The Service Industries Journal Diversity of innovation ...

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The Service Industries Journal

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Diversity of innovation patterns in services

Xavier Vence a; Alexandre Trigo a a Departamento de Economía Aplicada, Facultade de Ciencias Económicas e Empresariais, Avenida Burgo das Nacións, s/n, Universidade de Santiago de Compostela, A Coruña, Spain

To cite this Article Vence, Xavier and Trigo, Alexandre'Diversity of innovation patterns in services', The Service Industries

Journal, 29: 12, 1635 — 1657 To link to this Article: DOI: 10.1080/02642060902793631 URL: http://dx.doi.org/10.1080/02642060902793631

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The Service Industries Journal Vol. 29, No. 12, December 2009, 1635–1657

Diversity of innovation patterns in services Xavier Vence and Alexandre Trigo Departamento de Economıá Aplicada, Facultade de Ciencias Econo´micas e Empresariais, Avenida Burgo das Naciońs, s/n, Universidade de Santiago de Compostela, 15782 Santiago de Compostela, A Corunã, Spain

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(Received 11 July 2007; final version received 21 September 2008) Recently, literature on innovation in service activities has increased significantly. Much effort has been concentrated on understanding the importance of innovation for these activities, and on stressing innovative differences relative to the manufacturing innovation model. However, a deeper understanding is needed in three main areas: the degree of innovation heterogeneity among different service activities, the factors that explain this heterogeneity, and the primary drivers of the innovation process for each activity. Using results from the Third Community Innovation Survey, this paper aims to identify the extent to which there are similarities and differences in the main innovation attributes in four important service sub-sectors. After describing the characteristics of innovation and the behavior of variables in the sub-sectors, a typology of innovation patterns is identified. Keywords: innovation patterns; service innovation; service sector typology; Community Innovation Survey

Introduction In the past, service activities were disregarded by innovation researchers. The overdue attention could be attributed to the traditional disregard for services in general and the widespread assumption about their potential lack of innovative capacity, being considered just users of the innovations produced by the manufacturing activities (Evangelista, 2000; Pavitt, 1984). In short, services did not receive due credit for being innovative, to a certain extent, because of both their low R&D intensity and patent application (Salter & Tether, 2006). Perhaps the situation is also attributable to the traditional reluctance of economists towards the analysis of innovation outside the market, though the public sector has been responsible for most important service activities. However, when examples of innovation in services such as telecommunications, computer activities, and logistics became better known, researchers recognized some services as having innovative characteristics. The wave of public service privatization around the world may have contributed to attracting the attention of economists, providing conditions for an easier application of ‘market conceptual toolkit’ of economic analysis. Recently, services have become a topic under the focus of the community of scholars dealing with innovation issues (Salter & Tether, 2006). But an understanding of innovation in most of the service activities has required much greater focus and study, as well as a reconsideration of previously held concepts about innovation (Foray, 2004; Miles & Tether, 2003).

Email: [email protected], [email protected] ISSN 0264-2069 print/ISSN 1743-9507 online # 2009 Taylor & Francis DOI: 10.1080/02642060902793631 http://www.informaworld.com


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X. Vence and A. Trigo

The attempt to recognize the innovative character of the service activities has demanded a new perspective beyond the traditional view of innovation, allowing an easier identification of such characteristics. Aspects such as non-technological innovation or client – producer interaction permit a better understanding of the real scope of innovation in services and thus of the innovation concept. The assumed ‘specificities of innovation’ in the service activities (Sundbo, 2000) lead researchers to a reconsideration of the concepts of industrial innovation to be applied to the services. This change meant a significant advancement in the economics of innovation. However, a new step forward is required because innovation in services does not have a uniform pattern. Significant differences among service innovation processes have been found due to the diversity of the nature of activities. The scope and the nuances of that diversity and differentiation have been discussed critically in another article (Vence & Trigo, 2009). In the past, studies on innovation in the services tended to employ innovation indicators used in manufacturing. Innovation was thought to be connected exclusively to R&D efforts and the number of patent applications, thereby leading to biased analyses. This situation has been challenged over the last decade due to notable contributions by Ian Miles, Jon Sundbo, Faiz Gallouj, and others, who demonstrated the existence of a unique and important innovative activity in services, distinct from manufacturing innovation. In fact, some studies have highlighted that innovation concepts (e.g. innovation, R&D), employed in innovation surveys, may be comprehended differently according to the activity. These different perceptions could be explained by the diversity of the nature of activities, the varied level of intangibility of the products as well as the constitution of the knowledge creation flows. Moreover, some innovation aspects in services are difficult to be measured, like the R&D activities and other processes of knowledge creation. The differences of interpretation could lead to misunderstanding innovation in services (Tether, 2003); so, innovation in those activities should be analyzed taking into account also, the logic of the production process. Although many studies still attempt to highlight the inferiority of the innovative character of the service sector as compared with the manufacturing sector, innovation in specific service activities may actually be considered higher than the manufacturing average (Miles, 2001; Vence & Trigo, 2009). Newer analyses have shown services to be a source of innovation, in contrast with the traditional view (Barras, 1986; Tidd, Bessant, & Pavitt, 2001). However, innovation in some service activities lags behind the manufacturing innovation average (similarly to less innovative manufacturing). That evidence shows that innovation in services may not be analyzed using a one-size-fits-all model, and that these activities have different innovative goals. While many firms find their innovation activities constrained due to weak managerial and workforce skills, ‘some services are amongst the most sophisticated business in the world’ (Salter & Tether, 2006, p. 2). Looking ahead, beyond a simple recognition of the aggregate similarities and differences between industrial and service innovation, we need to understand the internal diversity of services and overcome the simplistic vision of the ‘specificities of the innovation’ in that sector. Analyzing the innovation patterns of this sector and attempting to create a common model that describes all service activities is a difficult (and perhaps inappropriate) task, given their heterogeneity and complexity. Therefore, the aim of this paper is both to better understand differences in innovation patterns within the service sector and to draw a typology of innovation patterns in services. Such typology will be made from the intra-industrial analysis of a set of innovation indicators provided by the Community Innovation Survey-3 (European Commission, 2004). Of course, in order to do so a fine


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disaggregation of service activities is needed. In this sense, our empirical analysis is constrained by the Third Community Innovation Survey-3 (CIS-3) classification of service activities into four broad sub-sectors: wholesale trade and commission trade, transport and communication, financial intermediation, and knowledge-intensive business services (Table 1). Recent approaches to innovation patterns in services A review of the recent studies on service innovation shows that there are not only certain specificities compared with the innovation process developed by the manufacturing industry, but also that there exist considerable differences among services themselves (cf. den Hertog & Bilderbeek, 1999; Miles, 2001; Sundbo & Gallouj, 2000; Tether & Metcalfe, 2004). However, empirical analyses demonstrate that many of these particularities, typically service-related (e.g. the close interaction between service providers and customers, the customization of service products, and the cooperation with other agents in order to innovate), can be also found in other industries. In short, services do not innovate as differently as expected. Hence, considering sectors as a whole, innovation patterns in both manufacturing and services more and more present comparable features. Intra-industrial analyses, conversely, point out considerable differences among activities. The innovation approach in services has changed throughout the last decades, and, so has the perspective to analyze, classify, and understand innovation in these activities. However, the definition and measure of innovation in services have been, until the present time, problematic issues. The approaches towards service innovation as well as the innovation pattern typologies created under each service innovation paradigm will be better explained in the following. By the 1980s the continuous rise of service activities attracted the attention of scholars and policymakers. Until then the service sector has been disregarded by innovation researchers. The first attempts to better understand innovation in services took into account the current innovation research and so the conceptual tools developed in a manufacturing sphere of innovation (Salter & Tether, 2006). That approach, called the assimilation perspective, consists of including services into current innovation research. Researchers, investigating traditional manufacturing innovation, tend to study service innovation in a manner similar to that in which they study the manufacturing industry (Coombs & Miles, 2000; Howells, 2000; Miles, 2001). In brief, the assimilation perspective perceives service innovation in the same way as it does manufacturing innovation. Several service innovation analyses have been carried out under this approach. One important work to be mentioned is Barras’ model based, fundamentally, on the technological trajectory in the innovation context. Barras (1986) observed that services followed an innovation path opposite to that of manufacturing activities. Consequently, he concluded that service innovations are characterized by a reverse product cycle (RPC). The RPC consists of three stages: (1) improved efficiency phase, which means an investment in new technology to increase the efficiency of delivery of existing services; (2) improved quality phase, in which technology is used to improve the quality of services; and, ending the cycle, the stage (3) new products phase, which consists, basically, of the generation of new services (Barras, 1986). Even though that approach represents a relevant contribution to the service innovation theory development, it has been considerably criticized for its technological focus, as well as for considering a ‘one-size-fits-all’ innovation model in services. Barras considered, fundamentally, the impact of information and communication technologies (ICT) – information

Authors Pavitt (1984), extended in Bell and Pavitt (1993), Tidd et al. (2001)

Soete and Miozzo (1989) and Miozzo and Soete (2001)

Classification Supplier dominant Scale intensive

Typical core sectors Agriculture, housing, private services, traditional manufacture Bulk materials, assembly (consumer durables and autos)

Specialized suppliers

Machinery, instruments

Science based Information intensive

Electronics/electrical, chemicals Finance, retailing, publishing

Supplier dominated

Education, healthcare, administration, food and drink, repair businesses, hairdressers

Scale-intensive physical networks and information networks

Transport and travel services, and wholesale trades and distribution; banks, insurance, telecommunications and broadcasting services Software, specialist business services, including technical and design services

Specialized technology suppliers and science based

Method

Data source and sample

Sector level

SPRU Innovation survey

Quantitative and qualitative analysis

2000 significant innovations in Great Britain (1945–1983) Dominance of large firms (53% with more than 10,000 employees, 25% with less than 1000)

Qualitative induction/ deduction

Based on the technological linkages with the diverse industries and aspects related to the production and use of innovations within services



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Table 1. Review of empirical taxonomies of innovation patterns in services.

Technology users Interactive services Science and technology-based services Technology consultancy services

den Hertog and Bilderbeek (1999)

Supplier-dominated innovation Innovation within services Client-led innovation Innovation through services Paradigmatic innovations Two additional patterns of service innovation: innovation in a firm’s internalized service function and innovation in an outsourced service function

Waste, land and sea transportation, security, cleaning, legal services, travel services and retail Advertising, banks, insurance, hotels and restaurants R&D services, engineering and computer and software services Mix of interactive services and science and technology-based services

Sector level

ISTAT-CNR Innovation Survey 1997 (Italy)

Factor analysis and clustering

19,000 firms with more than 20 employees

Transport, wholesale, retailing, financial services Retailing, temporary staffing services

Case studies

Meso- and micro-based case studies Structural provision of innovation and services sectoral database

Financial services Engineering, consulting, temporary staffing services Retailing, financial services



Evangelista (2000)

(Continued)

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Authors Hollenstein (2003)

Classification Science-based high-tech firms with full network integration IT-oriented network-integrated developers Market-oriented incremental innovators with weak external links Cost-oriented process innovators with strong external links along the value chair Low-profile innovators with hardly any external links

Sundbo and Gallouj (2000)

Typical core sectors IT/R&D services, business services, banking, insurance and other financial services Wholesale trade, banking, insurance and other financial services, IT/ R&D services, business services Business services, wholesale trade transport and telecommunication (few firms) Wholesale trade, business services, banking, insurance and other financial services Personal services, real estate, hotels and restaurants, retail trade and transport

Classic R&D pattern

Large-scale data processing, building maintenance, large software and telecommunications companies

Service professional pattern Organized strategic innovation pattern Entrepreneurial pattern Artisanal pattern Network pattern

Consultancy and engineering Consultancy sector IT services, repairing services Cleaning, security, hotels, restaurants Tourism enterprises and some financial services

Method

Data source and sample

Firm level

Swiss Innovation Survey 1999

Cluster analysis

2731 service enterprises; 880 firms with valid answers Nine industries

Based on indirect case studies, for instance: Barcet, Bonamy, and Maye`re (1987), Gallouj (1995), Sundbo (1997)



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Table 1. Continued.

Supplier-dominated firms

Retail and repairs, transport

Firm level

Specialized suppliers

Financial services, wholesale, computer and related services

Science-based firms

Business services (cleaning, surveillance, etc.), economic services (accountancy, consultancy), engineering and architecture Hotels and restaurants, personal services, business services (cleaning, surveillance, etc.), computer and related services

Principal component analysis Cluster analysis

Resource-intensive firms

Hipp and Grupp (2005)

Supplier dominance Scale intensity Network basis Knowledge intensity

Other financial services

Probit analysis Corporate level

Banks, insurance companies Technical services and R&D, software, other business services

EIM small business research survey (Netherlands) 1234 firms with less than 100 employees 677 service firms

Mannheim Innovation Panel (Germany) 513 service firms



de Jong and Marsili (2006)

Source: Own elaboration.

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and communication technology – on finance services (Pearson, 1997). It is well known that the technological dependence is not equal for all activities. Two years before that, in 1984, Pavitt presented an industrial typology based on technological trajectories for a range of activities. Such taxonomy became an important framework for subsequent industrial analyses. Diverse sector analyses gave rise to industrial classifications; however, most of them still take into consideration Pavitt’s taxonomy when categorizing industries. Pavitt, in the first version of his well-known taxonomy, classifies services, in particular private ones, as supplier dominated (Pavitt, 1984). These are the only service activities included in his initial work. Later, in 1993, Pavitt published an extended taxonomy including a new pattern, information intensive, represented by some service activities such as finance, retailing, and publishing (Bell & Pavitt, 1993; Tidd et al., 2001). This new category denotes the importance of the ICT in certain innovation trajectories based on information processing and product-related delivery. In order to better understand innovation patterns in services, Soete and Miozzo (1989) and Miozzo and Soete (2001) created a typology for service innovation founded on the Pavitt taxonomy. The range of innovation models in services covers all patterns identified in the previous work, allowing, in that way, the identification of different innovation patterns in services, apart from the ‘supplier dominated’ mentioned earlier. Also, they were the pioneers to describe interactive networks enterprises from an innovation perspective. Hipp and Grupp (2005) remembered that network-based innovation types were not included in the Pavitt taxonomy. The reason is related to the distributive nature of these activities, which cannot be found in the manufacturing sector. Gallouj and Gallouj (2000), however, remarked that the network character should constitute a transversal characteristic in services rather than one described in the taxonomy. They observed that even ‘supplier-dominated’ services had such features. Another criticism regarding Soete and Miozzo’s (1989) contribution concerns the idea of services as simple users of technologies (Gallouj & Gallouj, 2000). Evangelista (2000) proposed another similar taxonomy for services based on the Italian innovation survey examination. He used factor analysis and clustering to group service activities so as to identify a variety of service innovation. Miles (2001) observed that the study was constrained to operate with aggregate data rather than firm level micro-data, becoming thus unfeasible intra-industrial variations analyses. den Hertog and Bilderbeek (1999) proposed a service typology composed of seven types of innovation patterns. They highlighted both services’ capacity to innovate by themselves and the non-technological character of the innovation. All innovation patterns indicated consist of a combination of connections between suppliers of inputs, innovative service companies, and clients. However, they observed that more innovation patterns could be identified by using different variables such as the government and its role as an innovation promoter as well as customers’ interaction along the service production. A recent typology of service innovation was made by de Jong and Marsili (2006), who proposed an empirical taxonomy of innovative small and micro-enterprises, in both manufacturing and services. They assert that enterprises at the bottom of the size distribution use different business practices and strategies to innovate. In that way, their classification includes a new cluster called resource-intensive firms, in contrast to scale-intensive ones composed essentially by large enterprises. The authors, however, admit similarities with the Pavitt taxonomy with regard to the other clusters. A different line of research on innovation in services became eminent in the middle of the 1990s. According to this approach, named demarcation perspective, service innovation



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is highly distinctive. Subsequently, the use and even the adaptation, of conceptual and empirical tools commonly utilized in manufacturing innovation analysis are not suitable (Salter & Tether, 2006). On the contrary, this service innovation approach ascertains the need to use instruments of measure capable of embracing services particularities such as their intangibility and high levels of interaction. Whereas the assimilation perspective focuses on the technological trajectory of the innovation process, the demarcation approach concentrates on the attention on organizational innovation and innovation in knowledge-based business services (Salter & Tether, 2006). The service typology suggested by Sundbo and Gallouj (2000) consists of an important representation of this research line. They observe that enterprises may present different patterns for different innovations, although certain patterns are more common than others.1 They observe, also, that despite the existing specificities of services innovation, there is a growing convergence between services and manufacturing innovation (Miles, 2001). A third approach to research on innovation in services, the synthesis perspective, suggested that service innovation made evident neglected aspects of the innovation process (Coombs & Miles, 2000). Moreover, this approach moved the focus of research from a self-determining sector analysis towards a network of a particular market, in which services and manufacturing were interrelated activities. In that way, the gap between the innovation studies in both services and manufacturing is becoming more and more narrow. Recently, Hipp and Grupp (2005) empirically evaluated innovation patterns previously ascribed to services activities. Their results show that innovation patterns in services depend to a lesser extent on the sector classification found in each of the studied service industries. This evidence strengthens, thus, the conclusion of Sundbo and Gallouj (2000) to which previous allusion was made. Moreover, Hipp and Grupp affirm that the present service innovation typology is fit for services that hold a classical innovation structure. They add that, due to the existence of other innovative service enterprises, new patterns have still to be recognized from both alternative concepts and alternative measure instruments. With a view to upcoming work they, as well as other authors, support the idea that manufacturing and services should be studied together, taking into account ‘the products’ instead of the sectors in which such outputs were produced. All these contributions have made a substantial progress towards a better understanding of innovation in services. One important consideration is that not all services are ‘supplier dominated’;2 on the contrary, they can also be sources of new technologies. In fact, some of these technologies are outcomes of co-production between users and producers (Tether et al., 2001). In that way, services ‘are not merely passive recipients of others’ innovations’ (den Hertog & Bilderbeek, 1999, p. 4). However, most services possess the ‘supplier dominated’ character regarding the companies’ innovation activities. Another important point concerns the role of organizational innovation in services, highly neglected, particularly, by the assimilation perspective. Last comes the recognition of a complex and multidimensional character of services and manufacturing that claims new perspectives regarding industrial innovation analyses. It is thus manifested that there is a diversity of theoretical approaches to innovation in services and, consequently different lines to comprehend service innovation. A plurality of innovation patterns in services: the empirical evidence The aim of this paper is to identify the main differences among innovation patterns across the service sector by handling the available statistical data. In order to do so we use the


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recent data of the CIS-3 for European Countries provided by Eurostat. Since our purpose is to establish universal innovation patterns for services instead of a specific breakdown for particular a country, we used the EU-15 Member States’ average plus Iceland and Norway. In order to avoid possible national bias we use mean values at the European level for each service industry. A very detailed empirical analysis is constrained by the Eurostat classification of the service activities used in the CIS-3: wholesale trade and commission trade (NACE 51), transport and communication (NACE I), financial intermediation (NACE J) and business services (computer activities; R&D; engineering activities and consultancy; technical testing and analysis) (NACE 72, 73, 74.2, 74.3). According to the results of the CIS-3, the differences in innovative patterns within services are substantial (European Commission, 2004, 2005).3 Here we display main innovation indicators for the service activities. Although the diversity is not clearly demonstrated in certain indicators, the differences in the relative relevance of these attributes may indicate important dissimilarities among sub-sectors. Diversity of enterprises’ innovation intensity The proportion of innovative enterprises by sub-sectors shows that there are substantial differences among the various groups of activities. Transport and communication seem to lag behind the average while business services have the highest percentage (Table 2). These activities, clearly innovative, exceed both the manufacturing average and the service average. Wholesale trade and commission trade innovation is closer to the service average. Thus, the extent of the innovative character seems to show considerable heterogeneity within services. Another indicator, the innovative intensity, used to measure the innovation effort of enterprises (total innovation expenditure/total turnover), confirms the assumption of diversity. However, the comparison between these indicators points out a relevant impact of both the nature of the productive activity and the market structure on the innovation process. In other words, the financial intermediation sub-sector exhibits the lowest rate of innovation effort, despite having high proportion of innovative enterprises (in a sector dominated by the presence of very large firms). Thus, these two indicators are very important and complementary in the attempt to define innovation patterns. Diversity of enterprise R&D intensity R&D activities are an important way to create internal knowledge creation; not only for manufacturing but also for service industries, particularly for some of them. This is more evident after widening the R&D concept in order to include as R&D some creative works devoted to generating new knowledge and innovation. Actually, intra-sectoral analyses reveal that the intensity of R&D activities is higher in certain service industries than in some manufacturing industries. Innovation activity and expenditure Examining the distribution of expenditure on innovation is a good starting point for identifying the diversity of innovation patterns in services. The results of the CIS-3 reveal that the distribution of innovation expenditures is not very uniform across different service activities (Figure 1). To a certain extent, such expenditure depends upon the technological

Main aspects of the innovation General aspects

Proportion of enterprises with innovation activity

Innovation activities

Most frequent innovation expenditure

R&D

Wholesale trade and commission trade

Services 40%

Transport and communication

35%

Intramural R&D

34.8%

Intramural R&D

26.3%

Acquisition of machinery and equipment

30.7%

Training and market introduction expenditure

25.8%

Financial intermediation

28%

Acquisition of machinery and equipment Intramural R&D

47.4%

20.5%

Business services

58%

Acquisition of machinery and equipment Training and market introduction expenditure

64%

47.9%

Intramural R&D

57.0%

19.6%

Acquisition of machinery and equipment

13.7%

Total innovation expenditure/total turnover

1.6%

1.1%

1.8%

0.8%

8.3%

Proportion of enterprises with intramural R&D R&D expenditure/total turnover Personnel engaged in R&D/total employees Personnel engaged in R&D/total employees with higher education

42%

29%

34%

44%

69%

0.7%

0.3%

0.3%

0.1%

4.8%

4%

3%

1%

2%

11%

20%

23%

55%

16%



Table 2. Synthesis of the main aspects of the innovation in services, EU-15, Iceland and Norway, 1998 –2000.

27%

(Continued)

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Main aspects of the innovation Cooperation

Proportion of enterprises with innovation activity involved in innovation cooperation Geographic location of the agent with whom they cooperate more Main agents in the nationwide extent


Services 22%

National

Suppliers Clients

19%

10.5% 10%


16%

Financial intermediation 15%

13%

Business services

21%

National

13%

National

National

Clients

7.9%

Suppliers

11.2%

Consultants

Suppliers

7.7%

Clients

10.5%

Suppliers

Source: Own elaboration based on Eurostat data. The data for these indicators correspond to the year 2000. The calculation has been made from the average of the available countries.

18%

34%

National

11.6%

11.7%

Clients

15.7%

11.6%

Universities

15.7%



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Table 2. Continued.



Figure 1. Distribution of the innovation expenditure, by type of enterprise, EU-15, 2000 (%). Source: Own elaboration based on Eurostat data.

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level of innovation, the stage of the product life cycle, and the intensity of the human capital used in the innovation process. Clear differences regarding the distribution of expenditure on innovation in each sub-sector are evident. Although business services earmark, on average, 57% of their expenditures on ‘innovation in intramural R&D’, the financial intermediation sub-sector spends, on average, less than 10% of total innovative investment for the same purpose. Just as there are stark differences across sub-sector spending, there are also some similarities; for instance, the financial intermediation sub-sector and the transport and communication sector spend proportionally similar amounts on the acquisition of machinery and equipment. Additionally, the wholesale trade and commission trade subsectors may be characterized as the most similar with respect to the distribution of their innovation expenditures. Thus, these first results highlight a diversity of the innovation patterns in services.4 Concerning the propensity to engage in R&D activities, a similar empirical analysis has confirmed a significant variation across services sub-sectors, highlighting computer and related services, telecommunication and R&D services as the three most R&D-intensive sub-sectors (den Hertog et al., 2006). Human capital as a pillar of the knowledge-based economy The transition to a knowledge-based economy – in which service activities play a major role – has increased the transmission of knowledge for carrying out productive activities, in every service sector. However, this knowledge is related not only to codified knowledge, but also to tacit knowledge, which is controlled by employees and agents and whose generation, reproduction, and application is much more complex for enterprises to organize. To manage and make use of such knowledge, a qualified body of personnel is necessary, distinct from other divisions that carry out the new processes. Personnel qualification is considered a key element in the service innovation process (Sundbo & Gallouj, 1998). An analysis of the CIS-3 data shows that the ratio of personnel engaged in R&D activities to total employees is relatively high in services, but with large differences among sub-sectors. This ratio is relatively higher in the business services, where knowledge is a key factor in the R&D process, compared with other service activities (Figure 2). Other recent investigations confirm the supremacy of business services indicating, also, a high share of employees with higher education in many service activities like scientific libraries and universities, publishing houses, hospitals, news offices, architectural practices, and others (Hipp & Grupp, 2005). However, it is important to note that the ranking changes when comparing the ratios of R&D personnel to the total amount of employed personnel with higher education across service sub-sectors. In this case, the transport and communication sub-sector has the highest proportion of personnel engaged in R&D activities, followed by the business services. The relatively high proportions observed in transportation and communication and business may be explained by the composition of human capital in these fields, which tend to have a higher level of education than in other service activities where there is a high degree of non-graduate personnel. It seems most relevant, however, to stress the importance of the personnel with higher education not engaged in R&D activities, which plays a key role in the development of the innovative capacity of the enterprise and in the attainment of creative work characteristic of the business services. Therefore, we believe that the first ratio (persons engaged in R&D activities as a share of the total number of employees) to be more relevant than the second (persons engaged in R&D activities as a share of the total number of employees with higher education).



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Figure 2. Personnel engaged in R&D activities in enterprises with innovation activity, EU-15, 2000 (%). Source: Own elaboration based on Eurostat data.

Notable differences in values across service sub-sectors, in addition to attributes previously mentioned, contribute to the heterogeneity that exists in the service sector. The nature of activities pursued by service sub-sectors, as well as the configuration of the present elements of the innovation process, are other key factors in this heterogeneity. Diversity of cooperation linkages to innovate Innovation, from a systemic perspective, is a dynamic and interactive process of creating new products/services that involves the firm as well as other agents that constitute the firm’s business environment. Another important aspect for understanding the relationship between service enterprises and agents is the cooperation in the innovation process and the understanding of this cooperation as a formal collaboration. Moreover, formal collaboration provides the opportunity to exchange complementary information in the innovation process due to common efforts and goals. After checking the empirical results, it is possible to conclude that business services are much more inclined to cooperate than other enterprises involved in service activities (Table 2). This cooperation rate is quite high when compared with the corresponding data for the other service activities.5 The data thus reveal an important trend: service enterprises, in general, have a higher propensity to cooperate in the innovation process than do manufacturing enterprises – this is especially true for the business and financial intermediation service sub-sectors. By briefly analyzing the partners with which service enterprises cooperate, we believe that the financial intermediation sub-sector differs from other service sub-sectors not only in the extent to which this cooperation is undertaken, but also in its preference as to which types of agents to cooperate with (Figure 3). Whereas the main agents chosen by the business services are clients and universities, financial intermediation enterprises prefer to innovate with consulting firms and suppliers. The third most-utilized innovation partner for financial intermediation enterprises is another enterprise within the enterprise


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Figure 3. Proportion of enterprises with innovation activity involved in innovation co-operation, by partner, National level, EU-15, 2000 (%). Source: Own elaboration based on Eurostat data.

group, which reveals that these large enterprises have strategies to create specialized firms for covering specific needs, especially technological needs. The transport and communication sub-sector tends to have weak cooperation intensity with all kind of agents; in any case, the highest values are observed in the cooperation with suppliers, clients, and competitors. The wholesale trade and commission trade sub-sectors have the lowest ratio of enterprises with cooperative innovation activities as opposed to the other sub-sectors; in this case, the agents preferred for cooperation are also suppliers, clients, and competitors.

Towards a typology of innovation patterns in services The analysis of the innovation attributes of services reflected by the CIS-3 allows us to build up a taxonomy of service innovation patterns. The result leads us to a service classification that considers the innovative character of the sector, the innovative intensity of the enterprises as well as the type of innovation activities developed and the propensity to cooperate in order to innovate. As we said earlier, the sector level managed in this analysis is constrained by the aggregated data available. The service typology identified here consists of three broad service types according to their innovation process attributes: (1) low innovation-intensive sectors (LIIS) (represented by ‘wholesale and commission trade’ and ‘transport and communication’);



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(2) technology-intensive and moderately innovation-intensive sectors (TIMIIS) (represented by ‘financial intermediation’); (3) knowledge and innovation-intensive sectors (KIBS) (represented by ‘business services’). In Table 3 we present these groups and their respective characteristics. Obviously, the differentiating borders among the various types are not very clearly demonstrated and there is some overlapping among the different activities studied. One of the reasons is the inevitable internal heterogeneity of the groups considering the broad classification used here. Thus, this typology should be considered as a first step towards a better understanding of innovation in a highly heterogeneous sector and should lead us to reject excessively simple and generic conclusions about the service sector. Furthermore, we agree, that enterprises belonging to the same sub-sector may exhibit different patterns of innovation (cf. Sundbo & Gallouj, 2000). It is clear that, the three types of innovation patterns in services identified show remarkable differences. The analysis shows clearly that not all services are as noninnovative as previously supposed. Nor does innovation proceed in a ‘one-size-fits-all’ way. Actually, service activities possess different innovative character, intensity and level of formalization of innovation. Also, they differ considerably in the innovation inputs and the intensity of innovation cooperation. The other variables studied indicate diversity too. Additionally, underlying productive patterns can be identified in this typology. They surely determine the innovative performances, and thus the innovation patterns, in services. This verification confirms the belief that productive nature is narrowly linked to innovative performances. The first type identified, LIIS, is composed of trade enterprises, including goods transport and storage. The OECD classification (OECD, 2001), calls them ‘distributive services’. The sectors assigned to this type are wholesale and commission trade, repair of motor vehicles and transport. Due to the high level of aggregate data available we have been forced to classify ‘communication activities’ into this type, despite knowing the large extent of innovation in certain activities such as telecommunication. The performance of these activities is practically weaker than in the rest of the sub-sectors as far as most of the innovation indicators are concerned. Hollenstein (2003) identifies a similar cluster in his analysis of the Swiss case. He called low-profile innovators with hardly any external links those composed essentially of personal services, real estate, hotels and restaurants, retail trade, and transport. This author pinpoints as important characteristics of these activities the weak demand prospects, strong price competition, low appropriability and innovation opportunities, and the relatively poor human capital endowment. Most of these activities have been classified by several authors as supplier-dominated. The second type, TIMIIS, contains productive processes based principally on information. The enterprises belonging to this type are also sensitive to the innovation coming particularly from suppliers of new technologies and ICT; though non-technological innovations are also relevant to these activities. In any case, the ICT evolution could best explain what is behind the innovation developed by those enterprises (COTEC, 2006). The sectors assigned are fundamentally banking, insurance, and other financial services. Many authors have classified those activities as network-based (cf. Sundbo & Gallouj, 2000; Hipp & Grupp, 2005), due to their high level of interaction with clients and the information flows of these relations. In fact, the innovation related to the contact channel with clients has probably been the most important innovation type for financial intermediation in the last decade. That kind of innovation is often supposed to be product and process innovation (COTEC, 2006).

Low innovation-intensive sectors Innovative character of the sector Innovative intensity of the enterprises Formalization of the innovation intensity in R&D Main source of the innovation (innovation expenditure) Intensity in innovation cooperation Main agents chosen to cooperate Nature of the production Sectors assigned

Low Low Low Mix – acquisition of machinery and equipment, intramural R&D, training, market introduction expenditure Low Clients, suppliers Goods-related services

Technology-intensive and moderately innovation-intensive sectors Medium Low Medium-low Acquisition of machinery and equipment

High High High Intramural R&D

Medium Consultancies, specialized suppliers Information-intensive networks

High Clients, universities Knowledge intensive Computer and related activities, R&D, architectural and engineering activities and related technical consultancy, technical testing and analysis

Wholesale and commission trade, repair Bank, insurance and pension funding, activities auxiliary to financial of motor vehicles, transport, intermediation communication

Source: Own elaboration. Telecommunications is included because the aggregation level of the available data.

Knowledge and innovation-intensive sectors



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Table 3. Services typology from the particularities of the innovation process.

Main aspects of the innovation



Financial intermediation

Business services

Intensity of the innovation character

Relatively innovator

Lowly innovator

Quite innovator

Highly innovator

Innovation activities

Innovation expenditure activities

Equal distribution. Slightly preference for R&D, training and market introduction expenditure. Low

Mostly acquisition of machinery and equipment

Mostly acquisition of machinery and equipment

Mostly R&D

Relatively high

Very low

Very high

Very low intensive

Low intensive

Relatively intensive

Intramural R&D intensive

Low

Low

Very low

Very high

Relatively low

Very low

Low

Very high

Relatively low

Quite high

Low

High

Low cooperative intensity

Low cooperative intensity Mostly national and little internation cooperation Suppliers and clients. Inclined to cooperate with competitors

Quite cooperative intensity

High cooperative intensity Mostly national and relative internation cooperation Clients and university. Inclined to cooperate to suppliers

Total innovation expenditure/total turnover R&D

Cooperation

Proportion of enterprises with intramural R&D R&D expenditure/total turnover Personnel engaged in R&D/total employees Personnel engaged in R&D/total employees with higher education Cooperative intensity Location of the partners

Mostly national and little internation cooperation

Main agents in the national scope

Clients and suppliers

Source: Own elaboration.

Mostly national and very little internation cooperation Consultants and suppliers. Inclined to cooperate with other enterprises within the enterprise group

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General aspects



Table 4. Innovation patterns in services, EU-15, Iceland and Norway, 1998– 2000.


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The most common tool for obtaining direct information from external clients are the Focus Groups6 as well as surveys that measure the quality of the product. Another important tool whose use is more and more frequent in those activities is the Data mining (COTEC, 2006). These examples reveal, among other things, a growing participation of clients into the innovation process in the financial sector. In fact, this sector has become used to developing innovation jointly with lead users.7 Some authors, in fact, classify the innovation developed by financial services as client-led innovation (den Hertog & Bilderbeek, 1999). Nowadays, the links between financial entities and certain organizations considered traditional sources of knowledge, such as universities, technology institutes (TIs), and public research institutes for instance, are practically non-existent. Those activities normally incorporate new technologies, basically ICT, from technology suppliers, though some technologies are developed by the activities themselves. For that reason, some innovation pattern typologies consider innovation in financial services as IT-oriented network-integrated developers (Hollenstein, 2003). The last type identified in our analysis, KIBS, is composed of activities situated at the forefront of innovation (Miles, 1994). They are known to use knowledge largely, mainly tacit knowledge, for developing their services. However, knowledge could be considered not only an important tool, but also the core of their final product. They are ‘responsible for the combination of knowledge from different sources and for the distribution of knowledge itself’ (Hipp & Grupp, 2005, p. 518). In parallel, these service activities are commonly the ones that exercise innovation the most. The significant use of knowledge both for producing services and creating new outputs, in that way, allows these activities to innovate more frequently than any other sector. The so-called way to accumulate knowledge, learning by doing, permits these activities to develop innovation while providing their services. Additionally, the intense level of interaction, the ad hoc mode of innovation and the high level of interface with clients in business services contribute positively to the innovation process. Innovation in business services could be perceived as the result of co-production with the client; in fact, the innovation frequently takes place within the client firm. In this manner, den Hertog and Bilderbeek (1999) named this innovation pattern ‘innovation through services’. A great part of these activities play the role of source, carriers, and facilitators, providing knowledge to the innovation process at the client firm. Sundbo and Gallouj (2000, p. 54) observed that these enterprises ‘do not really sell productservices, but competencies, abilities to solve problems in different expertise areas’. Similarly, Miles (1994) classified them as information service producers. Computers and other service-related practices, R&D, architecture and engineering, technical consultancy as well as technical testing and analysis are examples of activities belonging to this cluster. Conclusion The study of innovation in service activities has traditionally been neglected because services were simply considered users of the innovation developed by the manufacturing sector – hence, the supplier-dominated approach (Pavitt, 1984). Nevertheless, despite the increasing number of contributions in literature to service innovation, much of the research is still too generic, examining service activities as a whole. Actually, service activities are quite heterogeneous and, consequently, the service innovation process should display different behavioral patterns. The aim of this



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paper was to identify specific innovative patterns in each group of service activities, rather than attempt to discern a general pattern. This paper comparatively analyzed four different service sub-sectors using a wide range of innovation attributes. It is important to stress that the service categorization used was determined by the availability of data and the previous classification established by the source (Eurostat – CIS-3). The low level of disaggregation could not account for certain differences between the sub-sectors. A more thorough breakdown would likely produce more nuances, and could lead to the identification of new innovation patterns. Nonetheless, it was possible to identify important behavioral differences for certain attributes and to identify possible patterns of innovation. Additionally, the activities belonging to each identified type possess a similar productive nature, which leads to the conclusion that innovation performance will likely depend on the features of production of the service activities. These innovation patterns could be summed up in three broad types: LIIS, TIMIIS, and KIBS. KIBS may be considered the leading service sector with regard to innovation; conversely, other activities might be characterized by low intensity in innovation. Several reasons could explain this disparity. KIBS intrinsically use and transfer knowledge; they develop their activities in direct contact with clients and therefore have a more intense level of interaction than do enterprises in the other service sub-sectors. The ad hoc mode of innovation and the high level of interface with clients in KIBS lead to the development of customized products, whereas LIIS offer mainly standardized services. An analysis of the innovation inputs in each sub-sector also reveals the existence of specific patterns. TIMIIS exhibit an innovative effort – the rate between innovation expenditure and turnover – well below the service sector average, whereas the KIBS rate is actually higher than that of some industrial activities. The other types exhibit rates around the service sector average. Almost half of all innovation expenditure in TIMIIS and in some LIIS activities is concentrated on the acquisition of machinery and equipment. In the latter case, such expenditure reflects the high percentage of ongoing innovation compared with the service sector average. The KIBS clearly consider R&D activities as a main source of knowledge for innovation. Additionally, the commonly held notion that R&D activity is focussed only on KIBS and on some activities belonging to TIMIIS loses merit. Empirical findings show that the other types also use R&D as a means of increasing knowledge for innovation. In general, a higher proportion of innovative enterprises cooperate in the service sector than in the manufacturing sector. However, an intra-sectoral analysis reveals, as anticipated, that there are differences regarding the tendency to cooperate among enterprises in the different service sub-sectors. For nearly every type studied, the supplier is still the main agent with whom enterprises choose to cooperate, with the exception of KIBS in which the client plays an important role throughout the innovation process. All types except KIBS consider clients the second main source of information – or rather, their main source of external information. In conclusion, the intra-sectoral study of innovation in services leads to a recognition that services increase innovation activities but they do it at a different pace, different intensity and following a different pattern.

Notes 1. The assumption that every innovation pattern can be found for every activity, though with different extents, is also supported by de Jong and Marsili (2006).


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2. The de Jong and Marsili (2006) clustering analysis points out that supplier-dominated is the less common pattern in services, taking into account the service average, in contrary to the manufacturing sample. That result contradicts the thought that supplier-dominated is the most ordinary innovation pattern in services (den Hertog & Bilderbeek, 1999). 3. The empirical results are summarized in Table 2. Table 4 summarizes the descriptive sub-sectors comparison based on the results expressed in the previous table. 4. Similar analyses were conducted for some EU-15 countries and, in general, in all cases the distribution structures were alike, except in the case of Finland. 5. It is also interesting to note that the service sector cooperation average is much higher than the manufacturing sector average, in which the proportion of cooperative enterprises is 17% (European Commission, 2004). 6. Focus group is a marketing concept for a type of qualitative research in which a group of people are asked concerning their attitudes towards products, services, concepts, advertisements, ideas, or packaging. Focus groups are an important tool for acquiring feedback regarding new products, as well as various topics (Marshall & Rossman, 1999). 7. Lead users is a term created by Von Hippel (1986) to qualify certain costumers. In own words, ‘lead users are users whose present strong needs will become general in a marketplace months or years in the future’ (Von Hippel, 1986, p. 6).

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