In the last two decades, the services sector has gained increasing importance in terms of its contribution to a country's Gross Domestic Product (GDP) and employment. Its share in total GDP for the Organisation for Economic Co-operation and Development (OECD) countries has grown from 70 per cent in mid-1990s to 75 per cent more recently, while its share for the countries in East Asia and Pacific has moved up from 37 per cent to 48 per cent over the same period. It further accounts for about 70 and 47 per cent respectively of total employment in the OECD countries and East Asia and Pacific region respectively (World Bank 2016).
The increasing importance of the services sector is driven by production fragmentation or outsourcing activities. While production fragmentation entails goods to be produced in multiple countries, outsourcing happens when multinational corporations (MNCs) focus on functions that they have comparative advantage while other functions are subcontracted to other firms. The resulting spatial or functional fragmentation is connected through service links such as transportation, ICT, distribution services, financial intermediation services and others (Jones and Kierzkowski 2005). Consequently, the competitiveness of manufacturing firms in an increasingly globalized world is determined to a large extent by the cost effectiveness and reliability of these service links.
In turn, the changing nature of manufacturing production has led to an increasing importance of trade in services as opposed to the earlier significance of trade in goods (Grossman and Rossi-Hansberg 2008). Trade in services now accounts for more than a fifth of global trade volumes (Saez et al. 2015). For the past two decades, trade in services has grown faster than merchandise trade, reaching over US$9 trillion for the first time in 2013 and constituting 11.9 per cent of the world GDP (UNESCAP 2015). It has also increased in recent years vis-àvis trade in goods as the latter has been affected by the slowdown in growth in the developed world after the global financial crisis while economic recovery is retarded by the crash in commodity and oil prices in 2015.