COURSES 4B & 5

INTERNATIONAL TRANSACTIONS WITH SERVICES

INTERNATIONALIZATION 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, email, 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 worlds 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 serviceoriented 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).

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.

B. Gary Sampson and Richard Snape concentrated on the producerconsumer 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 interact
This 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 services
Services 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:

- technological progress
- efforts towards deregulating services sectors
While more than half of the worlds 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 i 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);
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, knowhow, 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
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,
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 strategies
Direct 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 strategies

Direct 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
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 strategies
Electronic 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

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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
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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