Roundtable on Innovation in Services
Lisbon Council, Brussels, 27 November 2008
Factors and policies affecting services innovation:
some findings from OECD work
Dirk Pilat
Head, Science and Technology Policy Division
[email protected]
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The context: the services sector remains
underdeveloped in many OECD countries …
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Services account for the bulk of
employment growth in the
OECD, but growth has been
weak in several OECD countries.
Share of the working-age population
employed in services, 2002, in %
Low employment in services
accounts for most of the variation
in overall employment rates in
OECD countries.
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... notably for women …
Employment/population ratios in services and for women, 2002
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High employment in services goes hand-in-hand with high employment for
women
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… with productivity growth lagging
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The services sector makes a small
contribution to productivity growth
in several OECD countries, despite
its large weight in the economy.
Contribution of the services sector to
productivity growth, 1990-2003, in %
In other OECD countries, such as
Australia and the United States,
services now account for the bulk of
productivity growth, showing that
the sector can be a dynamic source
of growth and innovation.
This large difference in performance
suggests that some factors and
policies constrain productivity
growth and innovation.
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Services can be as innovative as manufacturing
firms …
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Service firms are potentially
just as innovative as
manufacturing firms (in
particular in some sectors).
Innovative firms in Europe as % of all firms in an
industry, by selected industry, 2002-2004
But their innovative capacity
is often constrained by
inadequate policies.
Many governments do not yet
sufficiently consider services
firms in their policies to
foster innovation.
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… and are involved in both product …
In-house product innovators by sector (as a percentage of all firms), 2002-04
OECD, based on Eurostat, CIS-4 (New Cronos, May 2007), National data sources.
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… and process innovation
In-house process innovators by sector (as a percentage of all firms), 2002-04
OECD, based on Eurostat, CIS-4 (New Cronos, May 2007), National data sources.
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Services are also heavily engaged in nontechnological innovation …
Non-technological innovators by sector (as a percentage of all firms), 2002-04
OECD, based on Eurostat, CIS-4 (New Cronos, May 2007), National data sources.
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… including marketing and organisational
innovations
Firms having introduced a marketing or organisational innovation, 2002-2004 (as % of all firms)
OECD Innovation Micro-data Project, 2008.
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The degree of innovation differs across countries
Output-based modes of innovation in services, 2002-2004
OECD Innovation Micro-data Project, 2008.
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Some factors may hold back innovation in services …
Trade in goods and services as a % of GDP
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Services are still less
tradable across borders
than goods (although
this is changing) …
… are often more
sheltered from foreign
direct investment –
regulations are higher.
… and are typically
characterised by a
smaller size of firms
(though with large
variation).
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… although international competition in services is growing
(exports of business, computer and information services)
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Other factors may spur innovation
Share of high-skilled employment in total employment. 2003
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Services invest
relatively more in
information technology
…
… use relatively more
high-skilled workers
than manufacturing
firms …
… and have higher
rates of new firm
creation than the
manufacturing sector.
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Surveys indicate several barriers for services innovation
Percentage of European services firms identifying a factor as highly relevant, as a share
of all firms expressing relevance, 1998-2000
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The growth of services is accompanied by growing
investment in intangible assets
• 
• 
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Estimates for the United States show
that intangible investment (software,
R&D, training and organisational
factors) is now larger than
investment in machinery, equipment
and buildings – this is increasingly
how firms create value.
Intangibles are often not included in
firm (& national) accounts.
Improved corporate reporting of
intangibles and business models can
help lower the costs of capital – this
may be particularly important in the
services sector.
Source: Corrado, Hulten and Sichel (2007).
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Opening markets can help create new services
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OECD case studies of successful services firms point to three
common factors (Erocal, 2005):
–  Market opening allowed new firms (e.g. low-cost airlines, or firms offering
new digital services) to enter new markets and expand, offering new
services (innovate) and creating jobs.
–  These firms are often innovative, provide new services, use modern
technology, and open up new areas of consumer demand.
–  These firms often apply new work practices, focusing on the organisation of
work (e.g. decentralised responsibilities), motivation of workers (e.g. profit
sharing), and improvements in skills.
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Opening markets also acts as a spur to innovation
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Opening up also:
–  Acts as a spur to innovation and strengthens incentives to adopt best practices.
–  Can bring new products to markets and create new market possibilities, enabling
firms to exploit economies of scale.
–  Can further stimulate economic activity and increase employment by reducing costs,
which can stimulate demand.
–  Allows entrepreneurship to flourish.
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Opening of markets, e.g. through regulatory reform and trade liberalisation, has
to be carefully designed to avoid creating important adverse effects.
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Creating a new firm is still difficult in some countries
(index of product market regulations affecting entrepreneurship, 2003)
Note: The index ranges from 0 (least restrictive) to 6 (most restrictive).
Source: OECD Product Market Regulation Database, March 2005.
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Services markets are also affected by barriers to international trade
and foreign direct investment
(indices of restrictions on foreign direct investment, 2003)
Note (1): Restrictions refer to limitations on foreign equity, screening and approval
rules, and other restrictions on FDI (e.g. restrictions on the composition of boards).
Source: Kongsrud and Wanner (2005).
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Labour market policies play and important role …
•  Low tax burdens may
encourage workers to offer
their services in the formal
economy and encourage
demand for personal
services.
High tax burdens may discourage demand for personal
services
(hours of work required to pay for one hour of service, 2003)
•  Overly strict employment
protection legislation may
inhibit hiring in services
and slow down mobility
and organisational change.
•  Structural change requires
active labour market
policies and supportive
social security systems that
promote reintegration.
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… as do human resources policies
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Services firms may require new skills:
–  For specific trades and activities.
–  Specific needs, e.g. ICT skills and qualifications for innovation.
–  Skills are essential to the interaction with customers.
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Education policies – adapting the curriculum.
Training policies – workers will change jobs and activities more
frequently than in the past:
–  Develop frameworks to foster training and life-long learning, e.g. through cofinancing by workers, firms and governments.
–  Develop systems to credit such training, e.g. through quality certificates and
skills accreditation mechanisms.
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Some of the variation in services sector performance is linked to the
application of information and communications technology (ICT)
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ICT is a catalyst for
innovation and change
in the services sector.
Annual average contribution of ICT-using services to
productivity growth, in percentage points
But impacts still differ
considerably across
countries.
Policy can help seize
greater benefits from
ICT.
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Countries with less product market regulation have seen a stronger
pick-up in productivity in ICT-using services
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Firm dynamics: more reallocation in the United States – productive
companies gain, poorly performing firms lose resources
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Source: Ministry of Economic Affairs: Fostering Excellence, 2004
Factors that affect the lack of ICT-induced services
innovation in many European countries
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Europe has invested less in ICT than some other OECD countries:
–  Structural differences play a role.
–  But OECD work shows that product market regulation and lack of market
integration also play an important role: they have lowered the amount of
investment in ICT in heavily regulated EU countries.
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Europe also trails in the complementary changes that are needed to
implement ICT effectively:
–  Organisational changes are sometimes difficult (e.g. due to strict
employment protection legislation),
–  The business environment for innovation is still inadequate – competition
in some services markets is still limited
–  New firms and experimentation are important, but new innovative firms
often stay small and barriers to entrepreneurship are still too high.
–  Reallocation to more productive sectors is relatively slow in Europe.
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Policies to seize greater benefits from ICT
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Some elements:
–  Development of efficient, low-cost broadband networks, which requires
effective competition in telecom markets.
–  Regulatory frameworks to enhance trust and security in the use of ICT.
–  Reform of regulations and rules that act as a barrier to the digital delivery
of services, the development of digital content, or the innovative use of
ICT.
–  Providing the right environment for Internet-driven innovation.
–  E-government – much scope for progress remains.
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What policies for innovation in services?
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Existing policies for innovation and technological change should be
made more relevant to services sectors, e.g. by:
–  Refocusing government innovation programmes to also address the needs
of the services sector.
–  Raise awareness of public policies among services firms.
–  Fostering links between service firms and scientific research institutions
and within the supply chain.
–  Addressing the long-term knowledge requirements of services firms, e.g.
by involving services firms more directly in long-term (basic) research.
–  Intellectual property rights:
•  Not considered a major problem for services firms in most surveys,
but some extension of patent protection to services has occurred.
•  Keeping a balance between innovation and technology diffusion –
strengthening IPR too far may affect the diffusion of innovation.
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For example, manufacturing firms currently benefit more
from public support than services firms
Share of innovative firms benefiting from public support
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What can governments do?
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Further opening and integration of services markets to strengthen competition
and foster innovation.
The development of lead markets, e.g. through public procurement.
Strengthen policies and institutions to support innovation – financial markets,
venture capitalists, excellent science and education, a more favourable
business environment, etc.
Provide greater scope for entrepreneurship, new firms and experimentation:
enable failure, rapid growth and changes within firms.
Broadening human resources policies to address skills needs in the services
sector.
Adapt policies for innovation and technological change to the growing role of
the services sector, e.g. by:
–  A better accounting for intangible assets.
–  Broadening the scope of innovation policies.
–  Seizing the benefits of ICT for innovation.
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Conclusions
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Services-related issues are now at the core of policies to strengthen
overall economic performance:
– 
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They are key to increasing employment, and to strengthening innovation
and productivity.
They will also help in adjusting to the globalisation of services.
A stronger services sector will also benefit other industries, such as
manufacturing.
There are costs in adjusting to change, but these can be overcome by a
comprehensive policy mix. Not adjusting will be more costly in the
long run.
Further work on innovation in services and non-technological
innovation is planned in the context of OECD’s work on an Innovation
Strategy, see www.oecd.org/innovation/strategy.
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