As the digitalisation of the global economy progresses, the value size of the services economy relative to the ‘real’ economy is steadily rising. Before computers and the internet, services such as transport, financial services, tourism, retail and communication were important contributors to the economy, but digitalisation has only accelerated their growth. Digitalisation has also created entirely new services and it is these services types that have changed the economy forever and now define our modern economy. This blog looks at the new services that are revolutionising our economy and the concept of ‘servicification’ in general

When it became apparent to economists that the value chains of merchandise goods were becoming increasingly infused with services inputs, they coined a new term – ‘servicification’. This refers to the rising content of services value both as inputs and outputs of manufacturing processes. The decline in the importance of the ‘real’ economy – the manufacturing economy – is only a relative one. Manufacturing output has not declined in absolute terms, only in relative terms, i.e. when compared with the significant growth in services output.

Services value flows differ from merchandise value flows in that they are heavily forward-linked. This means that services have a high ratio of the value they output to the value of the services they require as inputs. Not all services are the same in this sense; some services – such as software development – are highly forward linked, while others, such as transport, are less highly forward linked. There is a rough relationship between the extent of digitalisation of a service and the extent of its forward-linking. ‘New’ services such as software development and technology help desks are highly forward-linked, whereas ‘older’ or traditional types of services, such as transport and tourism are less forward linked.

The extent to which a service type is forward linked is related to its human capital input. Services which absorb the outputs of knowledge workers, such as website development or business services, are more forward-linked than services that do not, such as transport or retail. Therefore an important requirement for higher value-added servicification (and the exportation of high value services) is the ability of an economy to produce high skilled graduates.

An important consequence of servicification and their forward-linking is that services are now highly traded globally, both directly as ‘trade in services’ but even more importantly as services embodied within traded goods. These embodied services could be generated either domestically or internationally, via global value chains. This implies that the services content of a country’s imports could be comprised partially of global (third party) services content, perhaps even from the importing country itself.

An example would be a Google Chromebook notepad imported into the US from China. The physical notebook would have been manufactured in China, but the services implicit in the operating system and the bundled software applications were produced in the US. This situation implies that a mercantilist trade policy approach where the importing nation limits market access to these imported notebooks would ultimately be self-harming. It is just one example of how servicification has forever changed the environment for policy makers and where a change of mindset is necessitated. Some of these issues will be addressed in a companion tralac blog.

The services component of output and exports has risen as the world economy has become more sophisticated and the range of goods and services produced and traded has increased. But as pointed out at the outset of this blog, this shift is significantly related to digitalisation – the tendency for production processes to be increasingly dependent on computer technology. As a result, traditional services are produced with an increased digital input, but entirely new services that originate digitally are now produced as well; and some of them are internationally traded.

Two examples of entirely new services type that are also internationally traded are cloud technology and software as a service (SaaS). Cloud technology is mostly business to business (B2B) and offers businesses the opportunity to buy network services rather than have them in-house. This saves businesses the costs of equipment maintenance and upgrades and offers them constantly updated platforms. It also means that services are accessible from a range of devices anywhere that network access (wifi or cellular) is available. An example of this is the accounting software known as Freshbooks, which is aimed at small and micro businesses and has an interface that is optimised for non-specialist use. It is also integrated with other e-commerce and fintech services such as the payments gateway Stripe and the e-commerce platform Shopify.

Although cloud services such as the above are usually seen as B2B, one of the largest cloud services providers is dominated by B2C interaction – Google services. Google offers a large range of cloud services completely free of charge, and pays for them via its Google Ads division. Clients can use services such as email, cloud storage, digital authentication, video conferencing and online document editing all free of charge. Although no payment is made for these Google cloud services, ‘the customer is the product’ and their interaction with the services generates data that Google effectively uses in advertising campaigns for its business clients.

A related service, and one that is not more than 15 years old, is the concept of software as a service (SaaS). Unlike with cloud computing, the intention is not necessarily to reduce the client’s dependency on localised installations of software. Usually, software sales do not result in ownership of the software by the client, only the licensing of fair use of the software. SaaS recognises this and turns the ‘once-off sale with installation’ transaction into more of a rental of a software application, even though it may be installed locally. The application will auto-update and be kept at the latest version as long as the client pays a subscription.

Examples of SaaS software include the Windows 10 operating system and the Adobe Creative Cloud (ACC). The ACC suite of applications is the world leading graphic design suite and the latest versions of the applications are now only available in the SaaS subscription format. On the other hand, Windows 10, although a SaaS product, is bought once-off and then regularly updated by Windows. Both of these products are available on local machines but there are other examples of SaaS products that are located in the cloud. Data analysis package Tableau offers the SaaS Tableau Cloud, which provides sophisticated data analysis and visualisation services to paid subscribers.

It should be obvious that these services are domestically and internationally traded, leading to cross-border flows of value that had no precedent even 15 years ago. The US is the leading provider of such SaaS products, with these services exports contributing to its massive services trade surplus with the rest of the world. The implications of this are, for example, that the US company Adobe produces outputs that are part of the value chains of millions of graphic design houses across the globe.

However, the flows of value resulting from digitalisation have taken even more complex forms than those resulting from cloud technology and SaaS. A value chain that involves the beneficiation of remotely-sensed data is a good example: US company Precision Hawk offers clients analytic services on clients’ own agricultural drone imagery, which is uploaded to Precision Hawk’s servers and analysed before being pushed to the client via an app. The company thus sells data analytic services on data they do not own, and is not itself a drone operator. South Africa has an equivalent in Aerobotix, a Cape Town based startup that does similar work to Precision Hawk, except that Aerobotix has set its focus on orchard farms rather than field crops. Both companies use sophisticated data analytics technologies such as machine learning and image analysis. These companies are exporters of a new type of service that did not exist even 10 years ago.

There are more examples, but it should be clear that the world economy has changed forever and is now driven by services value flows. The first class apples that are exported from the Western Cape, South Africa, have implicit in their value sophisticated data analytics, in addition to the traditional inputs such as soil nutrition and farm labour. This is perhaps one of the most striking examples of the new economy, given that its inputs range from the most basic and most traditional – unskilled farm labour – to the most sophisticated – data analytics driven by machine learning. It is to this changed world that policy makers and trade governance specialists must now adapt their approaches.

By John Stuart

John Stuart is an economist and policy analyst with special interests in trade, economic integration, data visualisation and economic modelling. He began his career in academia at Rhodes University and later the University of Cape Town, after which he entered private consulting first with AFReC (Pty) Ltd and subsequently with PBS (Pty) Ltd. Besides economics research and teaching, he has experience in project management, general management, public sector performance management, systems analysis and entrepreneurship. He holds an M. Com degree in Economics from the University of Natal (Durban).

Courtesy:  The Trade Law Centre (Tralac)