Services and innovation

By , Institute of Economic Research (IER)

The need for innovation, coupled with the pervading role of services in advanced economies, requires a broader understanding of innovation that better captures the multi-dimensional role of services in innovation. In this paper, we consider ‘service innovation’ as any innovation activity with service-like attributes, which can occur in any part of the economy, apart from the service sector. Innovation in the service sector is being increasingly acknowledged, but the horizontal aspects of service innovation with an impact on other sectors of the economy, most notably manufacturing, is little studied.

In the last three decades, theoretical approaches to innovation theory have gradually evolved in the direction of recognising the important role of services. Whereas the technologist approach focuses on technology adoption in services as the main driver of innovation, the demarcation approach highlights service-specific forms of innovation. The integrative approach sees no need to treat innovation in services separately from innovation in manufacturing, because of the growing convergence in production of goods and services. Nevertheless, business strategies and public policy design need to take account of the specificities of services in relation to innovation, such as intangibility, prevailing incremental nature of the innovation process, interactivity between suppliers and customers, and the central role of demand as the driver of innovation.

More data has become available in the last decade on service innovation in the European Union, enabling monitoring of the dynamics of innovation activity in the service sector, and of the occurrence of different types of innovation in different sectors that incorporate non-technological innovation (organisational and marketing innovation). EU Community Innovation Surveys (CIS6 and CIS7) reveal that service firms carry out innovation activity than manufacturing firms in most EU economies, though the gap is diminishing. Service firms are more prone to introduce non-technological innovations (e.g. innovation in activities with service-like attributes) than manufacturing firms, reflecting the nature of innovation in the service sector. This pattern holds true for all but three EU economies. The main message is that innovation-active firms in general introduce both types of innovation in both the service and manufacturing sectors, confirming the complementarity of innovation types. Knowledge intensive business services (KIBS) play a particular role in innovation. Innovation intensity in KIBS is higher than in manufacturing, and KIBS also serve as a catalyst for the overall innovation capability of an economy. Firm-level analyses reveal knowledge spillovers from KIBS and their facilitating role in fostering the innovation activity, productivity and export performance of manufacturing firms. KIBS contribute to technological and non-technological innovations in user firms.

The social implications of service innovation have so far been insufficiently researched. Because of the dominance of services in advanced economies, service innovation is predestined to have a substantial effect on employment, on skills, on social inclusion, etc. Those issues are all the more important in view of the current crisis, high levels of unemployment in several European economies and public budget cuts, which challenge present policy approaches and models of public services provision.