# **Introduction**

The efficiency of services industries has a powerful influence on economic growth. The productivity and competitiveness of both goods and services firms increasingly depends on access to low‐cost and high‐quality producer services such as telecommunications, transport, finance and distribution. Telecommunications are crucial to the dissemination and diffusion of knowledge; transport services affect the cost of shipping goods and the movement of workers within and between countries; financial services influence the transformation of savings into investment and their allocation to the most productive uses; professional services such as accounting, legal, engineering and consulting services reduce transaction costs associated with the operation of financial markets and the enforcement of contracts, and are also channels through which process innovations are transmitted across firms. Retail and wholesale distribution services connect producers and consumers. Health and education services are key inputs into – and determinants of – the quality of human capital (Francois and Hoekman, 2010; Mattoo, Stern and Zannini, 2008).

Services have assumed added significance from a broader global policy perspective in the aftermath of the 2008 financial crisis. There are strong political and economic imperatives that require adjustment in countries with major current account surpluses and deficits. Much of the policy debate on rebalancing revolves around fiscal, monetary and exchange rate policies. But structural reforms, including in services, also need to be part of the package. As services account for most non‐labor costs of production, action to improve the efficiency of services must be a major focus of policy in deficit countries, complementing policies to switch the pattern of expenditure and reduce net consumption. Expanding domestic consumption and investment in surplus countries must also involve a focus on services such as financial intermediation, insurance, and retail distribution and related logistics. Expanding the scope for international trade and investment in services can help generate the required structural changes.

Recent studies such as Arnold et al. (2007, 2008, and 2010) and Fernandes and Paunov (2008) analyze the effects of allowing foreign providers greater access to services industries on services markets and on the productivity of manufacturing industries relying on services inputs. The results show a positive relationship between FDI in services and the performance of domestic firms in services and in manufacturing. Francois and Woerz (2008) find that increased import penetration in producer services has a positive effect on the skill and technology mix of exports in a panel of OECD countries, with greater openness in producer service sectors implying better export performance by skill and technology intensive industries.

In last three decades, a variety of policy reforms have supported the rapid internationalization of production, consumption, trade and investment in services, reflecting increasing recognition that barriers to foreign entry and operations affect services performance. Given relative labor abundance in many developing countries, modern information technologies allow ever more cross‐ border, “disembodied” trade in services to occur.<sup>1</sup> But barriers to trade and investment remain prevalent. A recent World Bank research project has documented that services barriers in both

> 1 Determinants of trade in services include relative factor costs and trade costs (access to – and quality of – telecom networks) but also “technology transfer” costs. The latter can limit the feasibility of offshoring to locations that have the required institutions and capacity (Keller and Yeaple, 2009).

2