Activity

Service trade involves the provision of a service such as financial, engineering, administrative, and legal support to a company. The services sectors are global and they involve the export/import of persons or objects, purchase of removals or re-arrangements, transportation of material and supplies and development of plans for service improvement projects. finance has many associated opportunities with globalization. In developing countries, where infrastructure is developing and capital is becoming expensive, outsourcing offers an opportunity to service the cost savings in that country. Services in developing countries often include electrical and computer services, house cleaning and sanitation, medical diagnostic services, financial and legal advisory services, and legal transcription.

Developing countries have access to a large number of service firms from around the world, and they also have access to large capital inflows, mainly from developed countries. There are many reasons why developing countries should develop their own service industries. The developing countries would be able to capture the service market, expand the infrastructure, improve the quality of life, reduce corruption and tackle unemployment effectively. They can build up their infrastructures faster, reduce their dependence on imported goods, increase the level of exports and improve the productivity.

Service firms are normally small firms with a few employees, and they normally export their products quickly. In order to maximize the firm’s productivity potential and to lower its overheads, service firms should import the items they want to export. Importers usually purchase these products directly from exporters and then they pass on the export facility and any associated benefits to the firm.

Service firms can increase their service trade by establishing a proper relationship with their exporters. A good relationship between the firm and its exporter reduces the cost of exporting goods and it increases the firm’s productivity potential. Service firms can increase their productivity potential by: Implementing a standardized payment system; improving the quality of purchasing procedures; outsourcing some processes such as quality assessment and pre-delivery notification; improving quality control measures; purchasing raw materials, components and equipment from their exporters; streamlining the process of payment; buying machinery or tools that can be re-used by their exporters; co-operating with their exporters in common export duties and taxes.

The growth of the services sector is highly dependent on the world trade scenario. If the global trade scenario remains as it is, then world trade will witness growth in the services sector, though at a slower pace than the past. According to forecasts, the world trade will continue at about 3% annual growth until the end of 2021. The productivity of the service sector is higher than that of any other sector of the economy. So finance have a key role to play in boosting the competitiveness of the economy of any nation.

The growth of services trade depends largely on the amount of capital available in the country and the rate at which that capital is invested in the nation. Thus, one of the biggest factors determining the growth of services trade is the inflow of foreign investment. According to a recent study by the World Trade Organization (WTO), there has been a steady inflow of foreign direct investment (FDI) in the services sector of the Indian economy over the past fifteen years. The report also points out that more than nine out of ten FDI flows originates from Asian countries like China, India, Malaysia, Singapore and South Korea.

However, finance have shown that the productivity of service trade depends mainly on the extent of specialization of the service firms and the extent of mismatch between the service firms and the customers. This means that although outsourcing helps reduce costs for the firms involved in doing business, it does not necessarily help to boost their productivity. Moreover, empirical studies have also shown that the magnitude of mismatches between the service sector and the direct suppliers or the customers remains high even after controlling for various factors.

There are various theories that explain the productivity mismatch. The theory of firmheterarchy suggests that firms with diversified internal structure and efficient pricing will enjoy a superior competitive advantage over other firms. Firmheterarchy also suggests that the elasticity of the production curve, i.e. the extent to which domestic prices fall or rise when demand falls or rise, is a fundamental determinant of the level of international trade. Another important factor, besides firmheterarchy and elasticity of production, is the degree of mismatch between the suppliers of inputs and the firms manufacturing output.