The Rise of Services Exports: New Pathways for Growth

Economic

Summary:

The pursuit of export-led growth through manufacturing has become increasingly difficult in the face of growing global competition. A shift towards service export-led growth offers new opportunities, but it also demands investments in human capital, infrastructure, and institutional capacity.

The traditional 20th century path to development involved manufacturing-led growth and a shift from agriculture to manufacturing. Over the past decades, however, manufacturing's share of value added has declined across most emerging economies, particularly in Eastern Europe and Central Asia. This reflects both global competitive pressures and a trend of premature deindustrialisation (Nayyar et al. 2023). With China accounting for 35% of global manufacturing production in 2020 (up from 5% in 1995), newcomers face stiff competition in establishing manufacturing bases (Baldwin 2024a).

At the same time, the rise of digital technologies, improved infrastructure, and fewer policy barriers have made services more tradeable across borders, with the cost of services trade dropping by 9% between 2000 and 2017 (WTO 2019). Within services, digitally enabled, tradeable services – especially global innovator services such as information and communication technology (ICT) services, financial services, insurance services, professional services, and scientific and technical services – have a high growth potential (Baldwin, 2024b). In recent work (EBRD 2024), we document the shift to the service sector and discuss policies to support the shift towards high value-added services.

Is manufacturing export-led growth still possible?

While data suggest that growth is often still export-led, it is now more likely to be led by exports of services (Figure 1). Our analysis shows that, since 2008, EBRD economies in the EU have increasingly shifted toward services-led growth, and in a significant percentage of other EBRD economies growth has become less likely to be led by manufacturing exports. In other emerging market economies, growth is now almost as likely to be led by services exports as non-export-led.

This shift toward service-led growth has been enabled by digital technologies making services more storable, codifiable, and transferable, reducing the need for the producer and the consumer to be in close proximity at the time of delivery, as well as improving their linkages to other sectors. Global innovator services, in particular, can be traded internationally through remote cross border delivery, they mostly employ skilled workers, and they have strong links to other domestic sectors. While they typically do not yet account for most value added in the service sector in emerging Europe, several economies have positioned themselves as major exporters of computer and information services. Estonia, Ukraine, Serbia, Armenia, North Macedonia, and Moldova were among the world's top ten exporters of computer services relative to GDP in 2022, alongside established tech hubs like Israel and India. These countries have leveraged their strong technical education systems – a legacy of their communist past – to develop competitive advantages in IT services.

The Rise of Services Exports: New Pathways for Growth_1

Strong governance and high human capital are required for service export-led growth

Not all countries are equally well-positioned to pursue service-led growth. Economies with stronger governance, more educated workforces, and more liberalised service sectors are better able to succeed in high-value service exports (Figure 2). While many EU member states have both the human capital and institutional capabilities required, other economies face varying challenges. Countries like Jordan, Kazakhstan, Moldova, Serbia, and Ukraine could benefit from improving their regulatory environments, while Egypt, Morocco, Tunisia, and Türkiye confront a dual challenge: they must enhance both their skills base and institutional frameworks to fully leverage services export opportunities.

The Rise of Services Exports: New Pathways for Growth_2

Services are increasingly vital within manufacturing itself

In advanced European economies, service-related occupations accounted for 55% of all manufacturing-sector occupations in 2019, up from about 45% in 2000. This ‘servicification’ of manufacturing reflects the growing importance of pre- and post-production activities such as R&D, design, marketing, and after-sales services. Hungary, where participation in global value chains (GVCs) accounts for 62% of gross exports, provides an insightful case study (Bisztray et al. 2024).

Between 2008 and 2019, the share of goods exports accompanied by services from the same firm grew by 20 percentage points. This growth was driven primarily by foreign-owned manufacturers, with two-way traders in goods and services accounting for 17.5% of foreign-owned firms versus just 0.7% of domestic firms by 2019 (Figure 3). These firms often bundle manufactured products with complementary services such as engineering or maintenance, potentially moving up the value-added ladder. The data also show significant clustering of service-exporting firms in urban areas with strong skill bases, particularly Budapest, which hosts numerous R&D centres and shared service facilities for multinationals like Deutsche Telekom, IBM, and Thyssenkrupp.

The Rise of Services Exports: New Pathways for Growth_3

How can we foster a shift to productive services?

The policy-light approach that worked for the shift from agriculture to manufacturing – no significant investment in workers’ skills or wide-ranging improvements to governance and regulatory frameworks – would not work as well now. Automation has reduced the benefits of having plenty of cheap unskilled labour, while innovation in manufacturing is increasing demand for specific skills (Rodrik and Sandhu 2024). Moreover, global innovator services such as ICT services and business process outsourcing require skilled labour, investment in physical capital, technology and innovation, as well as strong infrastructure, robust economic institutions and a conducive business environment (Atolia et al. 2020).

The liberalisation of trade in services may allow economies to target some low-hanging fruit in terms of facilitating a structural shift towards services with higher value added. Our analysis shows that while market access is important for service exports, liberalising your own service market has a greater impact than trade barrier reductions in destination countries. Gravity estimates suggest that reducing domestic restrictions on services trade could boost service exports by approximately 9%. For digital services specifically, the impact could be even larger, with relaxation of digital trade restrictions associated with increases in service exports of up to 20%. Adopting clear and transparent regulatory frameworks, such as GDPR-equivalent data protection legislation, can also facilitate cross-border trade in services by aligning standards and reducing compliance costs for firms operating internationally.

Other targeted industrial policies, such as investment promotion, can support the shift towards high-value-added services, but their effectiveness depends critically on state capacity. In 2023, the EBRD conducted an online survey of investment promotion agencies (IPAs), gathering data on the sectors targeted, the strategies employed and the timing of the relevant initiatives. The information collected was combined with data from the FT fDi Markets database – a project-level dataset on FDI projects – to assess the effectiveness of sector-targeting policies.

The results show that on average, sector targeting policies have significant positive effects: Ten years after implementation, targeted sectors see 2.8 times as many FDI projects as non-targeted sectors. However, Figure 4 shows that the positive effects are driven entirely by service-related projects (such as R&D centres, business services, and ICT infrastructure) in countries with relatively higher levels of state capacity, with the latter measured through indicators of government effectiveness, regulatory quality and rule of law (O’Reilly and Murphy 2022). Countries with weaker state capacity see no significant differences between targeted and non-targeted sectors, and there is no significant impact on manufacturing-oriented investments regardless of state capacity.

The Rise of Services Exports: New Pathways for Growth_4

Conclusions

For policymakers looking to promote structural transformation toward high-productivity services, three main lessons emerge. First, fundamentals matter – investment in education, digital infrastructure, and governance are essential prerequisites.

Second, lowering restrictions on trade in services can boost service exports, particularly for digitally enabled services. However, this doesn't mean eliminating all regulation – clear frameworks like GDPR-equivalent legislation can facilitate trade by establishing transparent rules.

Third, while targeted industrial policies like investment promotion can work, their effectiveness depends heavily on state capacity and pre-existing capabilities. Countries should therefore sequence reforms carefully, building fundamental capabilities before pursuing more activist policies.

The transition to service-led growth presents both opportunities and challenges for emerging economies. While the traditional manufacturing-led development path may be narrowing, new digital technologies and the growing tradability of services are creating alternative routes to high-productivity employment and economic growth. Success will require careful policy choices and sustained investments in human capital and institutions over the medium term.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Risk Disclosure

The risk of loss in trading financial instruments such as stocks, FX, commodities, futures, bonds, ETFs and crypto can be substantial. You may sustain a total loss of the funds that you deposit with your broker. Therefore, you should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.

No decision to invest should be made without thoroughly conducting due diligence by yourself or consulting with your financial advisors. Our web content might not suit you since we don't know your financial conditions and investment needs. Our financial information might have latency or contain inaccuracy, so you should be fully responsible for any of your trading and investment decisions. The company will not be responsible for your capital loss.

Without getting permission from the website, you are not allowed to copy the website's graphics, texts, or trademarks. Intellectual property rights in the content or data incorporated into this website belong to its providers and exchange merchants.

Recent Searches

Top Searches

Markets

Analysis

User

24/7

Economic Calendar

Education

Data