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JES
34,5

Revealed comparative advantage

and competitiveness in services
A study with special emphasis on
developing countries

376

Belay Seyoum
Nova Southeastern University, Fort Lauderdale, Florida, USA
Abstract
Purpose The purpose of this paper is to analyze the competitiveness of selected services: business,
financial, transport and travel services in developing countries in relation to that of the rest of the
world based on three indices of revealed comparative advantage.
Design/methodology/approach The study uses revealed comparative advantage (RCA) indices
to measure developing countries comparative advantages in selected services for the period
1998-2003.
Findings Strong comparative advantages exist for many developing countries in transport, and
travel services. There is substantial room for improvement in financial and business services. Trade
liberalization and lack of adequate preparation appears to have resulted in a weakening of their
comparative advantages over the years. However, their revealed comparative advantages remain, by
and large, stable and do not show a fundamental shift in the structure of their comparative
advantages.
Originality/value There are no studies examining developing countries comparative advantages
in services. The findings and policy recommendations can be used by developing countries to improve
the competitiveness of their service sectors.
Keywords Services, Developing countries, Comparative tests, Competitive strategy
Paper type Research paper

Journal of Economic Studies

Vol. 34 No. 5, 2007
pp. 376-388
q Emerald Group Publishing Limited
0144-3585
DOI 10.1108/01443580710823194

1. Introduction
Services encompass a heterogeneous group of economic activities often having little
in common other than that their principal outputs are largely intangible products
(Shelp, 1981). It includes both intermediate (construction, distribution, etc.) as well
as final demand services (tourism, health, education, etc). Services account for an
increasing share of employment and GDP in both developed and developing
countries. The growth of trade in services has outstripped manufacturing. Services
trade now makes up a quarter of all cross-border trade (Hoekman and Matoo, 2000).
In 2003, developing countries exported services estimated at $US 504 billion and
this is likely to grow with increasing globalization of their economies and the
market access resulting from the widespread deregulation and privatization of state
owned corporations (IMF, 2004).
There is recognition of the important role of services in many countries. The price
and quality of services is crucial in determining the competitiveness of goods
producers. Africas poor trade performance, for example, is largely attributable to poor
infrastructure-based services. Limao and Venables (1999) show that a 10 percent
decrease in transport costs increased trade by 25 percent. In many developing
countries, services account for a large proportion of foreign exchange revenues.

Presently, tourism appears to be the most significant export although they also possess
comparative advantages in certain natural-resource based exports such as electric
power, water as well as labor-intensive services such as construction. Imports of
services through foreign direct investment also provide developing countries with
inflows of capital and technology thus facilitating economic growth and increased
exports. The use of information technology has been fundamental in bringing about
productivity improvements and new product development.
Trade in services is subject to protectionism in many countries. Such restrictive
policies are largely intended to limit the access of foreign services and/or foreign
service providers to domestic markets. They range from outright prohibitions against
foreign providers, reciprocal agreements, licensing and certification requirements, to
discriminatory fees and limits to access to distribution and communications systems
(Stern, 2002). In his study of market access barriers for services, Hoekman (1996) shows
that the benchmark tariff equivalents ranged from about 200 percent for air and
maritime transport, postal services, and life insurance to 20-50 percent for sectors in
which market access was less restricted. Services in many developing countries have
been largely costly and inefficient partly due to the absence of vigorous competition.
This underscores the need for reforms and the potential for more inflows of capital and
technology arising from increases in foreign and domestic investment.
To date, there is no clear and adequate definition of services. However, a broad
consensus exists on the characteristics that distinguish trade in services from that of
trade in goods. Services can be remotely accessed or electronically delivered as
opposed to goods that enter through customs. They are also intangible, non-storable
and characterized with more extensive regulations than trade in goods. Trade in
services requires the movement of factors of production i.e. capital or labor thus
necessitating commercial presence or the movement of people to the location of the
service consumer. Unlike the cross-border mode for trade in goods, services can be
provided at various locations: locations of the services provider, consumer or at neither
of these locations (Abu-Akeel, 1999; Chanda, 2003).
The value of trade in services is underestimated because the statistics does not
cover trade in services embodied in goods as well as production and sales of foreign
affiliates (Hoekman et al., 2002). The lack of precise definition and comparable data on
services has partly contributed to limited research in the area. To date, there is hardly
any theoretical and/or empirical research on the competitiveness of services or its role
in promoting exports or economic growth. The objective of this paper is to examine the
competitiveness of selected services in developing countries compared to international
markets. The focus on four service sectors (business, financial, transportation and
travel) is dictated by the importance (or future potential) of these services for many
developing countries and the availability of data. Since many countries began to
implement their GATT/WTO commitments in services after 1998, this study examines
the period 1998-2003.
The study is organized as follows. The following section reviews the literature on
competitiveness in services in developing countries. Section 3 provides various
approaches to measure revealed comparative advantage (RCA) in services. Section 4
identifies areas of RCA in services for developing countries. Section 5 discusses the
stability of RCA indices. Section 6 is devoted to summary and implications.

Comparative
advantage and
competitiveness
377

JES
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378

2. Recent studies on competitiveness in services and developing countries

A number of studies suggest that exporting is a less attractive option to gain access to
foreign markets in services (Gorg, 2000). Since most services require direct
involvement and input from consumers (production and consumption takes place
simultaneously), firms have to establish some form of local presence in a foreign
market (Winsted and Patterson, 1998; Javalgi and White, 2002). The presence of
dynamic service sectors in developing countries is considered critical for the growth
and efficiency of a wide range of industries as well as overall economic performance.
Certain services can directly or indirectly help goods producers become more efficient.
They provide vital inputs in the form of skills and know-how into the production of
export-oriented primary or secondary industries (Thangavelu and Owyong, 2003;
Mahadevan, 2002). Sectors such as transportation or financial services, for example, set
the conditions under which goods, labor and capital can flow (Mildner and Werner,
2005; United Nations, 2004). A large part of the studies on services and developing
countries is devoted to the impact of liberalization (of services) on their economy as
well as the level of competitiveness in services.
Many recent studies explore the potential impact of liberalization of services on
developing economies. Liberalization of services is expected to offer great growth
potential for these countries by fostering foreign direct investment in important
services such as banking, transportation, etc. as well as knowledge and technology
transfers, which stimulates innovation, increasing gains from comparative
advantages, enhancing competition, and lowering the costs of production for
industries that use services and providing a more efficient infrastructure (Mildner and
Werner, 2005). Petrazzini (1996) shows that reforms in the telecommunications sector
in 26 Asian and Latin American countries (1990-1994) increased exports by over 20
percent in markets allowing for varying degrees of competition as compared to 3
percent in monopoly markets. A number of developing countries have progressively
opened up their services sector to foreign investment because they lack the requisite
financial and technical capability to meet the demand for certain services such as
electricity, telecommunications or banking (Gabrielle, 2004). Some countries, however,
fear that liberalization of services will have an adverse effect on their balance of
payments. A large proportion of foreign direct investment in services is
market-seeking and does not contribute to foreign exchange earnings. Payments for
services can quickly outweigh capital inflows, and thus lead to net foreign-currency
losses. Profit remittances for example, amount to 35 percent of the total income of
services of foreign affiliates of US multinationals in 2002 (United Nations, 2004).
Another concern is that many service industries in these countries are insufficiently
developed to withstand foreign competition. Some scholars believe that trade
liberalization can actually reduce competition in small economies because there is little
incentive for new companies to enter the market, i.e. with high entry costs and low
potential revenues, liberalization is likely to result in a single incumbent monopoly or
oligopoly.
Some developing countries have used their locational advantages such as low labor
costs, appropriate skills and infrastructure to develop competitiveness in certain
services. They have also attracted foreign investment in services in which they enjoy
comparative advantages. For example, the export intensity of Indian service industries
rose from 58 to 78 percent (1996-2003) accounting for about 21 percent of total exports

in 2003 (RIS, 2004). A similar trend is observed in other developing nations such as the
Philippines, Malaysia, China, Brazil, Chile, Mexico, Ghana and South Africa (United
Nations, 2004). During the period 1998 to 2003, for example, developing countries
registered overall increases of over 30 percent in their service exports (IMF, 2004).
Apart from these general observations, there are no comprehensive studies on the
competitiveness of the service sector in developing countries. This study focuses on the
degree of competitiveness in business, financial, transportation and travel services
based on a random sample of 60 countries from different geographical areas and covers
six years (1998-2003).
3. Measuring revealed comparative advantage
The factor proportions theory states that countries should specialize in the production
and export of products that use intensively its relatively abundant factor. Unlike
classical theory, it assumes that the same technology of production would be used for
the same goods in all countries (Heckscher, 1949; Ohlin, 1933) and thus does not
assume productivity differences. According to classical theory, trade between
countries is determined by differences in the efficiency of production which arises from
differences in technology or the productivity of labor (Ricardo, 1981). Measuring
comparative advantages or factor endowment ratios poses certain difficulties since
relative prices under autarky are not observable (Balassa, 1989).
Balassa (1977) claims that comparative advantage is revealed by observed trade
patterns, i.e. high shares of export markets. Revealed comparative advantage (RCA) is
one measure of international competitiveness and has gained general acceptance in the
literature (Utkulu and Seymen, 2004). It is grounded in conventional trade theory and
measures a countrys exports of a commodity relative to that of a set of countries. The
RCA measure has undergone a number of revisions/modifications over the years
(Vollrath, 1991; Dimelis and Gatsios, 1995). This study uses three of the commonly
used RCA indices to establish existing comparative advantages in services in selected
developing countries. Data for business, financial, transportation and travel services
are obtained from the IMFs (1999, 2000, 2001, 2002, 2003, 2004) Balance of Payments
Yearbook. The definition of each service covered in the study is provided in Table I.
The first RCA index employed in this study uses the original index formulated by
Balassa (1965):
RCA 1 Xij=Xit=Xnj=Xnt
where X represents exports, i is a country, j is a service, t is a set of exports (all exports)
and n is a set of countries (the world). RCA 1 is based on observed trade patterns and
measures a countrys exports of a service relative to its total exports and to the
corresponding exports of all countries in the world. Comparative advantage is revealed
if RCA 1 is greater than 1 (RCA . 1).
The alternative measure is a modification of RCA 1 to suit bilateral, regional and
other trade specifications (Vollrath, 1991; Dimelis and Gatsios, 1995; Gual and Martin,
1995). In order to determine whether a country has a comparative advantage for any
particular service, the countrys export share of a given service to that of all services
exports is divided by the corresponding figure for all countries. This index provides
some insight into the national structure of service exports:

Comparative
advantage and
competitiveness
379

0.205
0.222
0.000
0.111
1.080
0.266
0.323
0.640
0.078
0.248
0.149
0.435
0.000
0.000
0.504
0.086
0.257
0.189
0.243
0.469
0.116
0.000
0.072
0.588
0.317
1.417
0.000
0.000
0.566
0.036
0.000
0.521
0.672
0.000
0.000

0.024
20.026
0.000
20.228
0.492
20.113
20.121
0.142
20.155
20.139
20.539
20.488
0.000
20.536
20.307
20.263
20.235
20.095
20.329
0.185
20.092
0.000
20.284
0.427
20.335
0.548
21.212
0.000
20.186
20.643
20.217
20.197
0.431
0.000
0.000

0.138
0.906
0.000
0.000
0.685
0.389
0.290
0.348
0.046
0.299
0.381
0.395
0.000
0.000
1.488
0.085
0.428
0.101
0.238
0.488
0.141
0.000
0.067
0.499
0.276
1.864
0.000
0.040
0.843
0.108
0.000
0.384
0.000
0.000
0.000

Argentina
Barbados
Bolivia
Botswana
Brazil
Bulgaria
Chile
China
Colombia
Costa Rica
Croatia
Czech Republic
Dominican Republic
Ecuador
Egypt
El Salvador
Estonia
Gabon
Ghana
Guatemala
Guyana
Haiti
Honduras
Hong Kong
Hungary
India
Indonesia
Iran
Israel
Jamaica
Kenya
Korea
Madasgascar
Malawi
Malaysia

Table I.
Revealed comparative
advantages (RCAs) for
selected developing
countries (1998-2003)

Country
0.046
23.588
5.135
0.000
1.504
0.953
1.092
0.230
0.802
0.156
1.380
1.204
0.000
0.105
1.395
3.229
0.746
0.292
0.425
2.190
10.228
0.000
2.709
1.621
0.956
0.734
0.003
0.421
0.082
1.640
0.388
0.597
0.000
0.000
0.446

0.064
5.793
6.827
0.000
2.383
0.655
1.209
0.419
1.344
0.138
0.547
1.300
0.000
0.167
0.467
3.299
0.448
0.531
0.437
2.052
8.431
0.000
3.171
1.919
1.098
0.569
0.007
0.000
0.055
0.541
0.326
0.822
0.000
0.000
0.704
22.670
29.326
23.224
0.000
21.406
21.898
24.393
23.979
25.461
22.531
22.590
23.724
25.610
22.652
23.889
25.137
20.766
21.314
23.109
23.145
218.102
0.000
3.015
20.120
22.692
20.652
21.250
0.000
21.893
23.596
25.890
0.138
0.000
0.000
20.804

Financial servicesa
RCA1
RCA2
RCA3
.1
.1
.0
0.000
0.000
0.000
0.000
0.528
1.950
2.168
0.313
0.000
0.000
1.384
0.908
0.000
1.063
4.000
1.699
3.586
1.077
0.916
0.524
0.118
0.000
0.486
1.199
0.378
0.000
0.392
0.478
0.000
2.476
3.025
1.552
0.000
0.000
0.584

0.000
0.000
0.000
0.000
0.834
1.318
2.390
0.573
0.000
0.000
0.545
1.010
0.000
1.579
1.344
1.713
2.118
2.918
0.926
0.506
0.097
0.000
0.539
1.381
0.431
0.000
0.916
0.000
0.000
0.811
2.419
2.093
0.000
0.000
0.899

0.000
0.000
0.000
0.000
20.222
20.298
0.676
20.493
0.000
0.000
20.174
0.487
0.000
0.122
0.127
0.086
0.403
1.764
21.012
21.430
20.030
0.000
21.445
0.475
20.121
0.000
20.127
0.000
0.000
20.755
0.671
0.809
0.000
0.000
20.381

Transport servicesa
RCA1
RCA2
RCA3
.1
.1
.0
1.403
9.340
0.860
1.417
0.463
2.509
0.652
0.893
1.012
2.613
6.147
1.351
5.497
1.146
4.085
1.056
1.862
0.108
2.217
2.165
1.826
4.554
1.774
0.025
1.568
0.796
1.291
0.288
1.280
6.657
1.675
0.560
1.470
0.999
0.836

RCA1
.1

1.933
2.222
1.081
2.010
0.688
1.695
0.718
1.655
1.665
2.175
2.348
1.521
2.980
1.598
1.359
1.039
1.113
0.120
2.201
1.854
1.538
2.464
1.749
0.029
1.795
0.609
2.989
1.044
0.847
2.185
1.008
0.743
0.996
2.361
1.294

0.243
1.514
0.462
0.842
20.082
0.581
0.184
0.467
0.506
0.960
1.259
0.571
2.204
0.792
0.737
0.347
0.365
0.000
1.630
0.985
0.459
1.793
1.031
20.004
0.802
0.169
2.295
0.448
0.018
1.629
0.270
20.062
0.205
1.362
0.768
(continued)

Travel servicesa
RCA2
RCA3
.1
.0

380

Business servicesa
RCA1
RCA2
RCA3
.1
.1
.0

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34,5

Mauritius
Mexico
Morocco
Namibia
Nicaragua
Nigeria
Pakistan
Panama
Paraguay
Peru
Phillipines
Poland
Romania
Senegal
Singapore
Slovakia
Slovenia
South Africa
Sri Lanka
Thailand
Trinidad and Tobago
Tunisia
Turkey
Uruguay
Venezuela

2.449
1.467
0.609
0.000
0.599
0.033
0.449
5.208
3.279
3.495
0.443
2.638
1.422
0.969
2.200
5.218
0.400
0.298
3.206
0.207
2.214
1.241
1.538
4.962
0.021

1.229
3.857
0.395
0.000
0.587
0.084
0.724
4.154
2.144
3.774
0.934
2.492
2.043
0.773
2.632
3.000
0.446
0.417
3.100
0.230
3.206
0.855
0.848
3.332
0.091
22.048
220.293
20.999
0.000
21.500
20.423
21.890
24.822
26.732
21.999
22.404
23.568
21.690
23.700
21.254
0.000
21.035
20.780
21.674
23.014
2.839
23.960
26.497
20.113
23.919

Financial servicesa
RCA1
RCA2
RCA3
.1
.1
.0
0.000
0.000
1.224
0.000
0.729
0.000
1.669
3.182
0.000
0.711
0.357
1.291
1.272
0.560
1.340
1.649
1.077
0.608
1.676
0.908
1.130
0.000
1.273
1.939
0.300

0.000
0.000
0.789
0.000
0.698
0.000
2.631
2.578
0.000
0.817
0.736
1.307
1.808
0.438
1.736
1.230
1.194
0.855
1.809
0.986
1.562
0.000
0.699
1.288
1.450

0.000
0.000
20.816
0.000
21.093
0.000
0.137
0.606
0.000
20.677
20.717
0.532
0.521
21.649
0.089
1.340
0.309
0.609
20.326
20.620
20.007
0.000
20.375
20.393
20.065

Transport servicesa
RCA1
RCA2
RCA3
.1
.1
.0
3.480
0.854
3.479
2.570
2.408
0.043
0.141
0.959
0.762
1.659
0.806
1.412
0.410
1.947
1.340
0.589
1.505
1.364
0.818
1.557
0.838
3.027
2.725
2.681
0.323

RCA1
.1
1.772
2.226
2.090
2.740
1.968
0.088
0.167
0.760
0.469
1.813
1.443
1.455
0.578
0.000
0.542
0.768
1.686
1.875
0.860
1.705
1.156
1.988
1.508
1.735
1.435

0.878
1.039
1.362
1.903
1.164
20.653
20.384
0.204
20.306
0.993
0.785
0.443
20.141
0.000
20.072
0.126
0.405
0.653
0.305
1.032
20.301
1.299
0.759
0.621
0.574

Travel servicesa
RCA2
RCA3
.1
.0

Notes: a Business services: services provided by residents to non-residents (or by non-residents to residents) and covers merchandising and trade-related services,
operating leasing services and profession/technical services. Financial services include financial intermediation services such as letters of credit fees or
commissions, credit and banking services (excludes insurance). Transport services includes freight and passenger transportation by all modes and other auxiliary
services including rentals of transportation equipment crews. Travel services are those services acquired by non-resident travellers (including excursionist) for
business and personal use during their visits of less than a year. It excludes passenger services which are included in transportation
Mean values for 1998-2003. RCAs are measured in relation to the rest of the world. RCA are shown in italic
Source: IMF (1998, 1999, 2000, 2001, 2002, 2003)

0.000
20.084
20.333
20.612
20.577
0.000
0.017
20.112
0.000
20.344
0.000
20.280
20.207
0.107
0.370
0.000
20.223
20.082
0.000
20.101
20.130
0.000
0.050
20.061
20.171

0.000
0.028
0.313
0.000
0.000
0.000
0.175
0.189
0.000
0.174
0.000
0.280
0.292
0.491
0.000
0.344
0.247
0.139
0.000
0.493
0.095
0.000
0.874
0.202
0.051

Country
0.000
0.72
0.203
0.021
0.000
0.000
0.281
0.157
0.000
0.206
0.000
0.282
0.417
0.392
0.752
0.000
0.277
0.194
0.000
0.533
0.129
0.000
0.435
0.132
0.248

Business servicesa
RCA1
RCA2
RCA3
.1
.1
.0

Comparative
advantage and
competitiveness
381

Table I.

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382

RCA 2 Xij=Xis=Xnj=Xns
where X represents exports, i is a country, j is a given service, n is a set of countries (all
countries in the world), and s is a set of services (all services). While RCA 1 measures a
countrys service exports in a given sector in relation to total exports, RCA 2 relates it
to all service exports. Comparative advantage is revealed if RCA 2 is greater than 1
(RCA2 . 1). Both indices do not take into account imports.
The third RCA index (RCA 3) considers exports and imports within a particular
service. It is derived by subtracting a countrys import advantage (RMA) from its
relative export advantage (RXA). A similar study was made by Ferto and Hubbard
(2003) in their study of the competitiveness of Hungarian agri-food sectors:
RXA RCA 2 Xij=Xis=Xnj=Xns
RMA Mij=Mis=Mnj=Mns
where M represents imports, i is a country, j is a service, s is a set of services (all
services) and n is a set of countries (all countries in the world):
RCA 3 RCA 2 2 RMA:
Comparative advantage is revealed if RCA 3 is greater than 0 (RCA 3 . 0).
The RCA calculations based on observed trade data show that strong comparative
advantages exist for many countries in transport, travel and tourism services;
comparative advantages for low income countries are limited to travel and tourism,
and that many developing countries have not developed comparatives advantages in
business and financial services. These measures, however, do not account for the effect
of government distortions on RCA indices such as quotas or subsidies. In spite of this
shortcoming, it offers a useful tool to detect comparative advantages in specific sectors.
4. Identifying areas of comparative advantage: empirical findings
The RCA analysis, largely based on contributions of Balassa (1977) and Vollrath (1991)
shows the revealed comparative advantages of developing countries in selected
services (Table I). It is primarily intended to examine their global competitiveness as
opposed to specific countries or regions. Here are the most significant findings of the
study:
(1) Countries which have revealed comparative advantages in all three indices
(1998-2003):
.
business services: India;
.
financial services: Honduras, Trinidad and Tobago;
.
transportation services: Chile, Egypt, El Salvador, Estonia, Gabon, Hong
Kong, Kenya, Korea, Pakistan, Panama, Poland, Singapore, Slovakia, and
Slovenia;
.
travel services: Argentina, Barbados, Botswana, Bulgaria, Costa Rica,
Croatia, Czech Republic, Dominican Republic, Ecuador, Egypt, El Salvador,
Estonia, Ghana, Guatemala, Guyana, Haiti, Honduras, Hungary, Indonesia,

Jamaica, Kenya, Mauritius, Morocco, Nicaragua, Peru, Poland, Slovenia,

South Africa, Thailand, Tunisia, Turkey, and Uruguay.
(2) Countries with revealed comparative advantages (RCA) in 1998 but show
revealed comparative disadvantages (RCA) in 2003 in one or more indices i.e. in
countries losing their RCAs (RCA ! RCD):
.
business services: Brazil, Israel, Turkey and Uruguay;
.
financial services: Brazil, Bulgaria, Colombia, The Czech Rep., Ecuador,
Korea, Senegal, Trinidad and Tobago and Uruguay;
.
transport services: Brazil, Ecuador, Gabon, Indonesia, Iran and Turkey;
.
travel services: Botswana,Colombia, El Salvador, Estonia, Guyana, Israel,
Kenya, Madagascar and Trinidad and Tobago.
(3) Countries with revealed comparative disadvantages in one or more indices in
1998 but have revealed comparative advantages in 2003 (RCD ! RCA):
.
business services: Argentina;
.
financial services: Estonia, Hong Kong, Hungary, India, Malaysia, Mauritius,
Morocco, Pakistan and Tunisia;
.
transport services: The Czech Rep., El Salvador, Pakistan, Singapore,
Uruguay and Venezuela;
.
travel services: Bolivia, Costa Rica, Ecuador, Guatemala, Honduras,
Malaysia, Malawi, Mauritius, Mexico, Nicaragua, Panama, Peru,
Philippines, Sri Lanka, Thailand and Turkey.
5. Consistency of the RCA indices
It is important to evaluate the extent to which the RCA indices are consistent in their
identification of comparative advantage. Balance et al. (1987) suggest three statistical
tests to measure the consistency of RCA indices:
(1) Cardinal measures: cardinal measures identify the extent to which a country
has a comparative advantage or disadvantage in a given service. Consistency
test of such measures is established by comparing correlation coefficients
between paired indices (1998-2003).
(2) Ordinal measures: consistency tests of RCA indices an ordinal measures
determine whether pairs of RCA indices yield a consistent ranking of countries
by the degree of comparative advantage. Rank correlation coefficients for each
service and each pair of RCA indices are calculated (1998-2003).
(3) Dichotomous measures: these tests compare alternative indices of comparative
advantage to establish the extent to which they are consistent in distinguishing
between countries that enjoy comparative advantage and countries that do not
(1998-2003) (Balance et al., 1987).
The consistency test of the indices as cardinal measures (of RCA indices) shows that all
twelve of the correlations are significant at 0.01 and 0.05 levels (Table II). The tests
indicate that the indices are consistent as cardinal measures of revealed comparative
advantage. The correlation coefficients are between the average pairs of RCA indices
for 1998-2003. Similarly, the correlations between the indices as ordinal measures are

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Table II.
Correlations among RCA
measures to test
consistency of indices

Business
services
Financial
services
Transport
services
Travel
services

Cardinal

RCA2

RCA3

Ordinal

RCA2

RCA3

Nominal

RCA2

RCA3

RCA1
RCA2
RCA1
RCA2
RCA1
RCA2
RCA1
RCA2

0.78*
1.00
0.73*
1.00
0.75*
1.00
0.65*
1.00

0.34*
0.51*
0.40*
0.48*
0.24**
0.43**
0.63*
0.89*

RCA1
RCA2
RCA1
RCA2
RCA1
RCA2
RCA1
RCA2

0.83*
1.00
0.93*
1.00
0.86*
1.00
0.78*
1.00

0.10
0.17
0.26
0.28**
0.19
0.34*
0.71*
0.90*

RCA1
RCA2
RCA1
RCA2
RCA1
RCA2
RCA1
RCA2

0.98*
1.00
0.77*
1.00
0.73*
1.00
0.65*
1.00

0.96*
0.98*
0.15
0.71*
0.59*
0.78*
0.55*
0.62*

Notes: * significant at 0.01 level; ** significant at 0.05 level

Correlations using cardinal, ordinal and nominal measures to test consistency of RCA indices

significant for seven of the 12 pairs. The tests are based on the rank correlation
coefficient of each ordinal measure. The nominal measures based on dichotomous pairs
of RCA indices (comparative advantage as 1 and comparative disadvantage as 0) also
show 11 of the 12 correlations as significant (Table II).
The correlations tests confirm that all the three indices are largely consistent in
measuring comparative advantages and serve as useful proxies in establishing
whether developing countries have comparative advantages in certain services.

5. Stability of RCA indices

Stability measures of revealed comparative advantage are intended to evaluate any
shifts in the structure of a developing countrys RCAs in a given service sector over a
certain period (1998-2003). A given service may reveal RCA in 1998 and a RCA in 2003
or vice versa (Table III). The relative importance of a certain service is used as a
stability indicator (Ferto and Hubbard, 2003; Wilson, 2000). Examining the changes in
the distribution of RCAs, developing countries have, by and large, experienced a

Services

RCA Index

Business
services

RCA1
RCA2
RCA3
RCA1
RCA2
RCA3
RCA1
RCA2
RCA3
RCA1
RCA2
RCA3

Financial
services
Transport
services
Table III.
Stability of RCA
measured by shifts in
comparative advantages
between 1998 and 2003

Travel
services

RCA, 1998a

RCA, 2003

RCD, 1998b

RCD, 2003

4
2
14
30
28
5
22
23
14
39
41
52

1
1
6
25
25
2
19
22
18
43
40
47

52
54
42
24
28
51
34
32
42
17
15
5

55
56
50
31
32
54
37
31
38
14
14
8

Notes: a Comparative advantage; b Comparative disadvantage (by numer of countries)

weakening of their comparative advantages in services. However, their RCAs do not

show a fundamental shift in the structure of their comparative advantages.
6. Conclusion and policy implications
This paper examined the competitiveness of developing countries in selected services,
based on three indices of revealed comparative advantage for 1998-2003. All three
indices show that many developing countries have revealed comparative advantages
in travel/tourism and transport services. About a third of the countries in the sample
also show comparative advantages in financial services. In spite of the general concern
in industrial countries about outsourcing of business services to developing countries,
there is no evidence to show that the latter used their locational advantages to increase
investment and/or exports in this sector. Only a small number of countries such as
Argentina, Egypt India, or Turkey show RCAs in business services.
Consistency tests measured by significance of correlations among RCA indices
suggest that, by and large, the three indices employed are consistent as measures of
comparative advantage. The consistency test of the indices was made by using
cardinal, ordinal and nominal measures of comparative advantage. RCA explains the
level and trend of service export patterns in developing countries. Even though there is
evidence of some weakening in RCA in the service sectors under study, there does not
appear to be a fundamental shift in the structure of their of comparative advantages.
Services represent 40 percent of exports in many developing countries and are
expected to increase to about 70 percent by 2010 (De Souza, 2005). This is partly
attributed to technology and trade liberalization in many services. As developing
countries face erosion in their trade preferences and stiff external competition in
traditional sectors such as agriculture or manufacturing, their dependence on services
is likely to grow. Service exports offer opportunities for suppliers in developing
countries. Technology allows for cost-effective delivery of business and financial
services across borders. Outsourcing has gained popularity as corporations in
advanced countries strive to reduce fixed overhead by contracting out routine
functions. These include data processing, electronic publishing, customer call centers,
medical records management, hotel reservations, credit card services etc. US
corporations alone spend over $50 billion a year on information processing (Riddle,
1998). Bilateral/regional agreements have also reduced restrictions on cross border
delivery of transport services. Many countries have also taken measures to develop a
sustainable tourism industry that will contribute to the creation of economic growth
and employment (Perrings and Ansuategi, 2000).
In order to take advantage of existing opportunities in services, developing
countries need to upgrade their infrastructure and technological capability. It is,
however, difficult to develop competitive services in the absence of roads, railways,
electricity or telecommunications (England, 2005). An important ingredient in the
development of a vibrant, competitive service sector is the presence of a well developed
private sector that works with the government in the development of national
infrastructure; foreign direct investment, joint ventures or other forms of strategic
alliances with leading service firms in other countries to upgrade existing capabilities
and enhance overall competitiveness. It is important to promote and target
export-oriented investment in services to gain employment, foreign currency and
skills, and governments in these countries need to support competitiveness in services

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by providing a conducive climate for the private sector, and improving infrastructure
and skills (Clark, 2000; Perrings and Ansuategi, 2000).
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About the author
Belay Seyoum is associate professor of international business studies at Nova Southeastern
University in Florida, USA. He earned his Doctorate at McGill University in Canada. His research
interests are in the areas of trade and technology policy. Belay Seyoum can be contacted at:
seyoum@huizenga.nova.edu

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