A fresh look at our services economy highlights its important role in our export performance

New research has found many key Australian merchandise exports incorporate increasing levels of 'embodied services'. Part of the value of a service or good is created by the services used to produce it and, when a good or a service is exported, so too are the 'embodied' services.

The research also found that sales of services by foreign affiliates of Australian-based companies provide a major contribution to the Australian economy. While contemporary data on these sales is incomplete and is not reported on in regular statistical reports, the research estimates these sales are over $A100 billion per year.

What are embodied services?

Services are essential to agriculture, mining and manufacturing. Businesses need energy, a water supply, and transportation to market. Few can survive without modern communications, banking, or insurance. Most will consult a lawyer and an accountant when making a contract or obtaining capital.

All of these services are 'embodied' in the final output of the business, contributing part of its value. The 'carrier' exports for these embodied services – that is, exports that use service inputs in production – are concentrated in mining and manufacturing.

The diagram below illustrates the embodiment of services into coal exports. The coal exporting business uses its own internal resources (the primary inputs of labour, capital and land) to extract coal from its mining site. In order to do this, however, the business requires additional services – energy to power its machinery, accounting and other business services to manage its labour and capital, and transportation services to take the coal from mine to port. To extract $A100 worth of coal, official statistics indicate that an average mining company spends $A24.40 on services. These external inputs – or 'embodied services' – account for almost a quarter of the final value of the coal produced.

Embodied services are a growing component of Australian exports. As trends continue towards greater outsourcing by business, the adoption of 'lean production' techniques in manufacturing, and increasing reliance on smart technology within products and in the manufacturing process, so too does the growth of embodied services exports.

International Service Delivery: the role of foreign affiliates

Looking at case studies of service providers across a range of sectors, the research found that Australian firms are primarily delivering services into foreign markets through overseas subsidiaries and joint ventures – foreign affi liates – instead of directly from an Australian-based head offi ce.

For these companies, foreign acquisition is the key driver of overseas sales growth – and that growth is significant. The report estimates foreign affiliate sales are over $A100 billion annually, with projections suggesting they will rise to around $A135 billion by 2014-15.

The economic importance of services is growing

In Australia, services account for around three-quarters of the country's gross domestic product and four out of fi ve jobs. The economic importance of services is expected to continue to increase as the Australian economy grows.

Services make an important contribution to Australia's export performance but the extent of their contribution is hard to establish with precision. In comparison with merchandise, which can be traded internationally by physically crossing an international border, the non-material nature of services means they can be traded internationally in a wide variety of ways.

Merchandise goods with embodied services

Virtually all of Australia's merchandise exports make a contribution to the exportation of embodied services. Some exports with significant levels of embodied services are pictured below:

• Coal
• Iron ore
• Oil
• Grains
• Sugar
• Seafood
• Medical and pharmaceutical products
• Wine, dairy and fruits
• Meat products
• Sheep
• Chemicals
• Cattle

About this research

For this report, ITS Global looked at new ways of measuring the value of services exports. It aims to help inform debate about the importance of the service sectors and trade policy settings.

The full report is available free of charge online at: www.dfat.gov.au/trade

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Services: Vital to exports [PDF 1.07 MB]