Towards a theory of innovation in services Faïz Gallouj University of Science and Technology of Lille.

Towards a theory of innovation in services

Faïz Gallouj

University of Science and Technology of Lille

Towards a theory of innovation in services

• Two major characteristics :1) They are service economies

2) They are innovation economies

• Several problems :1) The service economy is still perceived suspiciously.

2) Service economies and economies of innovation... but not economies of innovation in services.

3) Whatever field of economic theory is considered, services raise interesting issues.

Towards a theory of innovation in services

• Raymond Barre, former prime minister, former economics minister (1991) :•« Manufacturing industry is the basis of competitiveness. The “ service society ” is based on manufacturing activity : the creation of jobs in services depends on a large extent on it, (…) manufacturing is the sole determinant of competitiveness in global markets (…) ».

• Dominique Strauss-Kahn, also minister of economics (1998) : •« Our efforts must be focused primarily on production and particularly on industrial production, on the creation of real jobs, jobs that are directly productive... ». (Le Monde, 1998).

• Nicolas Sarkozy, when he was minister of economics (2004) :•« We need a strong French manufacturing industry…(…). France cannot be only an economy of banks, insurances and services…». (France Info, 16 april 2004).

Towards a theory of innovation in services

• Two major characteristics :1) They are service economies2) They are innovation economies

• Several problems :1) The service economy is still perceived suspiciously.

2) Service economies and economies of innovation... but not economies of innovation in services.

3) Whatever field of economic theory…, services raise interesting issues.

Towards a theory of innovation in services

• For example, problems as regards :

- productivity measurement

- international trade

- spatial localisation

- employment systems and skills

- Etc.

• Focus on problems in the field of innovation.

Towards a theory of innovation in services

• 1) Answer the question : what’s the trouble with services ?

• 2) Provide a state of the art

• 3) Focus on an integrative theoretical framework

I. What’s the trouble with services ?

• The trouble with services is twofold :

1. The survival of myths

2. The existence of specificities

1. First trouble : The myths about services and innovation in services

• 3 myths :- « Unproductive services » and « third sector »- Low productivity and low capital intensity- A « society of servants »

• Negative judgements about services• Rooted in the history of economic thought • Still vivid in present-day discourses• First myth : (negative) judgement on the nature of

an activity or a sector• The other two : negative assessements of the

production factors

1. First trouble : The myths about services and innovation in services

• 1st myth : the myth of unproductive services and of the « third sector »

– Origins in the history of economic thought.– A. Smith (1776) : productive work of manufacturing vs

unproductive work of services, which vanish at the very moment they are provided.

– Services = work of domestic servants, servants of the state and artists.

– But it continues to influence many present-day approaches.

1. First trouble : The myths about services and innovation in services

• 1st myth : the myth of unproductive services and of the « third sector »

• Fisher (1935) and Clark (1940) : a residual definition

• But not a value judgement on the economic worth

• Fo other analyses: service sector is ‘peripheral’, ‘pathological’:

- ‘Manufacturing matters’, Cohen and Zysman (1987)

- ‘Too few producers’, Bacon and Eltis (1978)

1. First trouble : The myths about services and innovation in services

• 2nd myth : the myth of low capital intensity and low productivity

• Linked to the absence of factories and large-scale production lines.

• Capital intensity in services is high (see Kutscher and Mark, 1983). • Energy distribution and transport

• Banking and insurance

• A new syndrome : Solow’s paradox.• ‘Industrialist’ definition of productivity (see Gadrey, 1996)

1. First trouble : The myths about services and innovation in services

• 3rd myth : the myth of the service society as a « society of servants »

• Concerns the quality of labour. • An attack on the strength of services : job creation.• Service society = a ‘society of servants’, a ‘hamburger

society’, a ‘bad jobs society’.

• The service society creates deskilled jobs. But also highly skilled jobs.

2. Second trouble : Service specificities

Service specificities

Analytical consequences on innovation : nature and organisation

Product is a fuzzy process

- Difficulty to distinguish between product, process and organisation innovation - Enumerating innovations is difficult - Difficulty to assess innovation economic effects - Difficulty to assess the degree of novelty - Easy imitation - Intangible product or process innovation - Formalisation innovation

Service is interactive

- Importance of certain forms of innovation (tailor-made, ad hoc) - Not compatible with a linear concept of innovation - Consistent with an interactive model of innovation - Client participation to the innovation process - Price fixing problems - Appropriation regimes problems

Absence of property rights

- Appropriation regimes problems

Service sector is heterogeneous

- Product (innovation) forms are variable - Double accounting problems in KIBS

II. Towards a theory of innovation in services

• 3 different approaches (Gallouj, 1992) :

1. A technologist or industrialist (or assimilation) approach : innovation = introduction of techical systems

2. A service-oriented (or demarcation) approach : focus on specificities

3. An integrative (or synthesis) approach : similar analysis for both manufacturing and services

II. Towards a theory of innovation in services

Integrative approaches

Service-oriented

Technologist approaches

Time

Quantity

1. Technologist (assimilation) approaches • Focused on the introduction of technical

equipments.

• Innovation is a manufacturing industry matter.

• Services are dominated by manufacturing industry. They adopt, but create not so much.

• Judgement confirmed by statistical surveys based on OECD manuals

1. Technologist (assimilation) approaches

• How to explain this technological bias ? :

1) Services : the main users of ICTs

2) Technologies have consequences on economic variables

3) Standard neoclassical theory

1. Technologist (assimilation) approaches

• 3 categories :

a) Approaches in terms of impact of technologies

b) Taxonomic approaches in terms of sectoral technological trajectories

c) The Barras' reverse cycle model

1. Technologist (assimilation) approachesa) Approaches in terms of impact

Model 1 : Mainframe

Model 2 : Decentralised computerization and network

Employment

Skills, task organisation

Productivity

Exchange

Quality

1. Technologist (assimilation) approachesb) Approaches in terms of sectoral technological trajectories

Scale- intensive

firms

Specialized suppliers

Science-based firms

- Continuous process activities (steel, glass) - Mass prod. (cars, cons. durables)

- Mechanical engineering - Instrumentation

Agriculture, construction, public works, traditional manufacturing industries

- Electronics - Electrical - Chemicals

Pavitt's Taxonomy

Market services

Supplier- dominated

firms

Large-scale physical networks

Specialized suppliers and science-based

firms

Soete and Miozzo's Taxonomy

Informational networks

Personal services: Repair, cleaning, catering, hotels, retail trade

Public and social services: education, health, public adminis.

- Transport - Wholesale trade

- Finance - Insurance - Communications

- Software - Specialized business services

Non-market services

Outside the taxonomy

Pro

du

ctio

n-in

ten

siv

e fir

ms

Supplier dominated

firms

1. Technologist (assimilation) approachesb) Approaches in terms of sectoral technological trajectories

• A statistical analysis of sectoral taxonomies: • 3 sectoral models of innovation (Evangelista,

Savona, 2003) :

– Technology users: Ex : retail trade, hostelry, catering, cleaning

– ICT users: Ex : Banking, insurance, wholesale trade, advertising

– S&T-based sectors : Ex : R-D, engineering services, consultancy

1. Technologist (assimilation) approachesc) Barras model

Phase ofthe cycle

Main formsofinnovation

Competitiveeffort

Enablingtechnologies

Examples

Phase I Incrementalprocessinnovation

Improvementof serviceefficiency(costdecrease)

Mainframe Computerization ofinsurance policy records,personnel records andpayrolls

Phase II Radicalprocessinnovation

Improvementof servicequality

Mini and microcomputers

Computerizedmanagement of housingwaiting lists in localpublic administration,on-line insurance policyquotations, ATMs

Phase III Productinnovation

New services Networks Home banking

1. Technologist (assimilation) approachesc) Barras model : limits

• The problem of transposition to other service sectors

• The problem of transposition to other forms of technologies than ICTs

• Fundamentally technologistic :

–  Product innovations are necessarily supported by technical equipment.

– New functions (relatively) independent of technologies are not recognized.

• For ex new financial products, new insurance contracts are not taken into account.

2. Service-oriented (demarcation) approaches

• Technology a core element of innovation in services. • Highlighting the specificities of innovation in

services :- through case studies - through local theories or analyses.

• Innovation can exist where the "technologistic" gaze perceives nothing.

• Focus on non-technological forms of innovation. • « Pure services » for empirical investigation. Ex :

consultancy activities.

2. Service-oriented (demarcation) approaches

• Ad hoc innovation– Original solutions (for organizational, strategic, fiscal...

problems) in cooperation with clients. – Examples : original ad hoc legal solutions, new strategic or organisational

solutions. – Non-programmed » innovation– Appropriation and reproducibility issues

• Expertise-field innovation – Knowledge accumulation related to emerging fields of

knowledge– Service provision related to these fields– Examples : in legal consultancy investments in new potential fields of law

(upper space, information technologies, environmental protection...).

2. Service-oriented (demarcation, particularism) approaches

• Formalization innovation– Heterogeneous type of innovation seeking for

tangibility

– Different forms :• Methodologies • Incorporation of technical tools in the process• Organizational innovations• Use of tool kits

3. Integrative (synthesis) approachesa) The representation of the product (Saviotti and Metcalfe, 1984)

Y1Y2.Yi..Ym

Z1Z2.Zk..Zo

Process characteristics

X1X2.Xj..Xn

(Internal) Technical

characteristics

Service characteristics

3. Integrative (synthesis) approachesa) The representation of the product (Gallouj and Weinstein, 1997)

C1 C2 .

Ck . .

Cp

T1 T2 . Tj . .

Tn

Y1 Y2 .

Yi . .

Ym

C'1 C'2 . . C' k . . C' q

Provider's direct competences

Final or service characteristics

Material and immaterial technical characteristics

Client's competences

3. Integrative (synthesis) approachesa) The representation of the product (Gallouj and Weinstein, 1997): the case

of a pure service

C1 C2 .

Ck . .

Cp

Y1 Y2 .

Yi . .

Ym

3. Integrative (synthesis) approachesa) The representation of the product (Gallouj and Weinstein, 1997): the case

of a pure service (with coproduction relationship)

C'1 C'2 . . C' k . . C'q

C1 C2 .

Ck . .

Cp

Y1 Y2 .

Yi . .

Ym

3. Integrative (synthesis) approachesa) The representation of the product (Gallouj and Weinstein, 1997): self-service

Y1

Y2

.Yi

.

.Ym

C’1 C’2. C’k . . C’q T1

T2

.Tj

.

.Tn

Technical characteristics

Service characteristics

Client’s competences

3. Integrative (synthesis) approachesb) Corresponding innovation models

Innovation models Nature of the ‘action’ on the characteristics

Radical - Narrow definition: creation of a new set of characte-

ristics {[C'*], [C*], [T*], [Y*]} - Broad definition: creation of a new set of characteristics {[C'*], [C*], [T*]} even though [Y] remains unchanged

Ameliorative Increase in the weight (quality) of characteristics

‘Incremental’ Addition (or elimination) of characteristics

Recombinative Combining or splitting of groups of characteristics

Formalization Formatting and standardization of characteristics

3. Integrative (synthesis) approachesc) Improvements of the framework

• Adding the customer’s own technology • Adding other providers’ technologies and competencies

(Erik De Vries, RP, 2006)

• Including the policy maker • Highlighting each agent competences and preferences

and the way the different agents preferences interact. (Paul Windrum and Manuel Garcia-Goni, 2006)

3. Integrative (synthesis) approachesd) The car as a good-service hybrid

X1 X2 .

Xj . .

Xn

Y1 Y2 . Yi . . Ym

T'1 T'2 .

T'j . .

T'n

Ym+1

Ym+2

C1 C2 .

Ck . .

Cp

The car in Saviotti and Metcalfe's

representation

Service characteristics

additionC'1 C'2 . . C' k. . C'p