5.1. Innovation in services

This section provides a summary of the thematic paper on services innovation [1]. The services sector[2] is becoming more and more important in developed countries, both in terms of its share in total value-added or GDP and employment. On average, the services sector contributed to 40% of total EU25 employment in 2004 and to 46% of EU25 value-added. This contribution is over twice as large as the contribution of the manufacturing sector. Within the services sector, Knowledge Intensive Business Services (KIBS) have attracted policy interest because of rapid rates of growth in some countries and because they are considered to be highly innovative. The relative economic contribution of KIBS has been increasing over time. The share of manufacturing value-added in real prices declined by 2.5 % between 1999 and 2004 while the share of services sector value-added decreased by 0.3 % and KIBS increased by 6.8 %. Based on these trends and the larger contribution of services to the economy, KIBS are likely to be one of the main factors for future growth within the EU. The economic importance of services suggests that improvements in European living standards are likely to depend more on productivity improvements in the services sector than in manufacturing. This has been demonstrated for the US, where services contributed three-quarters of the increase in productivity after 1995 [3]. Much of the productivity increase is due to different types of innovation, developed both in-house by service firms and from service firms adopting productivity enhancing innovations such as ICT.

Although both the economic weight of the service sector and the importance of service sector innovation to economic prosperity have been recognized for well over a decade, there has been a lag in the collection of European innovation statistics for services and in the development of innovation policies of relevance to service sector firms. There are partly good reasons for this. For instance, the manufacturing sector is the source of many of the technical product and process innovations that are adopted by services sector firms. However, a growing awareness of the role of non-technological innovation, software, and logistics in innovation has meant that the service sector is no longer (if it ever was) a passive adopter of manufacturing innovations. This is also leading to a rethink of European innovation policy and an evaluation of the steps that might be needed to remove or reduce the policy bias towards manufacturing [3].

A common concern is that innovation policy is not adequately serving the needs of service sector firms. By comparing innovation indicators for firms in the service and manufacturing sectors one can examine whether firms' responses to the CIS support this concern or not. This comparison indicates two areas where service firms responses differ markedly from manufacturing firms: public procurement and support from innovation programmes. For three policy areas, support could be required under specific conditions: use of intellectual property, use of and access to public science, and availability of financing. For three areas there is no evidence to suggest that policy is biased against service firms: supply of qualified personnel, support for start-ups, and regulatory burdens. However, in these areas the particular needs of services firms may differ from manufacturing firms even though the overall levels of concern are similar.

Another important concern for policy is whether innovation performance differs significantly between manufacturing and services sectors. Analyzing composite innovation indicators using CIS-4 data shows that several of the new Member States perform better on service sector innovation than on general innovation as measured by the Summary Innovation Index. The results suggest that innovative service sector firms in the new Member States could benefit as much from innovation as firms in more innovative countries, even though the nature of the ‘innovation’ could be very different. The results of an analysis of Knowledge Intensive Business Services (KIBS) provide no evidence that KIBS drive overall innovative performance, as measured by a change in the Summary Innovation Index. However, the KIBS share of total employment and value-added in 2004 is positively correlated with innovative performance on the 2006 Summary Innovation Index. This is probably because of the high level of innovative activity within KIBS itself, such as in software development. The lack of evidence for a driving role for KIBS could be due to a lack of data for many countries for NACE 73, which is a key KIBS sector that includes R&D services and high technology start-up firms.

A final important concern is whether current indicators properly capture services innovation. The Community Innovation Survey (CIS) is the main source of innovation indicators and was at first designed to measure technological innovation in the manufacturing sector. Over time improvements have been made to cover a large share, but not all, of the business services sector and improve questions dealing with both technological and non-technological innovation. But further improvements are needed to measure services innovation in the future, either through modifications to the CIS or through other surveys:

1. Research on service sector innovation (and on innovation in the manufacturing sector) would be considerably improved if disaggregated results were available for the CIS questions on firms introducing new or significantly improved goods and/ or services. Results for these two options could be used to obtain a better measure of the types of new products introduced both by manufacturing and service firms. Similarly, disaggregated results are needed on firms introducing new or improved methods of manufacturing or producing goods or services, new or significantly improved logistics, delivery or distribution methods, and new or improved supporting activities such as maintenance systems or purchasing operations.

1. CIS data are missing for far too many countries. Every effort should be made to ensure full coverage for all CIS questions.
   
   
2. All countries should be encouraged to survey NACE sector 73 to improvement the measurement of innovation in KIBS.

Many other new indicators could be constructed using CIS data, such as a measure of new to market innovations that controls for large differences in what constitutes a ‘market [4].