The competitiveness of business-related services

Outline of the Community (European Union) legislation about The competitiveness of business-related services

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Single market for services

The competitiveness of business-related services

Document or Iniciative

Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions – The competitiveness of business-related services and their contribution to the performance of European enterprise [COM(2003) 747 final – Not published in the Official Journal].

Summary

This Communication, which contains an economic analysis of the role of services in the European economy and examines their competitiveness, seeks to reflect their importance in the overall EU economy and to signal the Commission’s commitment to improving the framework conditions within which business-related services operate.

Business-related services

Business services cover knowledge-intensive business services, such as information technology (IT) consulting, management consulting, advertising and professional training services, as well as operational services consisting of services such as industrial cleaning, security services and secretarial services. The business services sector is not just the largest creator of employment, it also adds more value to the economy than any other macro-economic sector. It has the highest growth potential, more new enterprises are created than in any other sector, and business-related services provide the foundation for the knowledge-based economy.

Growth of business-related services is usually explained by the migration of employment from the manufacturing industry to services due to the outsourcing of the services functions previously produced in-house. But the reasons for the growth are much more complex. Changes in production systems, more flexibility, stronger competition on international markets, the increasing role of ICT and knowledge and the emergence of new types of services are other important factors. Business services have a key role to play in fulfilling the objective set at the Lisbon European Council in March 2000 of making Europe the most competitive and dynamic knowledge-based economy in the world by 2010.

The business-related services sector in Europe does, however, lag well behind the growth in productivity recorded in the United States. This will, in future, threaten the prospects for employment in Europe. There is a genuine danger that services jobs may be transferred to the US and Asia unless the political authorities respond quickly to the challenges facing business-related services in the EU. The main challenges in a knowledge-based economy relate to the ability to remain competitive, and that depends to a great extent on the capacity to invest in IT and R&D. Unfortunately, in this respect the EU is trailing far behind the United States: overall IT expenditures in the EU amounted to 4.2 % of GDP in 2001 compared to 5.3% in the US, whilst EU average R&D expenditures were 13 % – with large differences across Member States – against the US figure of 34 %.

As a result of this situation, and despite the significant share (26 %) of international trade (imports and exports) in business-related services held by European services compared to US services (18 %), in absolute terms the overall net US balance is double the EU one (35 billion versus 17 billion) and is clearly better in terms of the imports/exports cover rates: 124% of surplus versus 108%. This is explained by the fact that the EU is a major importer of business-related services, implying only a small net surplus. The positive net balance is created by relatively large surpluses for financial and insurance services, transportation and IT services, whereas some knowledge-intensive business services (legal, accounting and management services, advertising and market research) and royalties show a large deficit.

Challenges and political priorities

In order to be competitive on the international market, European companies need to be able to rely on framework conditions which are designed to rise to the challenges presented in a global market. This communication first of all identifies the main challenges facing business-related services in the EU in the form of the following five elements:

• Market integration and competition in business-related services markets is not vigorous enough to ensure and strengthen their competitiveness;
• The inputs necessary for the production (labour qualifications, integration of ICT and capital) are lacking in quality and quantity;
• The outputs from business-related services enterprises are not sufficiently transparent (standards), valued (reporting on intangible assets) or documented (quality);
• The provision and use of business-related services is limited in less developed regions, which mainly affects SMEs and convergence processes;
• Knowledge about the sector and the markets is scarce, hampering the decision-making ability of enterprises and policymakers.

This communication lists a number of actions which can be taken to tackle each of these five challenges. In response to a business-related services market which is not vigorous enough in terms of market integration and competition, for example, it proposes the:

• Elimination of obstacles to trade in services in the Internal Market and international trade. The abolition of legal and administrative obstacles to cross-border trade and investment in the EU has been stepped up following the Directive on Services in the Internal Market and the possible extension of the Notification Directive (98/34), together with the liberalisation of international trade in business-related services (see the ‘Services’ Directive). The reduction, or indeed elimination, of economic, social, cultural, etc. barriers hampering the full integration of service markets within Europe may be achieved through the promotion of complementary measures such as the reinforcement of entrepreneurship, networks, skills, common quality standards or innovation;
• Boosting of competition in the business-related services markets. The competitiveness of business-related services can only be obtained through competitive markets. The introduction of competition in some service sectors like telecommunications and air transport has increased the number of enterprises operating under market conditions, reducing prices, improving quality and boosting employment and the range of services offered;
• Modernisation of public administrations. The competitiveness of many business-related services is closely linked to the performance of public administrations. However, a wide range of services, traditionally provided by public authorities, can also be delivered by businesses. In particular, the development of e-government and the good management of services of general economic interest with enhanced private financing can result in better co-operation between public and private operators in the interest of users and providers of these services. Public Private Partnerships (PPPs) should thus be encouraged, leading to gains in efficiency and also lower costs to the user as a result of competitive pressure.

With regard to the lack of quality and quantity in the inputs necessary for production (labour qualifications, integration of ICT and capital), this communication proposes efforts to:

• Ensure continuous learning and updating of skills. The shift towards a knowledge-based economy depends on a labour force with skills adapted to this change, ensuring its employability and thus leading to a better balance between employment protection and flexibility of work organisation (e.g., part-time, teleworking). Furthermore, it facilitates the mobility of workers, helping to overcome skills imbalances, in particular in sectors such as computer and other knowledge-intensive services. Policy measures related to the qualifications of the labour force in the EU must be implemented in order to avoid a delocalisation of services professions, similar to what has been experienced within manufacturing;
• Support the integration of ICT into business processes. All enterprises in the field of business-related services, especially SMEs, must fully exploit the potential of ICT to increase their competitiveness. This has already happened in the US, where productivity growth acceleration occurred in sectors using as well as producing ICT. However, ICT-using services in Europe have shown weak productivity growth in the last years. ICT should be more and better integrated into business-related services using ICT;
• Encourage R&D and innovation in business-related services. Some of Europe’s most innovative companies are to be found in the services sector, but the overall level of R&D in this sector is generally low and lags substantially behind the US. Policy innovation initiatives should promote both specific actions oriented towards services activities (e.g. the role of organisational service innovation), and the more active participation of services companies in R&D programmes. The involvement of services companies in the national and European R&D programmes should be improved to address their specific problems and needs. The EU target of devoting 3 % of GDP to research and development will be less difficult to achieve if the business-related services sector plays a larger role, reflecting its overall economic weight.

This communication also notes that the results from business-related services enterprises are not sufficiently transparent (standards), valued (reporting on intangible assets) or documented (quality). It does, however, propose the following actions:

• The introduction of such voluntary standards. These voluntary standards permit the user to compare products and prices, thus enforcing competition and efficiency in the market. Standards benefit the services providers by enabling them to focus on the internal process of services production and obtain some economies of scale. They are also able to increase the market presence and negotiating position of services providers by compliance with standards. The Commission will promote the setting up of such voluntary standards led by the services providers, in the same way as for manufactured products;
• The introduction of a single method of reporting intangible assets. Productivity improvement in business-related services depends heavily on investment in intangibles, such as training, customer relationship management, brand image, internal organisation, investment in software and ICT. Businesses have now gained considerable experience in the use of various voluntary guidelines for reporting on intellectual capital and other forms of intangible assets. The Commission will bear these efforts in mind while identifying a single method of reporting intangible assets;
• The drawing up of quality indicators. A knowledge-based society cannot be competitive without high quality services. In addition, European services should be ready to compete internationally in quality since low-wages countries (e.g. those in Asia) are often in a better position to compete in costs. The Commission, however, encourages and supports the drawing up of quality indicators and promotes best services practices.

Faced with the limited provision and use of business-related services in less developed regions, this communication stresses the need for such services to feature more often in regional development policy. The development of regional markets for business-related services is a necessary element in the catching-up process for the less favoured European regions. These services can also contribute to the creation of a more competitive regional environment and thus attract inward investment.

Finally, with a view to facilitating decision-making by enterprises and policy-makers, this communication proposes improving the level of economic information and analysis, in particular through improved services statistics. Improvement of the knowledge and statistical coverage of business-related services is an essential instrument for giving guidance to decision-making by business operators, policymakers and other stakeholders, and for monitoring progress in the implementation of the policy action areas described in this Communication.

Establishment of a coherent policy framework

The challenges identified in the analysis must be dealt with urgently. If not, the European business-related services sector is at the risk of losing markets. At the start of 2004, the Commission set up a European forum on business-related services which will be composed of the Community institutions, Member State representatives, professional organisations, workers representations, research institutions and other enterprise-related stakeholders.