalization strategies discussed so far.Conversely, the internationalizing firm's control over the foreign operations is normally more limited when using this entry strategy. A central issue is to keep key people

Electronic strategiesElectronic marketing as an internationalizing strategy means that the service firm extends its accessibility through the use of advanced electronic technology. The Internet provides firms with a way of communicating its offerings and putting them up for sale, and a way of collecting data about the buying habits and patterns of its customers and using network partners to arrange delivery and payment. The electronic bookstore Amazon.com is a good example of a firm internationalizing its services using electronic marketing. When launching this bookstore concept, it had to take into account the interest in its services that would automatically develop outside national borders. TV shops are examples of other ways of internationalizing services using advanced technology, in this case satellite television. In

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Europe, for example, music and fitness equipment are offered through satellite television services.When using electronic marketing, the firm is not bound to any particular location. The service can be administered from anywhere on the globe and still reach customers throughout a vast international market who, for example, are connected to the Internet or exposed to satellite television broadcasting. As a matter of fact, the firm cannot avoid creating interest in its offerings outside its local or national market. Of course, language barriers and electronic illiteracy may hinder the electronic offer from being used. However, even a firm that chooses to internationalize using electronic marketing cannot manage its service operations totally on its own. On foreign markets it has, for example, to rely on at least postal and delivery services. The possibility for the service firm to control such network partners may be very limited.

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