Introduction

In general, increasing per capita income is associated with an increasing share of services in the Gross Domestic Product (GDP) of a country. Developed countries are therefore generally characterized with a relatively higher share of services in their GDP and total employment, compared with developing countries. There is, however, considerable debate on the contribution of services to growth in terms of both theory and empirical evidence. While part of the controversy is due to the ongoing debate on the growth of services and its impact on labour productivity (Maroto-Sanchez and Cuadrado- Roura 2011), part of the controversy is also due to the rapidly changing nature of services.

Traditionally, services are viewed as non-storable and non-tradable due to its proximity burden where they are used as mere inputs in the production of goods and for personal consumption within the confines of the domestic economy. These services are therefore associated with relatively low-skilled jobs and low productivity. In contrast, the twin revolutions in information and communication technology and what is commonly referred to as the 3Ts — technology, transportability, and tradability (Mishra et al. 2011), has transformed the nature of services in several significant ways such as increasing its storability, reducing its proximity burden and increasing its tradability across borders, including digital trading.

Services are therefore no longer used as a mere input for the production and trade in goods alone. Instead, services are exported as “final exports” for direct consumption as well. More importantly, services as in the case of goods, are also becoming fragmented in its production as a single service activity is increasingly unbundled and produced separately in different geographic locations.

Empirically, United Nations Conference on Trade and Development (UNCTAD 2004, p. 20) found services exports to be a significant factor in the growth performances of developed countries in the 1990s. But the services exports and GDP growth nexus is weaker in developing countries. There is also increasing evidence that some service activities have contributed to an increase in labour productivity which is comparable to, or even higher than those corresponding to manufacturing, in a sample of 16 European countries (Maroto-Sanchez and Cuadrado-Roura 2011).

In the case of Malaysia, there is increasing emphasis on the service sector as a new engine of growth as growth in the manufacturing sector has faltered since the Asian Financial Crisis (AFC). This is seen in the recent Plan documents of the country.