An executive summary for managers and executive readers can be found at the end of this issue

The internationalization of services: trends, obstacles and issues

Saeed Samiee
Collins Professor of Marketing and International Business, College of Business Administration, The University of Tulsa, Oklahoma, USA Keywords Services marketing, International marketing, Trade barriers, Market entry Abstract The international market for services grew to $1.2 trillion in 1995 and has been growing at double-digit rates. The USA possesses the lion's share of the world's services exports and stands to gain significantly from lower barriers to trade in services. However, despite the significant progress already made, numerous barriers remain and many countries have not joined the multilateral negotiations for eliminating or lowering existing barriers. This study examines the history of market access and trends, the obstacles to the international marketing of services, and key issues including classification methods and economic, regulatory, and cultural impediments, and offers directions for future research.

The USA has by far the largest net services trade surplus among key industrial nations. Its services sectors realized just over $100 billion in trade surplus in 1997, compared to about $60 billion in 1994 (Foreign Trade Outlook, 1998). However, Germany and Japan do not benefit from the same global competitiveness as the USA in the services sectors and, as a result, produce significant annual services trade deficits (approximately $39 billion and $50 billion in 1994, respectively). This poor showing is quite surprising given these nations' competitive strength and world-class performance in merchandise trade. Thus, from an international competitive strength and strategy viewpoint, the USA enjoys an excellent position in global trade in services. According to the World Trade Organization (WTO), the value of global trade in services was estimated at $1.2 trillion in 1995 which constituted about 25 percent of global merchandise trade. The value of global trade in services has been growing at double-digit rates and this trend is expected to continue. For example, the volume of services trade grew by 14 percent in 1995 over the previous year (The Economist, 1997). The service sector has accounted for the highest portion of total economic activity in Hong Kong, the USA, and France since the early 1990s. In general, the shift towards a servicebased economy in key trading countries has been evident since 1970. Only three countries (i.e. China, Korea and Singapore) produced a larger proportion of their GDPs from the manufacturing sector in 1992 than in 1970 (Blaine, 1996). Despite its growing size and tremendous importance, however, services trade was never a part of GATT negotiations until the Uruguay Round. Market trends The purpose of this study is to examine market trends and obstacles to the internationalization of services and to offer prospects for future development in international service marketing. In the sections that follow, a brief history of the international services trade and the obstacles to the international marketing of services are presented. Next, the issue of global
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competitiveness in services marketing is discussed. Finally, several important issues about international marketing of services and future research directions are highlighted. Market access: a brief history In terms of absolute volume, the USA is by far the largest exporter of services. Its total services exports were $277 billion in 1997, representing a growth rate of 8.5 percent over 1996 (Foreign Trade Outlook, 1998). This dominant position was the main reason for the leadership role assumed by the USA in negotiating the Uruguay Round. In September 1986, after the agenda for the Puta del Este, Uruguay Round of GATT had already been drawn, the USA took a hard-line position that services, foreign direct investment and intellectual property restrictions had to be added to the agenda. The US objective was to bring services trade under the same rules and governing body as merchandise trade. The US demand met with objections from many developing nations, notably Brazil and India. Though many nations initially opposed the USA, the developing nations in particular did so with good reason. Consider, for example, the computer services industries. The inherent national importance of this sector for development is widely known to governments. It also follows that if data processing and analysis are handled only through service importation (for example, by sending the data abroad through transnational data transfer), the nation will not gain the necessary competence, trained personnel, and software and hardware industries which are essential in competing globally across many industries (Goff, 1992; Gupta, 1992). Not surprisingly, both Brazil and India were among the most vocal opponents of the liberalization of services trade to the very end. General Agreement on Trade in Services Given the opposition of numerous nations, the progress resulting from the 1993 Uruguay Round for services trade was limited. In general, member countries agreed to apply the basic GATT framework to services trade in due course. About 88 of the 117 nations involved in the 1993 agreement also pledged to liberalize trade in a wide range of services. However, air transport, labor movement, financial services and the telecommunications sectors faced special provisions, but nations agreed to negotiate further on the latter two industries. These matters were formalized in the General Agreement on Trade in Services (GATS) which is one of the 15 agreements that together make up the WTO (Sigmund, 1998). According to Article 19 of GATS, the next round of services negotiations will take place in January 2000. The financial services and telecommunications agreements were separately negotiated in 1997. The support for market access for these services has been broad, but less than unanimous: terms for financial services were agreed to by 102 nations (with many exceptions) and only 69 nations agreed to the terms of the telecommunications agreement (Sigmund, 1998). Although significant progress on market access in many service categories has been made, much work remains to reach the generally low level of barriers negotiated in merchandise trade. Obstacles to the international marketing of services Barriers to the international marketing of services are numerous. Some obstacles are merely conceptual in nature, whereas others are based on tradition and regulation. Collectively, these problems have contributed to the exclusion of services trade in previous GATT negotiations. First, there is a
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lack of complete and reliable data for various services sectors on a global scale. Second, the natural tendency of governments is to protect domestic firms from foreign sources of competition and to buy only from domestic service suppliers. Third, the inseparable nature of services necessarily engages some governmental departments whose expertise and charge are not international. For example, when service providers must be personally present to offer their services, then such government bodies as immigration and labor necessarily get involved. The focus of the labor office in every country is to preserve domestic jobs for citizens, rather than to make it easy for foreign workers to perform services internationally. Likewise, immigration offices follow strict guidelines for controlling the flow of noncitizens across national boundaries, particularly for employment purposes[1]. Fourth, tax laws may be linked to immigration status and permit unfavorable treatment of service income in host countries and the absence of bilateral tax treaties can make it unprofitable for some service providers to move abroad. Services intertwined with information technology Fifth, as an increasing number of services are intertwined with information technology (e.g. financial), they are disproportionately affected by limits placed upon international transmission of data or transnational data flow (TDF) constraints (Samiee 1984, Francis-Laribee 1994). For example, as of 25 October, 1998, when the EU's new TDF laws took effect, the transmission and use of any data pertaining to EU citizens to countries whose laws do not afford the same level of protection as the 1998 EU directives is forbidden (Baker et al., 1998). Even when equal protection is offered by another country, firms there must show customers their full profile data upon request and must make corrections as required. Sales of mailing lists without the prior consent of individuals on the list is strictly forbidden. This model is the opposite of the US law which stipulates that the burden of being removed from a list for a US resident is on the individual, who must contact the listing firm (e.g. a bank) and request such removal in writing. In addition, greater levels of control will be placed on the use of the Internet as far as privacy of EU citizens is concerned. Web-site operators cannot place data tags (i.e. cookies) on users' computers and trace addresses for use for marketing or other purposes. Sixth, despite their growing importance, services sectors remain elusive and largely invisible areas of business. Generally accepted accounting principles, for example, invariably treat services as expenses whereas some services constitute assets acquired by the firm. This occurs despite increasing evidence regarding the critical importance and roles of intangible assets to the competitive posture of firms in virtually every industry. Employee and management education, for example, contribute to organizational learning and knowledge, which in turn enhance the competitive position of the firm. Likewise, the capabilities of a firm which set it apart from the competition are based on intangible business processes rather than capital equipment. Finally, the limited amount of information available about international trade in services has assisted in the mystification of this important and rapidly growing line of business. Unlike merchandise trade, the true volume of international services is not known. As a result, the management of service industries from a public policy and international trade and marketing perspectives remains complex and not well understood. Without this basic information, governments are handicapped in their deliberations, planning and negotiations to improve the global infrastructure for the marketing of services.
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The historic emphasis on merchandise trade along with the intangible nature of services are probably responsible for the lack of a reliable reporting structure. Governments have only embarked on developing classification and statistical data-gathering systems to facilitate services trade in the past decade. Even in the absence of the variety of services which are marketed internationally today, the inattention to statistics regarding services is surprising. Services have been important components of merchandise trade. For example, the merchandise cannot be distributed without the assistance of facilitating intermediaries (e.g. freight forwarders), transportation modes and channel intermediaries. This lack of, or limited, information has made it difficult for public policy officials to accommodate and promote the marketing of services internationally in the way they have supported merchandise trade. Thus, many service firms with the potential to export their services internationally have remained strictly domestic. For example, three-quarters of engineering consulting firms surveyed in one study indicated that they are not engaged in exporting (Winsted and Patterson, 1998). Global competitiveness in services marketing Despite the increasing dependence of the US economy on the services sector and its significant service trade surplus, service exports are relatively more important to some other nations. As shown in Table I, service exports as a percentage of GDP is nearly 23 percent for The Netherlands, making it the most active service exporting country in relative terms. Austria is the second most active exporter of services and 17 percent of its GDP consists of service exports. All other leading exporters of services export less than 7 percent of their GDP. Service export activities in Germany and Japan, in contrast, constitute about 3 percent and 2 percent of their GDPs, respectively. Among leading industrial nations, Germany and Japan produce the largest services trade deficits. When service exports are measured as a proportion of all exports, both Spain and The Netherlands rank very high. About 46 percent and 45 percent, respectively, of these nations' exports consist of services. In contrast, about 38 percent of exports from the USA and France consist of services. Exports of services from Germany and Japan are the lowest among the leading nations. On a per capita basis, The Netherlands is the single largest exporter of services ($4,582), and it exports about six times as much in services as the USA (Blaine, 1996). Belgium-Luxembourg and Austria are the second and third most active exporters of services. Germany and Japan are the lowest service exporters on a per capita basis. Thus, even though US service exports are over twice as much as the next leading country, i.e. France, its relative standing is not as strong as Austria, Belgium and The Netherlands. Within Europe France, with a service trade balance of about $20 billion in 1994, is the strongest exporter of services, particularly in tourism. With increasingly liberal views and policies towards the international marketing of services, the USA must compete with some very strong European contenders for global opportunities. Key issues in the international marketing of services There are indications that the industries of tomorrow will be very different as a result of the integration of an increasing number of services in the marketing of goods (OECD, 1996; Lovelock and Yip, 1996; Wyckoff 1996). As goods go through increasingly more complex value chains to increase firms' relative competitive advantage, services will play a more important
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Country

Millions of US$

Per capita
Millions of US$ Rank

1994 exports As a percentage of As a percentage of GDP all exports

Per capita

1994 imports As a percentage of As a percentage GDP of all imports

Services trade balance

USA 196,515 762 3.27 38.34 137,478 1 533 2.29 19.95 59,037 France 91,275 1,587 7.40 38.76 71,763 4 1,248 5.82 31.29 19,512 The Netherlands 70,104 4,582 22.76 44.77 69,431 5 4,538 22.54 48.35 673 Germany 61,043 756 3.49 14.56 100,064 3 1,234 5.72 26.81 (39,021) Japan 60,520 486 1.92 15.24 110,060 2 884 3.50 39.99 (49,540) UK 60,508 1,043 5.97 29.59 54,699 7 945 5.40 20.50 5,809 Italy 59,594 1,044 5.30 31.40 58,146 6 1,018 5.17 34.68 1,448 Belgium-Luxembourg 38,653 3,865 1.78 34.36 34,548 8 3,455 15.92 27.63 4,105 Spain 34,032 862 6.65 46.43 Austria 29,257 3,703 17.01 35.45 21,355 10 2,703 12.41 25.71 7,902 Canada 27,145 9 943 2.88 16.41 Sources: The US Department of Commerce, Bureau of Economic analysis (www.ita.docov). GDP data for 1994 from the Organisation for Economic Cooperation and Development (www.oecd.org). IMF, Balance of Payments Yearbook, Part 2, 1995, Table C-2. Data partially extricated from Blaine (1996)

Table I. Top ten service export markets and import origins for the USA

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role in their marketing. Interestingly, services are also going through a similar process as information technology enables unlimited variations for both sales and after-sales support for target markets. Every tangible product contains some service Regardless of this convergence and interconnectedness, many classes of services will always be distinguished from goods in that the customer receives value but no tangible object. Every tangible product necessarily contains some service because without it the exchange would be impossible (Lovelock and Yip, 1996). Thus, even though such activities as price quotation, order-taking, billing and payment are intangible (i.e. services), they merely facilitate sales and without them there would be no revenue. However, realistically only services that can be targeted as profit centers and marketed accordingly qualify as true services. As legal, technological, economic and competitive environments change over time, it is likely that certain cost center type services can be converted into profit centers. Two examples in this regard are automated teller machines (ATMs) and airline reservation systems. Both systems were initially conceived to support banking and air transportation services, respectively. ATMs were installed to save money in human resources and investment in additional bank branches. They were initially shunned by customers, who preferred personal service over the convenience offered by ATMs. However, as customers increasingly adopted the use of ATMs, an increasing number of banks viewed ATMs as profit centers and have instituted fees for those using them. Likewise, reservations systems like Apollo and Sabre were developed to enhance the booking capabilities of United and American Airlines, respectively. Classification issues The formulation of appropriate generic international marketing strategies is handicapped by the unavailability of a generally accepted classification method for services. The range of services offered internationally is quite broad and belongs to diverse industries that have developed highly specialized skills, capabilities and knowledge over a period of time that enables them to compete internationally. Although numerous classifications for services trade have been offered[2], industry-based classifications have been commonly used. This is not impractical given the diversity of so many unrelated service sectors and the commonality of industry-based approaches in the strategy literature. Meaningful analyses and appropriate strategies in services sectors can emerge when very similar entities (e.g. industry) are grouped together. Winsted and Patterson (1998), for example, focus on the international market-entry strategies of engineering consulting firms. However, in the absence of a more integrative classification method, relevant services theories may not emerge and this issue has been stated in the literature (e.g. Clark et al., 1996). Three groups Lovelock and Yip (1996) propose the classification of services into three groups. (1) People-processing services are those that involve tangible action to customers (e.g. restaurants, health care), thus necessitating a local presence by the international marketer. (2) Possession-processing services involve intangible actions to merchandise in an effort to enhance the value of the merchandise to the customer (e.g. transportation, appliance repair), and the customer is not involved in the process.
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(3) Information-based services are those that provide some value for the customer as a result of the collection, analysis and manipulation of data (e.g. accounting, insurance) and only minimally involve the customer. This classification method is articulate and thought provoking, but these categories are not mutually exclusive and exhaustive for all services. For example, conventional retail trade and custom tailor services are difficult to classify under this scheme. Store-type retailing is an action that involves the customer but the customer is not transported, diagnosed with a disease or fed. The retail process merely enables the customer to take possession of the goods or services. Of course, there are social and entertainment aspects of store-type retailing, and if these were the primary motivations for patronage, then retailing might qualify as a people-processing service. Two levels of ``tangibility'' and ``face-to-face'' contact Patterson and Cicic (1995) offer a useful classification based on two levels of ``tangibility'' of the service and two levels of ``face-to-face''contact with the client in service delivery. The resultant cells are thus labeled: (1) low face-to-face and low tangibility location-free professional services; (2) high face-to-face and low tangibility location-bound customized projects; (3) low face-to-face and high tangibility standardized services packages; and (4) high face-to-face and high tangibility value-added customized services. Likewise, Clark et al. (1996) offer a classification method based on four categories: (1) contact-based services; (2) vehicle-based services; (3) asset-based services; and (4) object-based services. Most services have the potential of being internationally marketed. A list of services with the potential for internationalization is shown in Table II. Like products, the development of capabilities and competencies drives competitiveness in services trade. It is evident from the list of industries in Table II that the nature of services varies widely. Each service industry has its own infrastructure, requires specific competencies and may be governed by a comprehensive set of regulations and laws (e.g. banking, health care, insurance). The firm's competitive advantage within a service sector, on the other hand, may be through the development of proprietary equipment, patented processes, and/or trademarks. Regulatory impediments As noted earlier, regulatory impediments are controlled by the government and in some nations, notably the OECD members, are being removed through bilateral and multilateral negotiations (e.g. GATS, EU, NAFTA). Some markets will be very slow to agree to opening their services markets, particularly financial and telecommunications. Structural changes within the global services industry coupled with technological change will serve as the main change agents for these countries. Economic impediments. Although a significant proportion of every nation's GDP is derived from services, international market entry for a broad array of
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Service industries Accounting Advertising Banking Broadcasting Computer services Computer software Construction Consulting Contract research Data entry Data processing Design and engineering Distribution (including service distributors) Agents, brokers and representatives Franchising Freight forwarders and customs brokers Retailing Shopping malls Warehousing Wholesaling Education: Executive and management development Institutions of higher learning Vocational and technical Entertainment Music and other audio Theme parks TV productions, motion pictures Spectator sports Theater, live performances

Funeral services Health care Insurance Investment banking (brokerage) Leasing Legal services Lodging Maintenance and repair Media Cinema The Internet Radio Still media Television Reservation systems Restaurants Royalties and licensing Security systems Tourism Telecommunications Online services Mobile Paging Telephone Transportation (courier) Express delivery Package delivery Transporation (merchandise) Transportation (passenger) Utlities

Table II. A list of international service sectors

services is largely limited to highly developed nations whose family units on average possess a high level of discretionary disposable income. Thus, relatively low family income in most countries is likely to impede successful international market entry and growth for many service sectors. For example, average expenditures for restaurants is much lower in developing economies than in developed markets. Furthermore, as income grows, potential target groups are likely to tap into the available local low-cost labor to perform human-resource intensive services (cleaning services, most repair) rather than to rely on services offered through commercially organized services firms. Cultural incompatibility Cultural impediments Cultural imperatives will necessarily have a significant impact on the acceptability and adoption pattern of services. Since services inherently involve some level of human resources, the likelihood of cultural incompatibility is greater. For example, nations which culturally define the housewife's role as the family caretaker will probably not be very keen on using day-care centers. Likewise, for-profit funeral services in Islamic nations will probably not be well-received. Standardization versus customization An important strategic issue in marketing services internationally is the extent to which each service might be standardized. In addition to the necessity for customer contact for many service categories, myriad host
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government regulations in numerous services sectors make standardization very difficult. Accounting and financial services markets are governed by very different rules around the world. Although regional markets such as the European Community are succeeding in lowering such host market regulatory problems, these are minor accomplishments at best. Retailing difficult to standardize Retailing provides an excellent example of a service business that is difficult to standardize. Despite much talk about the internationalization of retail trade, local retailing regulations vary considerably, not only across countries (including within the EU), but also within the provinces of each country (Samiee, 1995). Even if regulations were entirely removed, retail trade is inherently culture bound and influences merchandise type and merchandise mix. Therefore, the level of product and marketing standardization observed in the international marketing of goods is unlikely to be matched by services. McLaughlin and Fitzsimmons (1996) have also arrived at this conclusion in their analysis of service industries. It is thus plausible that relatively more service businesses must be adapted to host country environments and, as such, the global marketing of services may not be a realistic goal for many sectors. That is, common customer needs for services vary more widely across nations than is the case for products, and addressing them requires localized solutions. Hence, it is likely that a multidomestic (or multilocal) pattern of internationalization might be the most appropriate in many sectors of services, and this view is implicitly echoed by others (Lovelock and Yip, 1996, p. 81). These key differences set the international marketing of services apart from the international marketing of tangible goods. Whereas an increasing number of consumer and industrial goods are being marketed globally, for reasons outlined above, the same is not true of services. A key issue in the globalization of markets is the convergence of markets which is not occurring with sufficient speed to accommodate international growth in many services sectors. For some services, it will never occur. Concluding remarks It is evident from the issues raised in this study that the internationalization of services offers tremendous potential for growth despite the slow progress in multilateral negotiations aimed at market access. Although progress has been slow, it is of critical importance that much progress has been made to bring services gradually under the auspices of WTO and, therefore, the future seems promising. As the largest net exporter of services, the USA stands to gain a great deal. However, the data in Table I indicate that some other nations (e.g. Austria and The Netherlands) are better positioned in relative terms than the USA. Information limited In general, information regarding service marketing internationally is limited. Several research opportunities are thus plausible. First, empirical research aimed at validating the practical utility of existing services classification approaches for international use is appropriate. Second, a broadly accepted classification method may assist in determining whether the global industry concept can be extended to certain classes of services. Such a determination may go a long way in studying the competitive strategies of international services firms. Third, an examination of the trends in the international marketing of services in other leading nations (either single country or cross-nationally) may permit a better understanding of strategic forces behind their success. Fourth, domestic experiences in
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services indicate that successful services are based on processes that cannot be easily duplicated (e.g. Wal-Mart's cross-docking, Marriott's employment screening and guest-room preparation). Information technology is frequently the backbone of these success stories. However, market penetration and the application of computers across markets vary widely. Thus, it is useful to investigate the extent to which processes can be exported to host nations. Finally, only limited effort for developing reliable measurement scales for use with international marketing of services is evident. In particular, for certain segments and service industries, the Internet is bound to make customer-provider interaction very different than the traditional models of service exchange. Therefore, progress in scale development in these areas and their cross-national validation are also encouraged.
Notes 1. The importance of this issue is reflected in the employment of foreign workers in the services sectors. For example, with a foreign worker employment figure of 2 million collectively, the US services sectors constitute one of the four top employers of foreign nationals (Blane, 1996). 2. See Clark et al. (1996) for a review of various classification schemes. References Baker, S., Johnston, M. and Echikson, W. (1998), ``Europe's privacy cops'', BusinessWeek, 2 November, pp. 49-50. Blaine, M. (1996), ``Trade, FDI, and the dollar: explaining the US trade deficit'', Sloan Management Review, Fall, Vol. 38 No. 1, pp. 81-101. Clark, T., Rajaratnam, D. and Smith, T. (1996), ``Toward a theory of international services: marketing intangibles in a world of nations'', Journal of International Marketing, Vol. 4 No. 2, pp. 9-28. Economist (The) (1997), Financial Indicators, May 3, 342 (8015), p. 99. Foreign Trade Outlook (1998), Washington, DC, US Department of Commerce, Bureau of Economic Analysis, www.ita.doc.gov/industry/otea/usfth/t05.prn Francis-Laribee, J. (1994), ``American companies exploring networks in Europe: alternatives, challenges and recent advances'', Journal of Systems Management, Vol. 45, April, pp. 6-12. Goff, L. (1992), ``Patchwork of laws slows EC data flow'', Computerworld, Vol. 26 No. 15, p. 80. Gupta, U.G. (1992), ``Global networks: promises and challenges'', Information Systems Management, Fall. Vol. 9 No. 4, pp. 28-32. Lovelock, C.H. and Yip, G.S. (1996), ``Developing global strategies for service businesses'', California Management Review, Winter, Vol. 38 No. 2, pp. 64-86. McLaughlin, C. and Fitzsimmons, J. (1996), ``Strategies for globalization service operations'', International Journal of Service Industry Management, Vol. 7 No. 4, pp. 43-57. OECD (1996), Science, Technology, and Industry Outlook, OECD Publications, Paris. Patterson, P.G. and Cicic, M. (1995), ``A typology of service firms in international markets: an empirical investigation'', Journal of International Marketing, Vol. 3 No. 4, pp. 57-84. Samiee, S. (1995), ``Strategic considerations in European retailing'', Journal of International Marketing, Vol. 3 No. 3, pp. 49-77. Samiee, S. (1984), ``Transnational data flow constraints: a new challenge for multinational corporations'', Journal of International Business Studies, Spring-Summer, pp. 141-50. Sigmund, J.E. (1998), ``Services in WTO: recent developments and overview'', Business America, April, Vol. 119 No. 4, pp. 12-13. Winsted, K.F. and Patterson, P.G. (1998), ``Internationalization of services: the service export decision'', The Journal of Services Marketing, May-June, Vol. 12 No. 4-5, pp. 294-311. Wyckoff, A. (1996), ``The growing strength of services'', The OECD Observer, June-July, No. 200, pp. 11-15.

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