Jane Drake-Brockman Services Programme Cebu, 28 August, 2015

Competitiveness challenges facing internationalising services SMEs in regulated

sectors (Professional Services)

APEC Dialogue with OECD

4 aspects to services competitiveness

1  Enabling business environment for services competitiveness at the national level

2   Innovating & upgrading at firm level 3  Building and nurturing clusters of services

excellence at sub-sectoral industry level 4  whole-of-services development (and export)

strategies

After a brief introduction of all 4 aspects and how they are linked, this presentation focuses on SME level competitiveness in the

professions (both individuals and firms)

1. Enabling factors for services competitiveness (largely exogenous ie policy driven)

1.Human Capital (access to talent, education, skills, ideas, customer focus) For services firms, human capital costs can be 70-80 % of total costs- everything to do with recruiting, training and deploying people is critical

2.Investment in Intangible Assets (corporate IP including business methodologies) & supportive environment for collaborative services Innovation

3.(Two way) Access to Digital and other knowledge-economy Infrastructure 4.Quality of Institutions (complexity, rigidity, independence) & Efficiency of

Domestic Regulation (reduce compliance costs & allow firms flexibility to adapt to change)

5.Global and Regional Connectivity with the market (trade & investment reform, ability to move people, ideas and data, standards, technical inter-operability, mutual recognition, seamlessness of regulation, export promotion)

6.Deliberate Policy Focus (statistics, inter-agency coordination, national services strategies and industry competitiveness roadmaps)

7.Organised Services Business Advocacy and Public-Private Stakeholder Consultation

•  None of these drivers of competitiveness are exogenous •  Governments can influence all of them

•  The problem remains that there is relatively little literature and few public policy tools available on •  how to grow a services industry, or a hub of services excellence. •  how to train, attract and retain services skill sets. •  how to facilitate services innovation, collaboration and customer

orientation. •  Advice is rarely forthcoming on eg

•  which regulatory settings might be considered efficient, best practice including in ensuring interoperability across the value chain

•  Which is why technical assistance and capacity building for trade in services is needed

Regulated services sectors

•  For good reasons) Governments intervene more heavily in the services sector than any other sector

•  (Because of the nature & characteristics of services trade, operating resident-to resident via the 4 modes of supply) the trade liberalisation & trade facilitation agenda is very largely behind-the-border (in domestic regulatory regimes) even more than it is at-the-border or across-the-border

•  (Because trade restrictions behind-the-border tend to be cost-escalating including for domestic firms), they can impact negatively on competitiveness of local firms

•  And reform of behind-the-border barriers, especially any inefficient red tape, can deliver whole-of-economy productivity and competitiveness gains

Even though services sectors are different, the types of market failure and reasons for regulation are similar

Market failures Services sectors Governance response based on GATS

Natural Monopoly/ Oligopoly

Universal access

Network services: telecommunications; transport (terminals and infrastructure), energy services (distribution networks)

“Public” Services Education, Health, Water, Postal

Transparency Non-discrimination No quantitative restrictions WTO Rules on Monopolies and Exclusive Service Suppliers, WTO Annex on Telecom, WTO Reference paper and notional rules on anti-competitive business practices

Right to regulate

Assymetry of Information Intangibility and simultaneity of prod/cons

Intermediation and knowledge based services: financial and professional services.

Transparency Non-discrimination No quantitative restrictions WTO draft accountancy disciplines including a "necessity" test

Externalities Transport, tourism, etc.

Regulatory discretion can dilute the implementation of these disciplines •  The trouble is that the obligations of the GATS apply to like

services and like services providers, but have limited force when likeness is in the eye of the regulator, which is certainly the case for professional services

•  The market access obligation in the GATS prohibits de jure quotas, but not de facto quotas which can simply be applied by varying the regulatory stringency (eg affecting the number of professional licenses)

•  Quantitative restrictions are all but extinct in goods, but are pervasive in regulated services sectors

•  - these restrictions impose costs on firms, esp small firms

Source; Aaditya Mattoo, World Bank, 2014

Services sector is SME intensive

•  As the OECD presentation has explained, the bulk of the services sector everywhere, is chiefly made up of SMEs.

•  Increasingly it is SMEs in the services sector which are most engaged in global and regional value chains and business-to-business B2B activities.

•  Globally since 1997, more services SMEs have been involved in international alliances than manufacturing SMEs.

•  OECD data shows that in 2000, there were nearly 4 times as many services SMEs engaged in international alliances than manufacturing SMEs.

•  Firm size and production scale tend to matter less in services markets than “nimbleness” and project by project flexibility, presenting particular opportunities to smaller firms

•  But as the OECD presentation has pointed out, smaller firms also face big challenges, which technical assistance can alleviate

2. Firm level Competitiveness

Firm level upgrading Economic upgrading can be achieved by;

•  improving the efficiency of the “production” processes (process upgrading); •  adding new services offerings that are of higher value-added because more

tailor-made to the specificity of the clients needs (“product” upgrading); •  increasing value addition by moving up the value chain and taking on new

functions which are of higher skills and knowledge intensity (functional upgrading);

•  switching to a different sector for which final “products” are more technologically sophisticated/knowledge-intensive and hence of higher value-added (inter-sectoral upgrading).

anecdotal evidence suggests that firm level upgrading tends to be driven fundamentally by national level competitiveness policy changes and investments in physical and human capital.

SMEs need to cluster in coalitions for concerted advocacy to boost both their own & overall services competitiveness

•  Skills – What intervention would you need to increase the availability and expertise of your services skills to ensure you are positioned to take advantage of regional and global business opportunities.

•  Costs - Are you experiencing undue regulatory compliance costs, human resource costs, broadband internet costs?

•  Value-Chain analysis – is there potential for upgrading: where are the blockages?

•  R&D/Innovation – What could be done to boost the ability of the local services sector to increasingly improve productivity through innovation? Do you need a higher level of collaboration between the private sector, academia and governments?

•  Policy and Regulatory Focus and Attention; Do you need to achieve a higher level of support from the policy and regulatory institutions to help improve your access to global or regional opportunities?

•  Promoting and facilitating local services capability globally and regionally – is there anything you - or other agencies/institutions can do to improve your “branding” either domestically or internationally? Is trade finance readily available and if not, what needs to be done?

3 Building services centres of excellence (sectoral intervention versus economy-wide)

•  Development of human capital, training •  Inward direct investment including in Special Economic Zones •  Regulatory reforms; one stop shops •  Connectedness with the international market (openness to

imports) •  Connectivity of standards •  Trade finance •  Export promotion •  Provision of digital infrastructure •  Facilitating collaboration for innovation •  Mechanisms for services stakeholder consultation, especially

SMEs •  Inter-agency government coordination

Professional Services •  What are they? Why do they matter? •  Are they traded? How are they traded?

•  Modes 1,2, 3,4 and what about “thinking in a box”

•  Why & How are they regulated? •  At the level of qualifications training and

certification •  How are standards assured and maintained

•  At the level of operations •  What untapped international business

opportunities exist? •  What constrains SME competitiveness?

Professional services are knowledge-intensive

15

ICT SERVICES

PROFESSIONAL SERVICES

CULTURAL AND CREATIVE SERVICES

AUDIO-VISUAL SERVICES

DESIGN SERVICES

EDUCATION AND R&D SERVICES

Knowledge-intensive business services are the fastest growing component of world trade.

What does competitiveness mean in professional services sectors?

Competitiveness is a relative concept.

•  In the domestic market context, it tends to mean are there enough of you, relative to demand? Are you in short supply? Are you being too exclusive? Are you open enough to new entrants? Have we got the balance right between ensuring high professional standards and meeting market demand? Do you need additional professional categories, or fewer?

•  Internationally, it means can you attract foreign clients and at what level of value-add? Do you offer professional value for money? For what categories of work? Are you trapped at the low value added end?

5 Key Professional Services Competitiveness Criteria

see box 1

•  Labour market conditions/trends in numbers of graduates/skills shortages

•  Core competency standards •  Quality assurance •  Salary/Fee expectations •  Language skills and personal attributes

Some Indicators of competitiveness

•  Relative numbers of universities offering professional degrees

•  Quality of Curricula

•  Relative numbers of graduates

•  Relative graduate competency levels

•  Numbers passing the licensure process

•  Relative extent and quality of local R&D

•  Relative numbers and standard of active qualified professionals

•  Objective professional outcomes indicators

•  Objective indicators of labour market conditions •  Relative professional salary expectations

•  Trends in Offshore Employment or other trade data

•  Others

Typical factors affecting competitiveness, emerging from perceptions surveys

•  Relative efficiencies/inefficiencies in the legal, regulatory or institutional framework for the professions

•  Relative extent/absence of data and research capacity at the regulatory level

•  Relative level of government support for tertiary education •  Relative level of government support for career advisory programmes •  Extent of international benchmarking of professional curricula •  Extent of international benchmarking of professional standards •  Extent of performance-based professional assessment/accreditation •  Relative effectiveness of mechanisms for provision of continuing

professional education •  Relative effectiveness of manpower planning/workforce quota systems

imposed on tertiary education institutions •  Relative level of government support for R&D (including Centres of

Excellence) •  Relative degree of traditional closedness to foreign professionals •  Relative degree of interaction with foreign professional bodies •  Absence of branding and export promotion

Examples

Barriers to trade in accountancy

Source: European Services Forum

Costs and benefits of reforming economy X’s accountancy regime

Legal  Services   •  Survey  work  undertaken  by  Australia’s  Interna:onal  Legal  Services  Advisory  

Council  (ILSAC)  with  Austrade,  Law  Council  and  8  leading  law  firms  •  Two  surveys  were  undertaken,  in  2004-­‐05  and  2006-­‐07  aimed  at  measuring  

legal  services  exports  in  all  the  modes  •  A  lot  of  interes:ng  findings  (including  total  “export  income”              was  142  %  higher  than  the  official  figure  and  that  mode  3  was  growing  

extremely  rapidly  especially  in  Asia,  that  interna:onal  business  was  highly  concentrated  –  10  firms  accounted  for  80%,    etc  etc)  

•  But  what  I  want  to  focus  on  is  the  fact  that  the  study  showed  that  once  established  offshore  (even  if  the  original  mo:ve  was  to  be  where  their  Australian  clients  needed  them  to  be  as  they  also  moved  offshore),  these  legal  firms  also  started  doing  business  elsewhere  in  the  region  from  their  new  offshore  base.      

•  This  business  of  course  is  measured  as  export  business  not  for  Australia  but  for  their  host  economy.    

•  In  other  words,  the  host  economies  have  a8racted  and  built  a  cluster  of          talent  that  is  a8rac9ng  interna9onal  work.      

                 The  host  economies  are  services  hubs.  

APEC Architect •  The APEC Architect Agreement has been in effect since 2004, and includes

Australia, Canada, China, Hong Kong,China, Japan, Korea, Malaysia, Mexico, New Zealand, Philippines, Singapore, Chinese Taipei, Thailand, US The only mutual agreements under the APEC Agreement are:

· Australia- Japan (2005): 3 Japanese APEC architects registered in Australia. No Australian APEC Architects registered in Japan. · New Zealand- Japan (2008) No APEC registrations in place · Arrangement between Australia, New Zealand, Singapore 2010: 3 Singapore APEC architects registered in Australia, no Australian or New Zealand architects registered in Singapore. · Arrangement between Australia, New Zealand, Canada 2015. 1 Australian APEC architect registered in Canada. No other registrations . · Notwithstanding the low number of APEC registrations there are significant number of firms working in APEC countries in the Asian region

· APEC is for individual registration not businesses

really, is this good enough?