Service innovation and non-technological innovation

Rationale and objectives

In the face of lagging productivity and job creation, many OECD governments are looking for new sources of growth and have recognised the importance of services in this regard. Services already account for around 70% of gross domestic product (GDP) and most employment across the OECD. Services also contribute half or more of all the value added in total exports (OECD, 2013). 

The boundaries between services and manufacturing are also increasingly blurred. Indeed, successful manufacturers often combine services with manufactured products in innovative ways. For example, during the global crisis, Hyundai managed to grow its share of the US automotive market in part by introducing income-loss insurance for buyers. And Caterpillar has introduced a charging framework based on the volume of material moved by its machinery. 

In spite of the overall growth in services, productivity in this sector has risen slowly in many OECD countries. Because of the economic weight of the sector, raising its productivity is clearly an important step in achieving higher aggregate productivity growth (it is recognised, however, that, all else being equal, raising productivity in services will put pressure on employment over the short term). Policy makers are therefore giving greater attention to promoting innovation and productivity in services through the design of appropriate framework conditions, such as regulation and competition policy, and targeted innovation policies.

OECD analysis shows that innovation in services relates positively to employment and firms’ turnover growth. Furthermore, positive spillovers from services innovation are found to be no less important than those from other types of innovation (OECD, 2015). 

Services innovation has some particular characteristics. Services firms typically invest less than manufacturers in R&D, but a high proportion of services firms still innovate. Indeed, knowledge-intensive services firms have levels of innovation comparable to firms in high-tech manufacturing. Service industries also tend to innovate in interaction with customers, suppliers and competitors. Service companies likewise use a wide range of mechanisms to appropriate the benefits of their innovations. These mechanisms include formal protection of intellectual property, through design rights, trademarks, copyright and patents (although patenting occurs predominantly in knowledge-intensive services). Informal protection is also used, ranging from confidentiality clauses in employment contracts to lead-times in innovation cycles. 

On average, market services use as much fixed capital per employee as manufacturers, but this capital is more skewed towards buildings and ICT. Service industries raise their productivity by combining investment in fixed capital with intangible assets such as computer software, human capital, design and new business models. Big differences exist across countries in the scale of business investment in intangible assets, and many policy settings play a role (OECD, 2013). Much of Europe, for example, lags behind the United States with respect to intangible investment. Policy must ensure that good framework conditions exist so as to facilitate business investment in both tangible and intangible assets. 

Some OECD work has found that service-sector firms are under-represented in innovation programmes. Policy should thus ensure that these firms enjoy equal access to non R&D based forms of innovation support (OECD, 2015).

Major aspects and instruments

In some countries, policies to support innovation have been developed mainly from an R&D or manufacturing perspective. Policy makers need to ensure that policies are well adapted to the specific characteristics of services innovation (e.g. more direct involvement of users) and to the market and that they deal with systemic failures that inhibit service innovation. Policies for service innovation cover a broad range of strategic objectives (Table 1), from reinforcing public research capacity to advancing knowledge in non-technological fields or service-related domains, to encouraging service innovation by firms, to strengthening business capacity to implement organisational and marketing changes, to supporting innovative entrepreneurship in services, to adopting a sector-targeted approach by supporting service industries, etc.

Australia, Austria, France, Germany, Denmark and Finland are examples of OECD countries with targeted instruments for service innovation. Instruments focusing on services include:

  • Making R&D support more relevant to the service sector: Across countries, relevant approaches have included establishing R&D programmes related to the needs of the more R&D-intensive segments of the service sector, such as computing, software and telecommunications services, and promoting R&D for the application of ICT to service industries such as health care, financial intermediation, wholesale and the retail trade.
  • Support for the application of ICTs: ICT-related service businesses have received strong support in many countries (for instance for e trade). Such support sometimes has a human capital dimension. For example, the Danish Ministry of Science, Technology and Innovation has implemented measures to help ICT staff with short-cycle higher education (such as multi-media designers) to gain credits towards a university education.
  • Support for services-oriented industries, including software.
  • Fostering start-ups in services: New firms effectively serve as a platform for experimentation with service-sector innovations (as they do in manufacturing).
  • Securing transparent regulation of the transfer of public data (maps, meteorological data, etc.) for commercial use.
  • Integrating service innovation in policies to better link industry and public research (commercialisation policies).
  • Adjusting demand-side innovation policies and instruments such as public procurement (Finland, United Kingdom) and regulations to better facilitate services innovation (Sweden, Denmark, Germany, United Kingdom).

As many policy instruments for services are relatively new, impact assessments are rare. A lack of indicators and measures of service innovation also hinders an understanding of the impacts of service innovation and policy. A key challenge for policy makers is to identify and adapt best practices for promoting service innovation. Measurement has improved, but many challenges remain:

  • Surveys and measurement guidelines must keep up with the increasing complexity of how R&D and innovation activities are organised within and across firms.
  • The coverage of services in innovation surveys has improved, but little information is collected on services innovations: new questions/indicators should be developed and tested.
  • In addition to surveys, other information sources should be further exploited (e.g. administrative data).
  • The data infrastructure for analysing services-based innovation must be strengthened, and access for researchers to data (micro-data, public sector data, etc.) should be facilitated.
  • More quantitative and qualitative information is needed to inform the design of new or improved policy instruments for services innovation.
Recent policy trends

In recent years there has been a shift to include policy support for service innovation in mainstream instruments such as R&D tax credits. Indeed, the churning rate in national services-targeted policies between 2014 16 is much lower than in other STI policy areas, meaning that policy intervention to renew, streamline or revise policy programmes targeted to services remains comparatively limited (Figure 1). New programmes have been introduced, primarily in support of health and education services.

In fact, rather than creating instruments specific to new services, most OECD countries are in the process of changing the scope of existing instruments. For instance, in 2016 Ireland launched Innovation 2020, a programme which among other goals aims to increase capacity in the higher education sector by appointing researchers with a proven track record of solution-driven research in services and business processes, in collaboration with business leaders. 

A growing number of countries also have some type of service innovation strategy, either as part of a broader vision on innovation, or a smart specialisation strategy, or in relation to social challenges and innovation in the public sector (Table 1). In Germany, for instance, the Services Task Force deals with a range of topics, including endowing university chairs, developing the "Service made in Germany" brand, establishing services-related qualification and promoting services-relevant research. The Services Task Force is included in the Science and Industry Research Union (Forschungsunion Wirtschaft Wissenschaft), which aims to support the government's High-Tech Strategy. 

Tax incentives are also increasingly being expanded to include services innovation, as in the Netherlands and Australia. In some countries public procurement procedures are being modified with the aim of spurring services innovation. 

References and further reading

EC / OECD (forthcoming), International Database on Science, Technology and Innovation Policies (STIP), edition 2016, www.innovationpolicyplatform.org/sti-policy-database.

Kergroach, S., J. Chicot, C. Petroli, J. Pruess, C. van OOijen, N. Ono, I. Perianez-Forte, T. Watanabe, S. Fraccola and B. Serve, (forthcoming-a), “Mapping the policy mix for innovation: the OECD STI Outlook and the EC/OECD International STIP Database”, OECD Science, Technology and Industry Working Papers.

Kergroach, S., J. Pruess, S. Fraccola and B. Serve, (forthcoming-b), “Measuring some aspects of the policy mix: exploring the EC/OECD International STI Policy Database for policy indicators”, OECD Science, Technology and Industry Working Papers.

Martinsson, I. (2011), “Promoting innovation in service production based on better practices: Deconstructing business as usual”, in Promoting Innovation in the Service Sector, UN Economic Commission for Europe.

Mas-Verdu, F., D. Ribeiro and S. Dobón (2010), “Government policies and services: An approach to the international context”, The Service Industries Journal, Vol. 30, No. 1, pp. 1-10.

OECD (2015), “Meeting 21st-century challenges with science, technology and innovation: A roadmap for policy making”, OECD Publishing, Paris, https://innovationpolicyplatform.org/system/files/Meeting21st%20CenturyChallenges_Final_Web_0_0.pdf.

OECD (2013), “Interconnected economies: Benefitting from global value chains”, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264189560-en.

Rubalcaba, L. (2011), “The challenges for service innovation and service innovation policies”, Promoting Innovation in the Service Sector, UN Economic Commission for Europe.

Vargo, S. and R. Lusch (2008), “From goods to service(s): Divergence and convergence of logic”, Industrial Marketing Management, Vol. 37, pp. 254-259.

Contributed by Alistair Nolan with input from Fernando Galindo-Rueda, Sandrine Kergroach and Irene Martinsson,
OECD Directorate for Science, Technology and Innovation. based on the work carried out by the OECD Committee for Scientific and Technological Policy and its Working Party of National Expert of Science and Technology Indicators.
Please cite as: OECD (2016), "Service innovation and non-technological innovation" in OECD Science, Technology and Innovation Outlook 2016OECD Publishing, Paris, http://dx.doi.org/10.1787/sti_in_outlook-2016-29-en.