Service trade and productivity
Vice Chairman & Vice President
World trade in services is increasing rapidly but micro evidence remains scarce. This column employs firm data from Japan to argue that service-exporting firms are more productive than non-exporting firms and goods-exporting firms. Information asymmetry, transportation costs, differences in institutions, cultures, and languages increase the fixed costs of service trade. Therefore, highly productive firms are more likely to self-select into service trade.
According to WTO statistics, world exports of services grew by 8% per annum between 1980-2013, exceeding the exports of goods (which grew at 7% per annum). The ratio of service exports relative to goods exports increased from 18% in 1980 to 24.7% in 2013. In 2013, Japan ranked fourth in export of goods and eighth in export of services, with annual growth rate of service exports (6.4% from 1980 to 2013) exceeding that of goods exports (5.3%). These numbers indicate a relatively low presence of Japan in the world service trade.
However, studies on service trade have lagged far behind those on goods trade, mainly due to the limited availability of good statistical data (see Francois and Hoekman 2010 for a survey). Particularly, empirical evidence on service trade using firm- or establishment-level micro data has been scarce.
As most services are distinguished by simultaneity of production and consumption, the transaction usually requires proximity between suppliers and consumers. Thus, the geographical distance matters more than in the transaction of goods. Cultural and institutional distances may impose an additional burden on service trade. In contrast to goods trade where tariffs and non-tariff barriers (NTBs) have been substantially reduced through multilateral and bilateral trade negotiations, a large number of services are still subject to public regulations. Given that regulations and standards imposed on services differ markedly by country, the barrier to crossing a national border is higher for service trade than it is for goods trade (e.g., Miroudot et al. 2013).
Firm heterogeneity in service trade
During the last decade, theoretical international trade studies on the heterogeneity of firms have advanced rapidly. Paralleling the theoretical development, a large number of empirical studies on international trade and foreign direct investments using firm- or establishment-level data has been accumulated. These studies demonstrated that there is a strong positive relationship between globalising activity and the productivity of the firms (see Greenaway and Kneller 2007, Wagner 2007, 2012, Bernard et al. 2012 for surveys).
However, the vast majority of the extant empirical studies that employ micro data have dealt solely with goods trade. The rare firm-level studies that conduct a separate analysis of service trade include Breinlich and Criscuolo (2011) on UK firms, Kelle et al. (2013) on German firms, Haller et al. (2014) on firms in four EU countries, and Malchow-MØller et al. (forthcoming) on Belgian firms. However, all of these studies analyse firms in EU countries. In particular, UK firms are exceptional in the world service trade because the UK is the third largest service exporting country, and the ratio of service exports relative to goods exports is very high (54.0% in 2013). Other studies mentioned herein also analyse firms in EU countries where goods/services market integration is advanced. From the service trade perspective, these countries differ greatly in economic circumstances from non-EU countries such as Japan or the US.
To deepen our understanding on this issue, we empirically investigated the relationship between service trade and various firm characteristics in comparison with that of goods trade using a large panel data of Japanese firms (see Morikawa 2015 for more detail). The data are from the Basic Survey of Japanese Business Structure and Activities (BSJBSA) by the Ministry of Economy, Trade and Industry for the period 2009-2012. The Basic Survey is a compilation of representative government statistics on all Japanese firms with 50 or more regular employees engaged in manufacturing, wholesale, retail, and service industries, and approximately 30,000 firms are surveyed every year. We perform a simple regression analysis to explain the total factor productivity (TFP), whereby the dummies for goods/service trading firms are used as key explanatory variables.
- We hypothesise, first, that the effect of firm productivity on self-selection into international service exports is stronger than the effect on goods exports.
- Our second hypothesis is that the size and productivity of service exporters with non-affiliate firms is higher than those with only affiliate firms and that the difference is more pronounced in service exports than goods exports.
Service exporters' productivity premium
According to our regression results, the TFP level of service exporting firms is significantly higher than that of domestic (non-exporting) firms and goods exporting firms. Exporters' productivity premiums relative to non-exporters are 13.8% for pure goods exporters, 19.9% for pure service exporters, and 21.3% for firms exporting both goods and services (see Figure 1). These results differ from the findings of past studies for EU countries. For example, according to Breinlich and Criscuolo's (2011) study on UK firms, the productivity differences of service exporters and goods exporters are small and statistically insignificant. Haller et al. (2014) find that labour productivity of service exporters in four EU countries is not necessarily higher than that of goods exporters.
- In comparison to EU countries, the development of service trade by Japanese firms is lagging. We interpret the results to suggest that only productive firms can engage in service trade due to geographical, linguistic, and institutional distances from foreign countries.
Next, we divide goods/service exporting firms into those that export only to their overseas affiliates (intra-firm exporters) and those that export to non-affiliate firms (inter-firm exporters), and we then investigate the differences in productivity between the subsamples. The TFP of inter-firm service exporters is significantly higher than those firms that export services only to their affiliate firms (see Figure 2).
- This result suggests that highly productive firms tend to self-select into service exporting beyond the boundary of the firms.
Summary and conclusion
To summarise, our findings indicate that fixed costs to initiate service trade exceed those to initiate goods trade. This is possible due to the information asymmetry in evaluating the quality of services, the high transportation costs, and the differences in institutions, cultures, and languages. We conjecture that policies to liberalise and facilitate service trade may play a more important role in globalising firm activities than do policies for goods trade.
This article first appeared on www.VoxEU.org on May 22, 2015. Reproduced with permission.
- Bernard, A B, J Bradford Jensen, S J Redding, and P K Schott (2012), "The Empirics of Firm Heterogeneity and International Trade," Annual Review of Economics, Vol. 4, pp. 283-313.
- Breinlich, H and C Criscuolo (2011), "International Trade in Services: A Portrait of Importers and Exporters," Journal of International Economics, Vol. 84, No. 2, pp. 188-206.
- Francois, J, and B Hoekman (2010), "Services Trade and Policy," Journal of Economic Literature, Vol. 48, No. 3, pp. 642-692.
- Greenaway, D and R Kneller (2007), "Firm Heterogeneity, Exporting and Foreign Direct Investment," Economic Journal, Vol. 117, February, pp. F134-F161.
- Haller, S A, J Damijan, V Kaitila, C Kostevc, M Maliranta, E Milet, D Mirza, and M Rojec (2014), "Trading Firms in the Services Sectors: Comparable Evidence from Four EU Countries," Review of World Economics, Vol. 150, No. 3, pp. 471-505.
- Kelle, M, J Kleinert, H Raff, and F Toubal (2013), "Cross-Border and Foreign-Affiliate Sales of Services: Evidence From German Micro-Data," The World Economy, Vol. 36, No. 11, pp. 1373-1392.
- Malchow-MØller, N, J R Munch, and J R Skaksen (forthcoming), "Services Trade, Goods Trade and Productivity Growth: Evidence from a Population of Private Sector Firms," Review of World Economics.
- Miroudot, S, J Sauvage, and B Shepherd (2013), "Measuring the Cost of International Trade in Services," World Trade Review, Vol. 12, No. 4, pp. 719-735.
- Morikawa, M (2015), "Service trade and productivity: Firm-level evidence from Japan," RIETI Discussion Paper, 15-E-030.
- Wagner, J (2007), "Exports and Productivity: A Survey of the Evidence from Firm-level Data," The World Economy, Vol. 30, No. 1, pp. 60-82.
- Wagner, J (2012), "International Trade and Firm Performance: A Survey of Empirical Studies since 2006," Review of World Economics, Vol. 148, No. 2, pp. 235-267.
May 29, 2015
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