Introduction

The globalization of services (especially knowledge-intensive services) not only involves the geographical extension of services economic activity across borders, but also is an intrinsic part of wider processes of change in the international organization of production and division of labor. Liberalization and the application of new information and communication technologies have transformed services, not simply improving their growth processes or increasing their trade, but altering how industrial activities are conducted, integrating services and goods, and contributing to the unbundling of services activities.

This chapter discusses the many factors involved in the globalization of services. The first two sections explore the particular modes (and barriers) of international “trade” in services. The following section examines the characteristics of services multinationals. The next section explores the role of services in globalization and international division of labor. The chapter then turns to knowledge-intensive services, defining knowledge intensity and knowledge-intensive business services, and the particular issues associated with the internationalization of knowledge-intensive business services (KIBS), including their outsourcing and offshoring.

Liberalization and International “Trade” in Services

Internationalization of services is encountered by many of us on a daily basis. We may drink coffee in a branch of a British coffee shop chain, connecting to the Internet through a French telecommunications company, executing web searches through an American search engine, and ordering goods from an online retail store that operates out of just about any country. The high street could be populated by global banks, offices of international accountancy and consultancy firms, and hotels, the brands of which are encountered in most capital cities. Is this so surprising? Most of the cars we see and phones we use are produced for a world market – so why not services?

Service sectors have grown to take major shares of the economy in industrially advanced countries such as members of the EU and OECD. Economists often view services as simply “intangible goods”; but this term is now increasingly used to cover digital content, software, and the like, as distinct from more traditional services. Many researchers stress that service activities are not just “intangible,” they are also very much a matter of service relationships: customer input often makes a major contribution to the activity, so that we often see reference to the “co-production” of services. The features of service products vary considerably across different classes of services: TV broadcasts, psychiatric consultation, veterinary treatment, freight transport, and land remediation are just a few of the vast range of activities included as services. But the features of intangibility and interactivity mean that many services are (largely) produced and consumed at the same time and same place, that they are hard to store, that supplier and consumer need to be collocated, and so on. Not surprisingly, these features mean that service trade is not strictly similar to trade in manufactures, which are physical artifacts that can usually be transported (by transport services!). Often a service company will need to set up branches in an overseas country if it wants to internationalize, rather than follow traditional exporting strategies.

Thus services trade is strikingly low, compared to the share of services in economic activity. Cross-border trade in services has stood at only around 20% of total world trade, and has been since the 1970s, despite the growing prominence of services (World Bank 2014). In contrast, foreign direct investment (FDI) was dominated by services over the first part of this century (it averaged 50% of FDI over 2005–2007), but nosedived after the economic crisis set in, down to 39% in 2010 and 40% in 2011, compared to 50% and 46% for manufacturing, respectively (UNCTAD 2012). UNCTAD figures show a shift away from international trade in services to FDI and especially mergers and acquisitions (rather than greenfield FDI). However, it is not necessarily the case that trade and investment are competing strategies – one may complement the other.

The liberalization of international trade and FDI in services has been underpinned by the introduction in 1995 of the General Agreement on Trade in Services (GATS). The GATS was advanced despite resistance from less developed countries such as Brazil and India, who argued that services were primarily a matter of domestic regulation (and in many cases, public provision). Indeed, many service sectors recently opened to internationalization are sensitive because of their distributional, cultural, or strategic significance. Following long negotiations, the GATS was the first multilateral agreement to cover trade in services and involved two elements: the framework of agreement containing rules and regulations; and each country’s schedule of “bound commitments” in individual sectors with respect to national treatment and market access for services in each mode (World Trade Organization 2014). The level and nature of commitments generally differ across modes.

Recognizing the greater diversity of international transactions in services compared to goods, the GATS followed earlier researchers (e.g., Bhagwati 1984; Sampson and Snape 1985) differentiating between four modes of international services “trade” (see Table 8.1) (cf. Baker, Miozzo, and Miles 2002):

• Mode 1, cross-border trade. This is most similar to trade in physical goods, with services being produced in one country and consumed in another. Cross-border communications are employed so that neither the producer nor the consumer moves physically: instead they interact through a postal or a telecommunications network (e.g., exporting software on a computer disc/CD-ROM, sending business reports or architectural blueprints by fax and computer-to-computer transfer; or providing educational or call center services by telecommunications).
• Mode 2, consumption abroad. The consumer moves from one country to another to acquire foreign services, as in tourism or travel for educational or medical purposes. This may also include activities such as aircraft maintenance abroad, where only the property of the consumer moves (there are even cross-border laundry services in Scandinavia!).
• Mode 3, commercial presence. Here the service producer sets up an establishment in a foreign country where consumers are located; this can involve corporations, joint ventures, partnerships, representative offices, and branches, and is evident in international restaurant and hotel chains and in some professional services. Note that commercial presence usually involves investment in the trading partner country. It is also liable to involve intra-firm trade in services.
• Mode 4, trade by temporary presence of natural persons. This involves the temporary movement of service personnel from one country to another, as in the case of lawyers traveling abroad to provide legal services, engineers moving to work on overseas operations, or intra-corporate transfers.

As noted earlier, with respect to modes 1 and 3, the different modes need not be straightforward substitutes one for another. There may be synergies between them, and specific firms may move from one combination of modes to another over time. The entwining of trade and investment issues in the case of services means that the GATS is as much an investment agreement as one concerned with cross-border trade. Indeed, commercial presence is the mode of supply where there have been the greatest number of bound commitments (countries guaranteeing levels of market access, national treatment, and that they would not impose new measures restricting entry into the market or the operation of the service) (Zampetti and Sauvé 2007).

“Barriers” to Internationalization of Services

Despite the introduction of the GATS, there remains much perception that services trade is problematic. Indeed, there is some evidence that services trade is substantially more expensive than trade in manufactures. Miroudot, Sauvage, and Shepherd (2012) examine just modes 1 and 2 services trade (due to issues of data availability for the other modes), across 12 services and 17 other sectors. Trade costs are difficult to assess, but here they are estimated by considering the extent to which a country trades with itself, rather than with others; this should take account of all factors that influence trade costs, not just protectionism or regulation. (Though they are unable to identify which specific factors are involved). Trade costs in services are much higher than for goods – often two to three times higher.

These authors estimate, further, that trade costs in services remained relatively steady (indeed, slightly increasing) over the first decade of the present century, whereas trade costs for goods declined overall by more than 15%. Despite the internal market, EU countries displayed quite varied experiences, with different overall levels of trade costs, and different trends over time. Substantial reductions in service trade costs between 1995 and 2007 were noted in Germany, Ireland, and Poland, but over the same period France displayed substantial increase in these costs. All four economies registered substantial declines in trade costs for goods over this period.

Thus services trade seems to be costly, which would be expected to affect the scope for economies of scale and other developments and innovation trajectories. The European Commission (2002) analyzed these issues in the course of preparing for the Services Directive (it instituted this in 2006, with the aim of further liberalizing service trade within Europe). Following the conventions of trade policy, it portrayed the issue here as one of “barriers” to trade, though the protectionist connotations of this term are not strictly accurate. It grouped barriers into legal and non-legal types, with numerous specific difficulties within each type. The main non-legal barriers were simply lack of information about regulations, competent authorities, etc., and broader cultural/language “barriers” affecting formal issues (like the need to have documents translated) as well as less formal ones (such as understanding local values and habits). As regards legal barriers, these were helpfully grouped according to the stage in the service process that was concerned, with a startlingly long list of impediments discussed under each heading. (The document also goes into some detail about the typical treatment of different services, under several of these headings.) A flavor of these legal “barriers” is provided in the following list:

1. Difficulties relating to the establishment of service providers. There may, for example, be “red tape” requirements to comply with local regulations concerning licenses, authorizations, etc., which can consume significant time and financial costs.
2. Difficulties relating to the use of inputs necessary for the provision of services. For example, rules governing the hiring and qualifications of staff, the mobility of personnel, pensions, and working hours.
3. Difficulties relating to the promotion of services. For example, what sorts of advertising are allowed (in some services, advertising is even forbidden in some countries).
4. Difficulties relating to the distribution of services. For example, cross-border supply of some services may be rendered problematic by national rules governing what sorts of professional are entitled to supply services in the country.
5. Difficulties relating to the sale of services. For example, because contracts tend to play a more important role in services’ sales than in those of goods, variations in the specifications for contracts across countries constitute obstacles, as do rules and practices related to invoicing, payment, and value-added tax.
6. Difficulties relating to after-sales aspects of services. For example, variations in practice concerning legal (and criminal) liabilities, the validity of post-sales obligations, warranties, etc.

Such issues lead to the EU’s “single market” being much less integrated in the sphere of services than in that of goods. This varies, to be sure, across different types of services. Cuadrado-Roura (2010) notes that even within KIBS there are substantial variations across activities – the advertising and marketing industry is relatively highly integrated in Europe, as compared to many traditional professional services (like legal services), but also some more technology-related services, like engineering and R&D.

Globally, the situation is even more diverse. Table 8.2 reproduces a recent assessment of the key regulatory issues confronting international service operations across a range of activities. All of the services encounter difficulties of one kind or another.

Services Multinationals

Services sectors’ multinational firms have become very evident in the last few decades. International fast food and retail chains are prominent in many world cities, along with hotels, banks, insurance, and travel firms; the logos of many other service corporations are familiar ones. While the best known are probably American and European, we can see the emergence of prominent Asian transport, hotel, and food chains (and the restaurant chain Nando’s is of South African origin). As well as consumer services, we can also see prominent global professional service companies (accountancy, consulting, computer services) and others engaged in international freight transport and business finance. Services multinationals come from all continents, and have come to play a substantial role in most metropolitan centers.

International business scholars have debated whether the international operations of services firms are different from that of manufacturing firms. In the run-up to GATS, many argued that theories developed for manufacturing firms are equally applicable to the international operations of services (e.g., Boddewyn, Halbrich, and Perry 1986; Dunning 1989; Enderwik 1989). Even though research has not kept up with the growth of services multinationals, their international behavior has also been viewed as mirroring that of manufacturing firms (see, e.g., Li and Guisinger 1992 on determinants of internationalization and Capar and Kotabe 2003 on multinationality and firm performance). But other commentators argue that studies on the international operations of service firms illuminate some subtleties peculiar to service multinationals – or phenomena that have been neglected in studies of manufacturing firms – that may well aid in the better understanding of internationalization processes in general (Lovelock 1983; Carman and Langeard 1980; Gebauer and Kowalkowski 2012).¹

Compared to studies of manufacturing multinationals, empirical examination of the international operation of services firms continues to be grossly unrepresented. We know relatively little about the international strategy, organization, and evolution of service multinationals. Despite fragmentation in the literature, there is some consensus that the international expansion of services has followed three “waves” (Kundu and Merchant 2008). A first wave involved finance and business services firms following internationalizing manufacturing firms before the 1980s. A second wave involved the internationalization of services firms in telecommunications and other sectors seeking new markets abroad. A third wave has been due to liberalization and privatization of service sectors, especially in less developed countries.

One controversial topic concerns the extent to which service multinationals can achieve scale economies. Campbell and Verbeke (1994) argued that the characteristics of services (as reviewed above) mean that scale economies are less relevant for service multinationals, though they do apply to some operations such as marketing (branding, investment in corporate image, etc.). Lovelock and Yip (1996) argued that information-based service firms can achieve economies of scale by providing global customers with standardized services and by centralizing upstream value chain activities. In one empirical study, however, Katrishen and Scordis (1998) reported that service firms actually suffer diseconomies of scale with increasing multinationality.

Another controversial topic is whether the acknowledged restructuring of (manufacturing) multinationals, from being loosely coupled organizations to ones that are more integrated and centrally coordinated (Nolan, Sutherland, and Zhang 2002; Rugman 2005), also applies to services multinationals. Miozzo and Yamin’s (2012) study suggests that such restructuring may not have been necessary for service multinationals (the internationalization of which has lagged behind that of manufacturing multinationals), but that service multinationals have a fairly centralized structure from the beginning. Instead, information and communication technology (ICT) has speeded up the internationalization process of services firms and facilitated the integration of subsidiaries through global clients, corporate processes and global suppliers rather than restructuring. Other determinants, however, account for variations among service multinationals in the autonomy of subsidiaries. A first set of factors relates to the characteristics of the different sectors, including whether the multinational serves global or local customers and the scale and diversity of subsidiary operations. A second includes the influence of institutions and regulations in the host country (such as restrictions on land or media ownership), sometimes curtailing the scope of local subsidiaries, but other times leading to joint ventures with local firms, enhancing the role of local subsidiaries of services firms.

A further issue of debate is whether the factors influencing the choice of entry modes by manufacturing firms are generalizable to services firms. Some suggest that this is the case (see Agarwal and Ramaswami 1992; Terpstra and Yu 1988; Weinstein 1977); but others stress how such characteristics of service firms as low capital intensity and the inseparability of production and consumption affect entry modes. For example, Erramilli (1990) argued (as GATS was to conclude) that the inseparability of production and consumption in services differentiates entry modes for services and manufacturing firms. While some services can be exported (mode 1), others require close physical proximity for simultaneous production and consumption, and are limited to contractual entry, licensing or franchising, and FDI. In turn, Erramilli and Rao (1990) argue that services firms prefer to start with full-control entry modes. They show variation in choice of entry mode when firms that are characterized by low asset specificity give up control in response to the rising costs of integration or the diminishing ability to integrate. Given that services firms need fewer resources to establish a wholly-owned subsidiary (and have greater flexibility to move those resources), service firms may have greater capability and latitude than manufacturing firms to establish integrated modes for the purpose of reducing transaction costs or implementing what are called “ethnocentric” strategies (Erramilli 1991).

The development of ICT is widely seen to have challenged the traditional inseparability of production and consumption in many services (Miozzo and Soete 2001), which increases the entry and internationalization options available for services. ICT’s role in separating the location and timing of (some) service production from its delivery and consumption, and thus in helping reshape the “mode of presence” of service organizations in foreign markets, was early on spotted by Vandermerwe and Chadwick (1989). New ICT allows for some services to be traded, and some management control procedures to be conducted, remotely. These practices compete with and may substitute for traditional physical modes of presence.

Often the initial impetus of such service firms to internationalize is in order to follow multinational corporations that are their major long-term clients, which is then followed by extending operations in the new host economy (Roberts 1998). Such client-following is one of the three paths that Toivonen et al. (2009) see internationalizing services firms as pursuing. They see some other firms as simply expanding markers through independent gradual internationalization (here we might expect services to follow something close to the “Uppsala model”; see Johanson and Vahlne 2009). A third path is that of the “born globals,” rapidly internationalizing new service firms, often relying on ICT-enabled exports. Despite all these contributions, we still know a lot less about the entry modes and international strategy and organization of services as compared to manufacturing multinationals.

The Role of Services in Globalization and the International Division of Labor

Internationalization of services (and, as we will see below, of KIBS) is one of the most important parts in the general process of the globalization of production, distribution, and innovation, having implications for the wider international division of labor and for the competitiveness of firms, regions, and countries. One of the problems with understanding these wider processes, however, is that different sets of literature address different issues. International trade issues are usually treated separately from the operation of multinationals, with each of these lines of research drawing upon different traditions of economic thought (see Chesnais 1992), although the issues have become increasingly closely intertwined since the mid-1970s.

Developments in ICT and liberalization have facilitated the reconfiguration of organizations in all sectors of the economy. ICT systems with unprecedented flexibility and reach have facilitated radical transformations of the organization of production, including not only an increase in services trade but also the development of new (international) services activities, new service suppliers, and new business models for service firms. Later, we argue that these developments apply especially to knowledge-intensive service firms.

The activities of service and other multinationals may simply follow the logic of expanding their sales in wider markets; they may involve establishing roughly similar systems of production and/or delivery in more countries (in the case of services operations, it has often been argued that their growth is as much a matter of replication of branches as a greater and more complex divisions of labor); or they may involve new configurations of production and consumption across borders. An example is the blurring of services and goods, with manufacturing firms responding to the commoditization of products by adopting strategies that recast these as service offerings (e.g., Rolls Royce selling power by the hour or Apple products’ links to iTunes). Another is the use of the Internet as a platform for delivery of services (note the evolution of shared services and of Cloud Computing, through which organizations in all sectors can store and access data without building their own data centers).

ICT has transformed services by enabling the formalization of activities requiring rules-based logic, which allows for the “unbundling” of business functions, which can be recombined and purchased from third parties (Breznitz and Zysman 2013). Thus the back-office service operations of many companies have been relocated to lower wage areas, often initially in the country of origin and only later in other and less costly countries. The offshoring of office services was already widely discussed in the 1980s, while, more recently, offshoring of many more knowledge-intensive services has been contentious. The more immediate point concerns multinational firms, whose operations span continents. Their operations can be restructured more readily through advances in ICT (and in transport and other services), and this is facilitated by the liberalization of cross-border transactions through GATS and related initiatives. Those parts of the business processes that do not require such close physical location to other parts can be located where new strategies suggest is most profitable (taking into account factors like long-term security and business and political partnerships). Low wages are not the only driver, there may be scarce skills concentrated in some locations, and and in some types of business the ability to span several time zones may be advantageous. Organizations in all sectors are reconsidering how each stage of their production processes (and business functions) are performed, establishing and reconfiguring global value chains, with business activities located in, and intermediate inputs derived from, several countries (Nicita, Ognivtsev, and Shirotori 2013).

Knowledge Intensity

The concept of “knowledge-intensive services” can be seen as rooted in early discussions of the service economy and post-industrial society, where the eminent theorist Daniel Bell placed much emphasis on knowledge as an “axial principle” in the emerging economy, and one that was transforming the nature of work (Bell 1974). But it became prominent toward the turn of the century, having been pioneered by researchers such as Edvardsson (1990) and Edvardsson, Edvinsson, and Nystrom (1993) who discussed knowledge-intensive service firms, such as management consultancies, often in the context of their international expansion. As statisticians turned their attention increasingly to services, there was demand for some parallel to the classification of manufacturing industries into high- and low-tech sectors. This was partly to do with the desire to get more insight into those sectors that are more innovative, and those that are more likely to display higher levels of growth and to carry competitive advantage and benefit national economies. High-tech manufacturing could be defined (if problematically) in terms of R&D intensity, but services firms typically conduct much more limited R&D, organizing their innovative efforts in other ways (Miles 2007).

A knowledge-intensive activity is likely to be produced by workers who are capable of deploying considerable knowledge and understanding in the service work. This can be assessed (again, problematically) in terms of levels of educational attainment. Educational attainment data for international comparisons are available in terms of three categories, the highest being university graduate or equivalent. As an operational definition, Eurostat considers sectors to be knowledge-intensive if more than 33% of the total employment in the sector is tertiary educated (ISCED97, levels 5+6). On this basis, Eurostat has concluded that around half of Europe’s service economy can be regarded as knowledge-intensive. NACE rev. 1.1 sectors G (Hotels, Restaurants and Catering), H (Transport, Storage), K (Trade and Repair), and L (Public Administration and Defence, Compulsory Social Security) are generally seen as not, while I (Financial Intermediation), J (Real Estate, Renting, Business Activities), M (Education), and N (Health and Social Work) are considered knowledge-intensive.² Eurostat’s definition of knowledge-intensive services features four broad categories, as outlined in Table 8.3.

This approach defines a large number of services sectors as knowledge-intensive. Perhaps if around half of Europe’s service workforce belongs to such sectors, this just confirms that we live in a knowledge economy. The large number and wide range of these services means that a thorough analysis of internationalization of all knowledge-intensive services would need to be very extensive.

Some service sectors, however, do have much higher levels of graduates in the workforce than most others, in particular education, health, and KIBS. Setting a higher bar to determining which sectors (i.e., which broad sets of core service transformation) are knowledge-intensive would focus just on these. Sectors like telecommunications and financial services are important in the internationalization processes, and they undoubtedly require high levels of knowledge to function, and employ many highly educated staff. But they also typically have many staff performing more routine tasks (e.g., telephone line installation and repair, and bank teller services). Health and education services are also subject to much internationalization pressure, but they are often organized as collective public services, and this status led to these two types of service being the focus of much debate about limitations that should be placed on the GATS. Thus we focus particularly on KIBS in what follows.

What Are Knowledge-Intensive Business Services?

Business services are services that are sold to (or undertaken within) firms and other organizations in the formal economy to support their business processes. (The broader category of business-related services includes services that are also supplied on a large scale to consumers, but that are vital to business, e.g., telecommunications, finance, and transport).

In sectoral terms, NACE (rev. 1.1) section J covers Divisions 70 Real estate; 71 Renting equipment; and 72–74 Business services. Divisions 70 and 71 are not usually considered to be KIBS, not featuring such high shares of graduate employment. Thus many studies identify the industries that comprise Divisions 72–74 as KIBS.

Division 72 consists of computer-related services: 72.1 Hardware consultancy; 72.21 Publishing of software; 72.22 Other software consultancy and supply; 72.3 Data processing; 72.4 Database activities; 72.5 Maintenance and repair of office, accounting and computing machinery; and 72.6 Other computer related activities. These are new technology-related activities, usually in the business of supplying and applying specialized knowledge that supports information systems and related business processes, often to customers from many other economic sectors. The workforce has a high share of people with science and engineering training.

Division 73 covers Research and experimental development services (R&D), consisting of two groups: 73.1 R&D on natural sciences and engineering; and 73.2 R&D on social sciences and humanities. This is a relatively small division in terms of employment and value-added. It is distinguished because of its significance for innovation studies, though how far R&D should be segregated here from activities like design, testing, and even market research is arguable.

The largest set of services in Section J is Division 74, where KIBS include: 74.11 Legal activities; 74.12 Accounting, book-keeping and auditing activities, tax consultancy; 74.13 Market research and public opinion polling; 74.14 Business and management consultancy activities; 74.15 Management activities of holding companies; 74.2 Architectural and engineering activities and related technical consultancy; 74.3 Technical testing and analysis; and 74.4 Advertising.³

Numerous studies demonstrate that KIBS are: typically small businesses, though a few large firms operate on a worldwide basis in many sectors; they report high levels of technological and organizational innovation; they tend, of course, to have high shares of highly qualified workers, and some are thus seen as “professional services.” While many services are known to customize their products for individual customers and to engage in “co-production” with these customers, KIBS are particularly prone to do so (Martinez-Fernandez, Miles, and Weyman 2011). Most service branches offer mixtures of relatively standardized and more customized/specialized service products, and some KIBS are relatively standardized (i.e., scanning the business environment for many clients). But many KIBS require high levels of contact between service producers and clients, which naturally has implications for internationalization.

Issues Affecting the Internationalization of KIBS

The need for interaction often implies physical proximity, so it is not surprising that many KIBS follow mode 3 patterns, and “trade” through FDI or through setting up professional relationships with firms operating in the host countries. As well as physical proximity, this may also be driven by factors such as language, knowledge of local cultures, and access to local social networks.

Additionally, the internationalization of KIBS may be influenced by regulatory frameworks, less deriving from conventional protectionist trade barrier motivations, and more from public interest considerations connected with these services. A recent IBRD report (Molinuevo and Sáez 2014) has examined the trade difficulties encountered by a number of KIBS in considerable detail. This review indicates that different KIBS have to operate under very different regulatory as well as market frameworks.

Long-established professional services often operate under conditions that can pose challenges to internationalization; national systems of accreditation and self-regulation of professions have grown up more or less independently. Despite many recent efforts to achieve comparability, these may make it hard to practice across different national contexts. More recently, emerging KIBS, such as market research and ICT services, are often less heavily regulated; ICT services, with many transactions mediated through telecommunications, can be particularly hard to monitor and control.

The regulations covering many traditional professional services may determine who is entitled to provide the service (entry regulation: e.g., what qualifications should be held), and what norms they should follow (conduct regulation: e.g., rules about advertising and pricing). There is a public interest rationale for such regulations: there are liable to be market failures, for example, because it is hard for consumers to assess service quality and value for money. There may also be doubts about the effectiveness of self-regulation, and suspicions that service suppliers may seek to provide premium services even when customer requirements would be met by more basic services. Thus, consumers may need to be provided with reliable information, and/or market entry should be limited by application of professional standards (education and qualification requirements; clear specification of what tasks specific types of professional should undertake).

One example of professional services that Molinuevo and Sáez (2014) examine in some depth is accountancy; reliable accountancy services are essential to the performance and stability of financial markets. Such KIBS may be subject to qualitative requirements, such as restrictions on access to the profession (where professional associations may exert a monopoly over training institutions), and multiple certification requirements. A country may have laws governing banking and insurance industries that require that companies use approved auditors (generally affiliates of one of the major companies, making it hard for smaller suppliers to access the market). Some national differences may be attenuating, however, as International Standards on Auditing are being adopted. Another long-established professional KIBS sector is legal services, where Molinuevo and Sáez (2014) describe three models of regulation (varying mainly in terms of the extent to which exclusive rights are granted to legal professionals). They point to price regulations, restrictions on advertising and on business structures (some sorts of intra-professional partnership and multidisciplinary activity may be prohibited to ensure the independence of professional advice and to reduce conflicts of interest).

In contrast, ICT-related services (among which they include back-office services, ICT maintenance, and software development), generally feature relatively open regulatory regimes. One reason for this is that cross-border trade relies on telecommunications platforms, which are difficult for regulators to monitor and therefore regulate. The novelty of these services may also mean that there has been less time for long-term institutionalization processes to have diverged across countries. There may be issues connected with data protection and similar regulations. The most important barriers in this sector thus relate less to regulations, more to constraints that affect services and infrastructures that are essential inputs, such as telecommunications, financial services, and professional services. (These constraints may impact the demand side as well as the supply side: for example, limitations on cross-border provision of professional services affect ICT services related to that professional activity.)

Outsourcing and Offshoring of KIBS

The general processes of trade and investment liberalization and advances in ICT have significantly increased the scope for segmentation of organizations’ activities in all sectors, through modular production networks in manufacturing (Sturgeon 2002) and unbundling of services (Breznitz and Zysman 2013). These developments have enabled multinationals to widen the scope of coordination, so that it includes not only their own subsidiaries, but also their network of external suppliers (Rugman and D’Cruz 2003; Nolan et al. 2002). Greater reliance by headquarters on externalization includes the unbundling of service functions, allowing multiple points of entry for new types of organizations and for innovation. The growing significance of services in adding value to products (e.g., marketing, distribution, and after sales maintenance), and the emergence of new markets for business services, have contributed to this trend.

As a result of such dynamics, many internal functions of firms and other organizations have been unbundled; they can be produced within the firm at new locations, or secured from a domestic or foreign company. Outsourcing refers to the decision to buy services previously produced internally from another (domestic or offshore) company. Researchers have examined how organizations are shedding important business functions such as human resources, ICT, accounting and finance, and R&D (Howells 1990; Miozzo and Grimshaw 2005; Sako and Tierney 2005). These processes of subcontracting and outsourcing are sometimes accompanied by the consolidation and geographic expansion of global suppliers. In the case of services, some very large suppliers are emerging in ICT services, personnel or human resources, and engineering services. These are growing in a different way from contract manufacturers or autoparts producers, whose strategy is to capture higher value-added activities in the same industry as their clients. Instead, services outsourcing firms provide novel combinations of services and business functions and develop functional knowledge and market position in a different industry from their clients (Miozzo and Grimshaw 2011).

Offshoring refers to a domestic company obtaining services from a foreign-based company, be that an overseas subsidiary (captive or international in-sourcing), or an independent service provider, in which case we have outsourcing and offshoring combined (offshore outsourcing). Nicita et al. (2013) note that from a very low base, services offshoring has mushroomed in the present century, though precise data are lacking. Estimates for 2010 (Gereffi and Fernandez-Stark 2010) suggest that some US$250–300 billion is spent on offshore services, and that there is increasing offshoring of more sophisticated services (Figure 8.1).

Data processing (and data entry), basic software, and other ICT services were the first services to be outsourced and offshored to a significant degree. In the 1980s, some US firms sent credit card processing to, and established call centers in, the Caribbean, while PC manufacturers established software centers in Malaysia. A substantial software offshoring industry emerged in the 1990s. India, Singapore, Ireland, Israel, and Hungary were all early entrants in the offshoring business and benefited from first-mover advantages. One driver of offshoring was labor shortages in the United States during the 1990s, especially connected to solving the “Y2K problem” and the speculative development of new Internet products and services during the dot-com boom. Other countries, too, faced similar pressures and were sourcing software development overseas. The burst of the dot-com bubble at the beginning of the century came after momentum had been established; offshoring was now seen as the transfer of jobs abroad, rather than the supplementing of an insufficient US labor market. (Likewise, in Europe longstanding concerns about ICT skills shortages were voiced less often.) Firms in India and the other countries moved up the value chain through specialization, deepening their expertise and building relations with clients which would eventually demand progressively higher value-added tasks for them to do. There were often substantial wage differentials for programmers of equivalent capability in emergent economies like India as compared to industrially advanced countries such as the United States. In India the process began with body-shopping, mode 4 service provision, with trained programmers sent to work for a few months in the client firm’s premises in another country. Later, following visa problems (Heeks 1996), a blended strategy was pursued: some of the work was done on the client’s site and some at the vendor’s site in India. US firms pioneered the relocation of operations to countries such as India, activities such as call center operations as well as software. Some of the service suppliers from less developed countries moved up the value chain, adding ICT-enabled knowledge-processing to more basic functions. Firms like TCS, Infosys, and Wipro have become prominent service suppliers, competing in the provision of outsourced business functions with large multinational suppliers like Accenture and IBM (Dossani and Kenney 2007).

Although outsourcing and offshoring are not altogether new phenomena, the contemporary outsourcing and offshoring of KIBS involves a number of new features. Massini and Miozzo (2012) document the trend in the offshoring of administrative services, call centers, ICT services, procurement, and product development from the United States and Europe to less developed countries. They outline the differences between the present phase of outsourcing and offshoring of KIBS and previous phases of outsourcing and offshoring. Among the peculiarities is that firms outsourcing and offshoring KIBS today involve not only large multinationals, but also less internationalized companies and small and medium-sized firms. This is a big transformation. Also, the activities outsourced or offshored are not designed to serve the local market of the host country, but instead to serve those activities based in the home country or global operations of the organization. This demands a great effort of coordination of globally and inter-firm dispersed knowledge and activities.

Suppliers of business services develop in a different sector from the outsourcer/offshorer, and develop know-how in specific functions that can be applied to clients in a broad range of sectors, and do not face (monopolistic) competition from their clients (Sako and Tierney 2005). This involves the growth of both firms from less developed countries (such as the well-known cases of Infosys and Wipro in India cited above) and multinationals carrying out ICT-enabled business processes such as ICT services, administrative business processes such as accounting, marketing, and sales, and procurement and product development. The clusters that develop in offshoring locations are technology/function-based (e.g., ICT services in Bangalore and financial services in Mumbai), rather than industry-based, and lead to the emergence of hybrid organizations and complex networks. Offshoring of business services involves rapid relocation of existing domestic activities to countries including India and China starting in the 1990s and expanding to other Asian countries, Eastern Europe, and Latin and Central America in the 2000s, through hybrid forms of organization and complex networks.

The developments in the outsourcing and offshoring of KIBS raise important questions about the potential erosion of knowledge-based competitive advantage of developed countries. While some less developed countries show upgrading in a number of KIBS, these activities are still very “footloose” (Miozzo and Grimshaw 2008). Also, most of the more creative and knowledge-intensive activities, and most of the functions of technological integration and coordination of lead firms, still remain rooted in dynamic regions in developed economies.

Conclusions

The globalization of knowledge intensive services thus involves a wide variety of processes. Alongside the overseas expansion of service production and delivery, we see new international service activities and the emergence of new (knowledge-intensive) service suppliers. These processes interact with other dimensions of the globalization of innovation (Archibugi and Iammarino 2002); they require efforts of coordination and management of international flows of knowledge and affect regions in the world to different extents and in various ways (e.g., incorporating countries such as China and India into new divisions of knowledge-intensive labor).

Understanding these processes is made difficult because, as has long been recognized, data on services remain relatively underdeveloped compared to statistics on manufacturing and extractive industries; the peculiarities of services “trade” compound the problem. Trade and FDI are intricately entangled, and both theory and measurement are in need of elaboration to assess trends and explore dynamics. The problems are, if anything, growing as a result of liberalization and the ways in which new ICT enables services to be unbundled and relocated. Both organizational and geographical change is underway, as firms (and even some public service bodies) reconsider how and where each stage of their production process is performed. The development of new KIBS and (more generally) knowledge-intensive services are also prompted by new technologies, as well as by social change associated with economic growth and the associated shifts in markets. Interest in service internationalization is thus bound to grow, even if our abilities to monitor and assess the processes here lag behind.

Much of the literature that we have reviewed examines services’ internationalization through a “barriers” perspective, following the widespread presumption that trade is necessarily beneficial to all parties.⁴ Future research could do well to adopt a more nuanced view here. Service internationalization can give rise to “nostalgic” regret, affronted aesthetic sensibilities, or a sense of threatened community, as, for example, one high street after another around the world becomes dominated by the same set of global shop fronts. But there are also concerns about the international cloning of knowledge-intensive services. Global businesses are emerging in community service fields like education, health, and even security services, and here profit orientation may not always align with such services’ other social goals. Less evidently, there are concerns that some international KIBS (e.g., advertisers, consultancies, and ICT service firms) transpose solutions originally designed for one cultural context to very different contexts, with problematic consequences. It is often pointed out that service clients find it hard to assess the suppliers’ offerings in advance of purchase, which may render their purchase of international knowledge-intensive services more prone to be influenced by factors such as prestige than on alignment of the service offering with local circumstances. What are taken to be barriers to service trade may really reflect the fact that the service does not mean the same thing or take the same form in different cultural and economic contexts: caution should be exercised in treating knowledge-intensive services as if they were simply intangible goods.

This caution applies particularly when we are considering the globalization of science, technology, and innovation. Knowledge-intensive services, and particularly KIBS, are not just supplying component goods that can be put together to make finished products for global markets. They are often playing important roles in shaping and integrating knowledge, in linking together various actors and communities, in contributing to innovation systems of all kinds. There remains much to be known about how they contribute to globalization, as well as how they respond to this phenomenon.

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