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Inviting Cinderella to the innovation ball
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by European Commission's Enterprise DG 18 the future of the Service Industry

The European Union is consciously engaged in transforming itself into a knowledge economy. But the extent to which this transformation has already taken place sometimes seems to be overlooked. The authors of a new Innovation study, to be published by the European Commission early in 2005(1), point out that services now account for around twothirds of EU employment and GDP. Of the 76 million jobs created in the US between 1970 and 2000, 93% are in services. And Eurostat believes that over the past two decades in Europe, additional jobs have only been created in the service sector.

1. The only game in town?
The service sector is no longer simply the facilitator and consumer of manufacturing innovation. It has become a powerful innovator in its own right.

Services not only form the largest sector of the EU economy, but they are also its fastest growing. As manufacturing migrates to regions with lower labour costs, European resources continue to shift towards services, including the service elements of manufacturing itself. Innovation is clearly critical to the dynamism of the service sector, in particular as information and communication technologies are applied to re-engineer business processes, to create and extend service offerings, and to realise entirely new business models. But knowledgeintensive business services (KIBS), such as market research, engineering and technical services, and design, which now account for 54% of total European added value, are also increasingly important as generators of innovations with economy-wide impacts, notably in traditional manufacturing industries.

Why, then, is innovation in the service sector still so poorly captured by official statistics, and so weakly supported by public policy, compared with that in manufacturing? Bruce Tether and Jeremy Howells of CRIC at the University of Manchester led the team that produced the new report. “A lot of service sector innovation is organisational,” says Tether (see figure 1). “The OECD’s Oslo Manual definition is currently being updated to take account of organisational innovation. But, to date, policy has focused on technology-led innovation, undervaluing softer aspects in which technology may play a role but is very often not the driving factor.”

Figure 1: Type of innovation, by sector

Unreported innovation

Ronald Mackay of the Enterprise DG unit responsible for Business services and distributive trades, which prepared the December 2003 Commission Communication on the competitiveness of business related services, agrees. “Service-sector companies are innovative in a different way. Clearly, they invest heavily to develop new services in response to changes in the market, but only a small proportion of this investment is in conventional research and development of the kind picked up by official statistics.”

The traditional view is that innovation in services relies exclusively on new technologies developed by other sectors and simply bought in. A more recent interpretation is that Europe’s service sector is spending too little on R&D. In 2001, business-related service companies across the EU accounted for only 13% of total business investment in R&D. This compares unfavourably both with the sector’s 54% share of the EU economy, and with the 34% of total business R&D spending by US business-related service companies. The recent Communication calls for policy action oriented towards services and “more active participation of services companies in R&D programmes”.

The full report is available: click here

Visit also the conference about 'the future of the Service Industry' and the sections with books, articles and links.

See also Summit for the Future: Trade / Service Industry

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