6 opportunities for investment in services to drive future growth

International investment is evolving, influenced by three megatrends: technology, sustainability, and geopolitics. Together, these megatrends are reshaping global economic geography and governance, leading to significant developments in trade and, in so doing, investment into services.

Investment into services now accounts for a whopping 72% of the total foreign direct investment (FDI) stock, in turn helping services to account for 67% of global GDP.

The growth of cross-border investment into services is a long-term trend. In each decade since 1990, FDI into services has grown significantly, five-fold in 2000, four-fold in 2010 and again by over 50% in 2020. This growth in FDI in the tertiary (services) sector has significantly outpaced FDI into both the secondary (manufacturing) and primary (natural resource) sectors.

Part of the reason why investment into services has been growing is that services play a dual economic role. Services can not only serve as final exports (think of insurance services for individuals) but also intermediate inputs into production (think of insurance services for shipping). With the growth of global value chains (GVCs), services have increasingly become the glue linking activities across economies, and thus requiring investment into services for GVCs to work.

The role of services as intermediate inputs into production also means that services are fundamental to the competitiveness of economies and firms across all sectors. In other words, efficient services inputs will not only help determine the competitiveness of other service sectors, but also of an economy’s natural resource, agriculture, and manufacturing activities. For instance, without efficient transportation services, it will be hard for an economy to provide competitive minerals, grains, or refrigerators on the international market.

Looking ahead, six transformations are creating new opportunities for investments into services. Governments need to put in place the right enabling policies – and firms the right strategies and investments – if they are to seize these opportunities.

Manufacturing is increasingly intertwined with services, known as "servicification" (services becoming more important as inputs into manufacturing activities, e.g., design and marketing services) and "servitization" (services becoming more important as add-ons to manufacturing, e.g., repair and maintenance contracts, customer support packages, and outcomes-oriented guarantees). Servitization thus refers to the process of transforming traditionally product-oriented businesses into service-oriented ones. This integration between services and manufacturing is largely driven by technological advancements. Services like design, software, and maintenance are becoming integral to manufacturing, enhancing product value and customer experience. The growth of intermediary services reflects the technological evolution in manufacturing processes and products, emphasizing the need for firms to focus on opportunities to invest in the synergy between manufacturing and service sectors.

The digitalization of services – encompassing sectors like e-commerce, cloud computing, and artificial intelligence (AI) – has also opened new opportunities for investment. Digital services are rapidly expanding, reflecting the broader digital transformation of the global economy. Three figures tell a powerful story: over 50% of services exports are now digitally delivered; their value is getting close to $4 trillion annually; and this represents a growth approaching 400% over about two decades. Firms can seize opportunities to invest in digital services, especially attractive due to their scalability and potential for disruption across various industries.

Firms are increasingly offshoring high-value services in the search for skills, and in so doing are creating new investment opportunities. For instance, industries such as finance, healthcare, and information technology are moving operations to locations where specialized skills are available and cost-effective. This shift represents a move away from traditional offshoring models focused on lower-cost manufacturing and basic services, towards higher-value added, skills-based services, given the growing importance of human capital in the global service economy. The recent rapid rise of FDI in AI is case in point. This is creating opportunities to invest in high-value added services in new geographies.

Geopolitical factors are also creating new opportunities in non-equity modes of investment, such as franchising, licensing, and management contracts. These arrangements allow firms to engage in international business without the need for substantial capital investments, reducing exposure to geopolitical risks. This trend is particularly relevant in today's uncertain geopolitical climate, where traditional investment models can face heightened challenges and scrutiny.

Sustainability imperatives are further creating new opportunities for services investment. As the world grapples with climate change and other environmental challenges, there is a growing emphasis on sustainability-linked services like renewable energy, water management, and eco-friendly transportation. Services are essential to adopting specific decarbonization technologies, further creating new investment opportunities as the world transitions to a low-carbon future.

Finally, the restructuring of global supply chains for resilience is creating new investment opportunities across natural resources, manufacturing, and also services. Furthermore, a diversified services export base can enhance resilience against economic shocks, whether caused by nature, geopolitics, or technology. To build resilience, firms can thus increase investment in more diversified supply chains across multiple geographies.

Policy-makers need to ensure that the right policies are in place for these investments to successfully take place. Cross-border investment into services is often relatively restricted compared to investment into manufacturing. Governments need to ensure policies are fit for purpose, up-to-date and achieving policy goals. They should facilitate investment in those services industries that are conducive to the country’s economic growth and job creation. They should particularly promote investment in Sustainable Development Goal-related services. They also need to target FDI in those services that are critical for enhancing the country’s manufacturing productivity and export competitiveness.

Business needs to build on the huge opportunities constantly emerging from the global sustainability endeavour and technology revolution, while tackling challenges arising from geopolitics conflicts, the triple drivers mentioned at the beginning of the article. Business also needs to articulate to government the kinds of policies they require to enable investment into services. This will help firms seize the opportunities for services investment generated by the six transformations detailed above.

Given the complexity of services markets and regulations, this is an area where deep and close public-private collaboration is needed to get the business environment right. Concerted effort is needed to ensure that policies, regulations, infrastructure, skills, etc., are conducive to a services-supportive and services-supporting economy. There is also need for joint effort to improve access to quality and affordable services for low-income economies and poor population. In so doing, investment in services can help drive a new era of sustainable development and inclusive growth.