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Gotsch, Matthias; Hipp, Christiane; Gallego, J.; Rubalcaba, L.
Working Paper
Sectoral innovation performance in the knowledge
intensive services
Working paper series // Chair of Organization, Human Resource & General Management,
Brandenburg University of Technology, No. 11
Provided in Cooperation with:
Chair of Organization, Human Resource & General Management, BTU
Cottbus
Suggested Citation: Gotsch, Matthias; Hipp, Christiane; Gallego, J.; Rubalcaba, L. (2011) :
Sectoral innovation performance in the knowledge intensive services, Working paper series //
Chair of Organization, Human Resource & General Management, Brandenburg University of
Technology, No. 11
This Version is available at:
http://hdl.handle.net/10419/54752
WORKING PAPER SERIES
Edited by the Chair of Organization,
Human Resource & General Management
Brandenburg University of Technology Cottbus
Working Paper N
o
11
Sectoral Innovation Performance in the Knowledge Intensive
Services
Gotsch, M., Hipp, Ch., Gallego, J., & Rubalcaba, L.
January/ 2011
In 2007, the Chair of Organization, Human Resource & General Management
launched a series of working papers. The series is intended to provide the research
results of our work in progress and to stimulate discussion and critical comments.
The research described in these papers is preliminary and has not gone through a
review process comparable to reviews for publications in ranked journals. The
working papers do not limit publication in any other venue. Copyright remains with
the author(s). All working papers are available as Adobe PDF files free of charge. We
welcome any and all feedback, and encourage readers to convey their comments
directly to the author(s).
Copyright for this issue:
© Prof. Dr. rer. pol. habil. Christiane Hipp, hipp@tu-cottbus.de
The Authors
Chair of Organization, Human Resource Management & General Management
Faculty 3 – Mechanical, Electrical and Industrial Engineering
Brandenburg University of Technology Cottbus
Postal Address: P.O. Box 10 13 44
03013 Cottbus
Germany
Location: Erich-Weinert-Str. 1
Lehrgebäude 10
Räume 408-411
E-Mail: ls_personal@tu-cottbus.de
URL: www.tu-cottbus.de/personalmanagement
Sectoral Innovation Performance in the
Knowledge Intensive Services
Draft final sector report
Task 1
January 2011
Authors:
M. Gotsch (Brandenburg University of Technology, Cottbus)
C. Hipp (Brandenburg University of Technology, Cottbus)
J. Gallego (Universidad de Alcalá)
L. Rubalcaba (Universidad de Alcalá)
Consortium Europe INNOVA Sectoral
Innovation Watch
Europe INNOVA Sectoral Innovation Watch
Detailed insights into sectoral innovation performance are essential for the development of effective innovation
policy at regional, national and European levels. A fundamental question is to what extent and why innovation
performance differs across sectors. The second SIW project phase (2008-2010) aims to provide policy-makers
and innovation professionals with a better understanding of current sectoral innovation dynamics across Europe.
SIW Coordination: TNO
Carlos Montalvo (carlos.montalvo@tno.nl)
Annelieke van der Giessen
(annelieke.vandergiessen@tno.nl)
Central to the work of the Sectoral Innovation Watch is analysing trends in, and reporting on, innovation
performance in nine sectors (Task 1). For each of the nine sectors, the focus will be on identifying the
innovative agents, innovation performance, necessary skills for innovation, and the relationship between
innovation, labour productivity and skills availability.
Sector Innovation Performance: Carlos Montalvo (TNO)
Automotive: Michael Ploder (Joanneum Research
Knowledge Intensive Business Services: Christiane
Hipp (BTU-Cottbus)
Biotechnology Christien Enzing (Technopolis)
Space and Aeronautics: Martijn Poel (TNO)
Construction (Mariagrazia Squicciarini (VTT)
Textiles: Bernhard Dachs (AIT)
Electrical and Optical Equipment: Martijn Poel (TNO)
Wholesale and Retail Trade: Luis Rubalcaba (Alcala) /
Hans Schaffers (Dialogic)
Food and Drinks: Govert Gijsbers (TNO)
The foresight of sectoral innovation challenges and opportunities (Task 2) aims at identifying markets and
technologies that may have a disruptive effect in the nine sectors in the future, as well as extracting challenges
and implications for European companies and public policy.
Sector Innovation Foresight: Matthias Weber (Austrian Institute of Technology)
Automotive: Karl Heinz Leitner (AIT)
Knowledge Intensive Business Services: Bernhard
Dachs (AIT)
Biotechnology: Govert Gijsbers (TNO)
Space and Aeronautics: Felix Brandes (TNO)
Construction: Doris Schartinger (AIT)
Textiles: Georg Zahradnik (AIT)
Electrical and Optical Equipment: Martijn Poel (TNO)
Wholesale and Retail Trade: Susanne Giesecke (AIT)
Food and Drinks: Govert Gijsbers (TNO)
Task 3 will identify and analyse current and potential bottlenecks that influence sectoral innovation
performance, paying special attention to the role of markets and regulations. Specifically, the analysis will
cover the importance of the different factors in the propensity of firms to innovate.
Role of markets and policy/regulation on sectoral patterns of innovation: Carlos Montalvo (TNO)
Helena Rozeik (PRAXIS)
Klemen Koman (IER)
Task 4 concerns five horizontal, cross-cutting, themes related to innovation. The analyses of these
horizontal themes will be fed by the insights from the sectoral innovation studies performed in the previous tasks.
The horizontal reports will also be used for organising five thematic panels (Task 5). The purpose of these
panels is to provide the Commission services with feedback on current and proposed policy initiatives.
Horizontal reports
National specialisation and innovation performance
Fabio Montobbio (KITes) and Kay Mitusch (KIT-IWW)
Organisational innovation in services
Luis Rubalcaba (Alcala) and Christiane Hipp (BTU-
Cottbus)
Emerging lead markets
Bernhard Dachs (AIT) and Hannes Toivanen (VTT)
Potential of eco-innovation
Fernando Diaz and Carlos Montalvo (TNO)
High-growth companies
Kay Mitusch (KIT-IWW)
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
Europe INNOVA Sectoral Innovation Watch
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Contents
Contents ....................................................................................................................... 1
1. Patterns and performance of sectoral innovation .................................................. 2
1.1 Statistical definition of the Sector and Sector-specific indicators .................... 2
1.2 Characterisation of the Sector ......................................................................... 7
1.3 Common set of Indicators .............................................................................. 13
2. Carriers of innovation ........................................................................................... 17
2.1 People ............................................................................................................ 17
2.1.1 Knowledge, Education, and Skills ........................................................... 17
2.1.2 Customers, Users, and Consumers ........................................................ 20
2.2 Organisations ................................................................................................. 21
2.3 Clusters and Networks ................................................................................... 23
2.3.1 The Role of KIBS in Innovation Networks ............................................... 24
2.3.2 Clusters.................................................................................................... 26
3. Sectoral Innovation Futures ................................................................................. 29
3.1 Emerging and future drivers of innovation between S&T and (market)
demand .................................................................................................................... 29
3.2 Sector scenarios ............................................................................................ 31
3.3 Future innovation themes and corresponding linkages with other sectors ... 34
3.4 New requirements for sectoral innovation: new forms of knowledge,
organisational and institutional change, regulatory frameworks ............................. 36
3.5 Sectoral innovation policy in a scenario framework ...................................... 37
4. Barriers to innovation ........................................................................................... 39
4.1 Market factors affecting innovation ................................................................ 39
4.2 Regulation and innovation ............................................................................. 40
4.3 Systemic failures ............................................................................................ 41
5. Horizontal issues relevant to the sector ............................................................... 41
6. Policy analysis and conclusions........................................................................... 44
References .................................................................................................................. 47
Annex 1. Statistical classification of activities and the Knowledge Intensive Services
sector ........................................................................................................................... 53
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
Europe INNOVA Sectoral Innovation Watch
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1. Patterns and performance of sectoral
innovation
1.1 Statistical definition of the Sector and Sector-
specific indicators
Eurostat statistics define the Knowledge Intensive Services (KIS) sector as a broad set of activities of
a very different nature. KIS include many forms of professional services, including computer and
management consulting, diverse types of specialist functions such as marketing and advertising, staff
recruitment, and trade promotion or distribution logistics, as well as telecommunications, air transport,
financial activities, and educational services, among others. However, innovation processes,
structures, and performance differ notably among these sectors.
This major aggregated sector as a whole currently accounts for more than 30 percent of total
employment and added value generated in the European Union. The economic importance of these
services means that improvements in European living standards are likely to depend more and more
on productivity improvements in advanced services than in manufacturing (European Commission,
2007).1 The growth of KIS has been supported by the increasing participation of knowledge in most
economic production processes, the pace of technological change, a major inclusion of skilled
workers, the introduction of new information and communication technologies (ICT), and the key role
of intangible inputs in the generation of outputs. This growth has opened up new venues for the
dissemination of knowledge and experience that has affected the way clients manage change and,
therefore, their competitiveness and innovativeness (Wood 2002).
This phenomenon is particularly true for a smaller part of the KIS sector, the so-called Knowledge
Intensive Business Services (KIBS) that in some cases are more manufacturing and service business
related, having grown very fast over the past few years. According to the European Commission, KIBS
are likely to be one of the main engines for future growth within the European Union (European
Commission, 2007).2 Therefore, KIBS have been referred to as key sectors for analysis within this
report. KIBS firms are increasingly considered to be major users, originators, and transfer agents of
technological and non-technological innovations, playing a major role in creating, gathering, and
diffusing organisational, institutional, technical, and social knowledge. Advanced services are no
longer thought of as laggards in adopting technological developments, working practices, or
managerial innovations since they have developed extensive knowledge-based operating routines to
support work such as knowledge management systems (Gann and Salter, 2000).
1
European Commission (2007) Towards a European strategy in support of innovation in services: challenges and
key issues for future actions. Commission staff working document SEC (2007) 1059, http://www.europe-
innova.eu/c/document_library/get_file?folderId=26355&name=DLFE-3710.pdf
2
European Commission (2007) Towards a European strategy in support of innovation in services: challenges and
key issues for future actions. Commission staff working document SEC (2007) 1059, http://www.europe-
innova.eu/c/document_library/get_file?folderId=26355&name=DLFE-3710.pdf
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
Europe INNOVA Sectoral Innovation Watch
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According to den Hertog (2002), these advanced services lead to the generation of positive
externalities by facilitating, adopting, transferring, and generating useful innovation for the other
economic agents. Thus, advanced services are considered ‘industry brains’ that lead to the increased
competitive advantage and economic development of organisations and regions with easy access to
them. KIBS has proved to create positive externalities in the economy throughout technological and
non-technological innovation contributions in client industries (van Cruysen and Hollanders, 2008). As
intermediary input-organizations for the rest of economic agents, KIBS limited economic performance
in terms of innovation and productivity may lead to a reduction of the competitiveness in other sectors.
In this respect, policy intervention for supporting and promoting this type of activities is desirable in
order to enhance the general economic performance of all productive agents.
In general, services innovation correlates quite well with overall innovation performance, as measured
in the European Innovation Scoreborad (EIS) 2008.
3
Different levels of innovation performance in
Europe can well be explained by different roles that knowledge intensive services are playing in the
economies. The relationship between the share of employment in total KIS and in high-technological
KIS is significantly and positively correlated with those innovation performance ratios attained by the
various Member States (see Figure 1.1).
Figure 1.1 Correlation between the 2008 European Innovation Scoreboard (EIS) rate and the
employment in total KIS and high-technological KIS as share of total national employment
Note1: KIS refer to NACE Rev. 1.1 codes 61, 62, 64 to 67, 70 to 74, 80, 85 and 92; High-technological
KIS refer to NACE Rev. 1.1 codes 64, 72, 73. Note2: Correlation factor EIS_KIBS: r = 0.7235; p <
0.001. Correlation factor EIS_KIS: r = 0.8271; p < 0.001.
Source: European Innovation Scoreboard 2008 (2006 data) and labour-market statistics (2005 data)
3
European Commission (2008c) European Innovation Scoreboard 2008. Comparative analysis of Innovation
performance, http://www.proinno-europe.eu/page/admin/uploaded_documents/EIS2008_Final_report-pv.pdf
KIBS KIS
BG
LV
RO
SK
LT
PL
HU
GR
MT
PT
IT
ES
CZ
CY
SI
EE
NL
FR
BE
AT
IE
LU
UK
DE
FI
DK
SE
0,20 0,25 0,30 0,35 0,40 0,45 0,50 0,55 0,60 0,65 0,70
European Innovation Scoreboard 2008
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
5,0
5,5
Share of employment in KIBS, 2005 (%)
10
15
20
25
30
35
40
45
50
55
Share of employment in KIS, 2005 (%)
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
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Northern European countries such as Sweden, Finland and Denmark represent both important levels
in terms of innovation attainment and high rates of knowledge-intensive activities in their respective
economies. On the other hand, those countries performing more poorly in terms of innovation
performance are mostly Member States that are also characterized by a weak position of KIS in their
economies. The relatively weak role of KIS within the German and Austrian economies could be an
indication that advanced services are still provided more “in-house” rather than through specialised
service providers in these economies.
To this day, the main statistical techniques and empirical tradition have chosen R&D indicators and
patents as measurement tools of innovative activities. Until recently, services as a whole have been
considered to be productivity laggards and marginal activities with respect to innovation on the basis
of limited R&D and patent generation (see for instance Pavitt et al. 1989). However, the frequently
used R&D expenditures measure is too simplistic, since it under-reports the R&D activities of small
firms and service providers since informal creative practices, software development, industrial design,
and engineering activities account for a vast majority of innovative effort, which remain unmeasured
(Salter and Tether, 2006). Different technologically advanced services over-perform the R&D activity
levels achieved in the manufacturing industry. Some researchers have evaluated the ways in which
total innovation activities undertaken by service firms are not well captured by official statistics (i.e.
Rubalcaba, 2007). There is clearly a strong need for a revision of these statistics, although some
minor improvements have been made in CIS2004 and in the new CIS2006 databases, mainly with
regard to reporting organisational innovations occurring within the services sector. This will be
analysed in Chapter 2.
This part of the analysis mainly deals with methodological issues for further clarification of the indicator
list, NACE sectors, and countries included in the analysis. Information from the CIS2004 database of
Eurostat has mainly been collected to measure and compare innovation performance indicators
concerning the manufacturing industry and total CORE-NACE
4
activities.
5
The new CIS2008 dataset,
though already published, has not been used, since it is more incomplete than the CIS2004
information.
Table 1.1 lists those main KIBS analysed through the present work. CIS2004 organises productive
activities based on the NACE Revision 1.1 codes.
6
Computer and related activities (NACE division 72)
are placed at the forefront of the information society and comprise a broad range of activities, from
hardware and software consulting to database activities and the repair of computing machinery.
7
In
2004, EU-27 NACE Division 72 generated 154.3 billion Euro of value added, employed 2.6 million
4
The CORE-NACE section includes NACE Sectors C (mining and quarrying), D (manufacturing), E (electricity, gas, and water
supply), I (transport, storage, and communications), and J (financial intermediation) and NACE Divisions 51 (wholesale trade
and commission trade, with the exception of motors vehicles and motorcycles), 72, 74.2, and 74.3.
5
Apart from the CIS2006 database, other statistical sources are helpful in investigating innovation developments in the services
industry, with the most relevant summarised as follows: ANBERD database from OECD, New Cronos from Eurostat, and the
Innobarometer Survey and Innovation Scoreboard, which consists of a collection of European innovation indicators on the basis
of different databases, including the previous ones. These services reinforce the Community Innovation Survey database since
they include information on industry activity, employment in high-technology sectors, human resources in science and
technology, and the European and US patent systems, among other key indicators of science and technology services.
6
Categorisation shifts occurring between NACE Revision 1.1 and Revision 2 are regarded in Annex 8.1.
7
This sector does not cover computing equipment manufacturing nor their wholesaling, retailing, and renting.
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
Europe INNOVA Sectoral Innovation Watch
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persons, included more than half a million enterprises, and reported a level of labour productivity
around 60,000 Euro per person employed (Eurostat, 2008). On the other hand, research and
development activities (NACE 73), as observed in the table below (see Tabel 1.1), are classified
according to the field of investigation, namely ‘natural sciences and engineering’ and ‘social sciences
and humanities’. In 2004, the R&D sector in the EU-27 economy included around 37,000 firms,
generated 18.4 billion of value added, and employed 390,000 jobholders (Eurostat, 2008). Finally,
NACE Divisions 74.2
8
and 74.3 refer to a number of technical business services which are grouped
into ‘architectural and engineering activities and related technical consultancy’ and ‘technical testing
and analyses’. In 2004, these NACE sectors employed 2.4 million people across 833,000 companies
and generated 108 billion Euro of added value within the EU-27 economy (Eurostat, 2008),
representing around 14.5 percent of the total value added for business services.
Table 1.1 Statistical classification of activities in the Knowledge Intensive Business Services
as reported in the analysis
NACE 1.1
72 Computer and related activities
72.1 Hardware consultancy
72.2 Software consultancy and supply
72.3 Data processing
72.4 Database activities
72.5 Maintenance and repair of office, accounting and computing machinery
72.6 Other computer related activities
73 Research and development
73.1 Research and experimental development on natural sciences and engineering
73.2 Research and experimental development on social sciences and humanities
74 Other business activities
74.2 Architectural and engineering activities and related technical consultancy
74.3 Technical testing and analysis
For any of the selected innovation performance indicators, the figures will refer to average values for a
set of European countries depending on the sector analysed. NACE 73 sector is not included within
these average values, since reported information to CIS questionnaire is not compulsory for firms
within this sector. The data for NACE 72, NACE 74.2, and NACE 74.3 include the following 18
countries: Belgium, Bulgaria, Czech Republic, Denmark, Germany, Estonia, Greece, Spain, France,
Italy, Cyprus, Lithuania, Luxembourg, Hungary, Netherlands, Poland, Portugal, and Romania.
CIS2004 database only provides information on NACE 74.2 and NACE 74.3 at an aggregated level.
Data for NACE 73 were only available for 9 European countries: Belgium, Czech Republic, Spain,
France, Italy, Lithuania, Hungary, Poland, and Romania.
Figures are given for innovative firms only. In order to complete the data analysis on KIBS, additional
information was obtained from the Eurostat Safe Centre in Luxembourg. In this case, NACE at the 2-
digit level is chosen as well as some other KIBS beyond NACE 72-74 in order to obtain additional
comparisons. Moreover, depending on the data source, some figures will also refer to KIS as an
aggregate sector (including NACE Rev. 1.1 codes 61, 62, 64 to 67, 70 to 74, 80, 85 and 92), high-
technological KIS (referring to NACE Rev. 1.1 codes 64, 72, 73), market KIS (NACE Rev. 1.1 codes
8
This includes, for instance, building design and drafting, town and city planning, construction engineering, and weather
forecasting activities.
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
Europe INNOVA Sectoral Innovation Watch
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61, 62, 70, 71, 74) and financial KIS (which comprise NACE Rev. 1.1 codes 65, 66, 67). For further
clarification on KIS and KIBS definitions, see Table 1.2. These latter definitions will be mainly valuable
to better approach the information coming form the REGIO database by Eurostat. Finally, the KIBS(2)
definition comprises those selected industries to be analysed in the present work, since CIS2004 data
for NACE Rev. 1.1 code 74 do not include information on disaggregated sectors NACE Rev. 1.1 codes
74.1, 74.4, 74.5, 74.8. Although KIBS(1) definition is a more generalized and concrete one, KIBS(2)
classification will be the one in use when reporting in the study about knowledge intensive business
services. In general, nearly all empirical studies use different definitions of KIBS. Therefore the
comparability of study results is limited in most cases.
Table 1.2 Clarification on KIS (Knowledge-intensive services) and KIBS (Knowledge-intensive
business services) definitions
NACE Rev. 1.1 codes:
KIS
High-
tech KIS
Market
KIS
Financial
KIS
KIBS(1)
KIBS(2)
(72) Computer and related
activities, (73) Research
and development.
X
X
X
X
(61) Water transport, (62)
Air transport, (70) Real
estate activities, (71)
Renting of machinery and
equipment without operator
and of personal and
household goods.
X
X
(65) Financial
intermediation, except
insurance and pension
funding, (66) Insurance and
pension funding, except
compulsory social security,
(67) Activities auxiliary to
financial intermediation.
X
X
(64) Post and
telecommunications.
X
X
(74.2) Architectural and
engineering activities and
related technical
consultancy,
(74.3) Technical testing and
analysis.
X
X
X
X
(74.1) Legal, accounting,
book-keeping and auditing
activities; tax consultancy;
market research and public
opinion polling; business
and management
consultancy; holdings,
(74.4) Advertising, (74.5)
Labour recruitment and
provision of personnel,
(74.8) Miscellaneous
business activities.
X
X
X
(74.6) Investigation and
security activities, (74.7)
Industrial cleaning.
X
X
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
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1.2 Characterisation of the Sector
Additional to the common set of indicators which will be presented in section 1.3, other indicators from
the CIS2004 database are particularly relevant for KIBS. As previously considered, KIBS are less
likely to engage in the acquisition of machinery and equipment in comparison to manufacturing and
other more traditional service enterprises. However, they undertake training and other external
knowledge activities to a larger extent (Table 1.3). The same applies with respect to innovation
outcomes, since innovation functions in KIBS result in a lower level of patent applications but a
superior level of copyright claims (more than doubling the levels attained in the manufacturing
industry). Furthermore, KIBS firms are more likely to introduce organisational innovations within their
production systems and tend to cooperate with external agents for innovation to an larger extent than
most other sectors. This is particularly true when considering cooperation with clients and customers,
competitors, or higher education centres.
Table 1.3 Sector specific indicators: KIBS industry innovation performance, innovative firms, in
percentages
Innovation Indicator
NACE
72
NACE
73
NACE
74.2-
74.3
SECT
ORS
AVG
MANF
GAP
TOTAL
GAP
Firms engaged in training
68.47
62.52
68.51
68.49
31.37
24.88
Firms engaged in other external knowledge
35.24
27.44
27.80
31.52
55.62
39.36
Firms that claimed copyright
15.70
14.92
10.19
12.95
157.98
149.55
Firms that introduced organisational
innovation
68.98
64.05
65.96
67.47
23.77
16.38
Cooperation with clients or customers
13.93
14.63
7.91
10.92
58.06
76.55
Cooperation with competitors or other
enterprises of the same sector
4.57
2.56
4.31
4.44
101.92
87.90
Cooperation with universities or other higher
education institutions
4.56
19.83
4.34
4.45
110.13
139.07
Note: KIBS AVG = Average value of NACE divisions 72-74.2-74.3; MANF GAP = Gap value between
the corresponding KIBS average and manufacturing industry values; TOTAL GAP = Gap value
between the corresponding KIBS average and total CORE-NACE values.
Source: Based on CIS2004 database, Eurostat.
The analysis of Table 1.4 indicates that firms in activities related to computers, telecommunications,
and financial intermediation are at the top of innovation through training. The results in terms of
copyrights present some differences, since firms in financial activities show lesser levels of copyright
claims, while others such as advertising and R&D in social sciences and humanities present much
higher percentages. Finally, concerning collaboration in innovative activities, nationality seems to be
an important factor (the percentage of collaborations with domestic partners is clearly superior to that
of foreigners, with the largest differences in activities that are affected by national legislations).
However, it seems that firms involved in activities more linked to hard science or computer activities
cooperate to a larger extent with foreign partners.
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
Europe INNOVA Sectoral Innovation Watch
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Table 1.4 Sector specific indicators: KIS industry innovation performance, innovative firms, in
percentages by subsector
Source: Based on CIS2004 database, Eurostat.
In terms of innovation impacts, it appears that cost- and production-capability-related effects are more
common within the industry sector (Table 1.5). On the other hand, innovation activities in the KIBS
sector generate superior impacts on a number of indicators such as improving the quality of products,
entering new markets or increasing the range of products. Thus, the way in which the introduction of
innovations affects enterprises is unequal depending on the sector regarded. The significant role of
more intangible aspects within KIBS innovation leads to more quality related impacts, instead of those
purely focused on costs and savings, which are more innovation in goods related.
Table 1.5 KIBS industry innovation activity impacts: results for innovative firms, in percentages
Innovation Indicator
NACE
72
NACE
73
NACE
74.2-
74.3
SECT
ORS
AVG
MANF
GAP
TOTAL
GAP
Increased range of products
41.76
38.97
24.67
35.13
9.66
10.11
Entered new markets
37.85
30.31
23.61
30.59
12.16
12.59
Improved quality in products
48.58
38.94
37.08
41.53
15.06
14.55
Improved flexibility of production
28.68
19.12
22.51
23.44
-13.92
-9.15
Increased capacity of production
24.29
17.79
21.72
21.27
-27.95
-17.51
Reduced labour costs
11.59
11.60
13.47
12.22
-50.08
-32.32
Reduced materials and energy
6.63
8.01
11.30
8.65
-45.61
-20.86
Reduced environmental impacts
6.21
23.40
14.15
14.59
-18.19
1.76
Met regulations and standards
16.36
27.06
19.32
20.91
7.86
10.15
Note: KIBS AVG = Average value of NACE divisions 72-74.2-74.3; MANF GAP = Gap value between
the corresponding KIBS average and manufacturing industry values; TOTAL GAP = Gap value
between the corresponding KIBS average and total CORE-NACE values.
Source: Based on CIS2004 database, Eurostat.
Engagement in
training
Claimed
copyright
domestic
partners
foreign
partners
64
Post and telecommunications
83,6%
0,6%
90,3%
63,1%
64.1
Post and courier Act.
47,1%
2,5%
84,7%
32,3%
64.2
Telecommunications
67,9%
9,5%
87,9%
67,1%
65
Financial intermediation, except insurance and pension funding
75,4%
2,0%
75,5%
39,5%
65.1
Monetary intermediation
70,1%
8,0%
89,0%
29,8%
65.2
Other financial intermediation
69,5%
1,1%
86,7%
24,4%
66
Insurance and pension funding, except compulsory social security
68,7%
3,3%
88,7%
33,3%
67
Act. aux. to fin. intermediation
100,0%
0,0%
73,6%
11,2%
67.1
Act. aux. to fin. intermediation, except insurance and pension funding
66,8%
4,2%
91,9%
42,7%
67.2
Act. aux. to insurance and pension funding
71,9%
1,0%
94,8%
34,6%
72
Computer and related act.
79,9%
5,6%
94,6%
73,2%
72.1
Hardware consultancy
67,7%
15,1%
91,2%
58,6%
72.2
Software consultancy and supply
66,7%
21,0%
89,0%
48,9%
72.3
Data processing
73,0%
8,7%
92,5%
36,0%
72.4
Database activities
30,8%
20,7%
86,7%
58,2%
72.5
Maintenance and repair of office, accounting and computing machinery
57,1%
6,6%
86,7%
33,5%
72.6
Other computer related Act.
51,4%
5,5%
90,0%
38,6%
73
Res. and dev.
58,8%
9,1%
96,1%
54,2%
73.1
Res. and experimental dev. on natural sciences and engineering
68,0%
15,4%
93,9%
79,9%
73.2
Res. and experimental dev. on social sciences and humanities
48,7%
22,3%
100,0%
39,9%
74.1
Legal, accounting, book-keeping and auditing act.; tax cons.; market res. and public
opinion polling; bus. & mgmt. cons.; holdings
65,8%
7,0%
89,0%
37,4%
74.2
Architectural and engineering Act. and related technical consultancy
70,4%
7,2%
90,8%
47,1%
74.3
Technical testing and analysis
72,8%
8,6%
86,0%
45,2%
74.4
Advertising
35,7%
12,9%
98,3%
62,5%
74.5
Labour recruitment and provision of personnel
56,3%
4,8%
87,7%
10,8%
Cooperate with:
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
Europe INNOVA Sectoral Innovation Watch
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Besides the traditional quantitative indicators, other more qualitative and dynamic indicators are
needed within a context where services are key dimensions of an evolutionary innovation system.
New indicators need to be created, taking into account the indirect impact and intangible gains of
service innovativeness.
Moreover, an empirical analysis of Community Innovation Survey (CIS2004) data has shown that cost
factors are perceived by innovating firms as the most important factor hampering their innovation
activities (Table 1.6). Market factors are the second most important category of hampering factors,
followed by knowledge factors. In general terms, KIBS enterprises report higher difficulties in
developing their innovation activities than their counterparts in the manufacturing sector, although the
empirical analysis also shows strong sectoral differences in the relative importance of the different
types of hampering factors. Firm-size disaggregation illustrates how large enterprises in KIBS sectors
are more likely to be negatively affected by obstacles and barriers to innovation than manufacturing
companies. Although the latter seem to face higher costs in developing their innovation activities,
KIBS industry large firms report lack of funds, of finance, of qualified personnel, of information on
technology and markets, of market transparency and of alternative for cooperation at a superior level.
This trend evolves as the firm-size is declining. Thus, barriers to innovation mostly concern small-
sized firms in the manufacturing sector. This might be reflecting a bias towards innovation support
initiatives for large manufacturing corporations that are leading to innovation system malfunctions.
KIS are also characterised by a high proportion of professionally qualified staff. In 2007, the share of
human resources in science and technology in KIS as a percentage of total employment reached
58.15 percent, more than doubling the total volume included in the manufacturing industry.
Furthermore, a particular reason for the increasing interest in KIS is the distinctive localisation pattern
of the sector, which is highly concentrated in large urban areas. In order to better approach this issue,
we include a choropleth map (Map 1.1) where the shaded areas reflect the measurement of regional
employment in high-technological KIS as a percentage of total employment. This shows that those
areas largely specialised in high-technological knowledge intensive services mainly refer to European
capital-regions, or regions comprising the principal urban centres within the respective countries. As
suggested by Feldman (1994), the more knowledge intensive an economic activity is, the more this
activity tends to be concentrated geographically. Thus, high-technological KIS, which are more related
to information driving processes, show a superior trend towards geographical concentration than the
services average, particularly within international-profile regions. Very high levels of concentration are
observed in some national markets for some business services. Whether these may give rise to
competition concerns has not been assessed and, moreover, to do so would necessitate more in-
depth examination of the correspondence between market segmentation on the supply- and on the
demand-side (European Commission, 2008a).
9
9
European Commission (2008a) Study on Industrial Policy and Services, Directorate-General Enterprise & Industry, Contract of
Sectoral Competitiveness Studies – ENTR/06/054:
http://ec.europa.eu/enterprise/enterprise_policy/industry/doc/industrial_policy_and_services_Part_1.pdf
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
Europe INNOVA Sectoral Innovation Watch
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Table 1.6 KIBS industry innovation activity barriers: results for innovative firms, in percentages
COST FACTORS
KNOWLEDGE FACTORS
MARKET
FACTORS
Lack
of
funds
Lack of
finance
Innovati
on
costs
Lack of
qualifie
d
person
nel
Lack of
informa
tion on
technol
ogy
Lack of
informa
tion on
markets
Difficult
y in
finding
cooper
ation
partner
s for
innovati
on
Markets
dominat
ed by
establis
hed
enterpri
ses
Uncerta
in
deman
d for
innovati
ve
product
s
Total size
Total NACE
21.62
16.86
21.74
13.02
6.96
7.97
9.25
15.27
13.30
Manufacturing
24.49
18.49
24.40
14.07
7.53
8.27
10.26
16.26
14.36
Services
17.42
13.25
17.72
10.18
5.51
5.63
7.21
13.44
11.57
NACE 72
27.09
19.53
20.99
14.97
8.34
9.20
12.50
16.73
17.39
NACE 73
34.24
27.09
23.04
11.56
10.45
6.54
12.84
17.10
22.61
NACE 74.2-74.3
20.21
19.34
21.01
12.69
11.45
12.81
10.81
13.80
18.90
Large firms
Total NACE
19.02
14.31
19.00
11.66
7.68
8.77
9.21
13.75
14.59
Manufacturing
18.71
14.55
20.90
12.01
8.94
10.27
10.28
14.37
15.87
Services
17.62
12.37
15.31
10.74
7.68
7.59
7.21
10.94
10.79
NACE 72-74.2-74.3
25.91
19.69
18.34
18.81
18.31
12.32
20.13
20.63
22.07
Medium firms
Total NACE
19.78
15.38
20.79
12.28
7.77
8.20
9.41
14.37
12.94
Manufacturing
21.47
16.72
22.52
12.84
8.63
9.37
10.08
15.22
13.84
Services
15.36
12.19
17.30
11.06
6.79
7.64
7.13
12.14
10.38
NACE 72-74.2-74.3
22.91
18.02
23.87
11.63
5.91
6.06
8.84
12.09
15.40
Small firms
Total NACE
23.05
18.20
22.41
13.64
7.18
7.91
9.75
16.01
13.38
Manufacturing
26.08
20.75
25.55
15.31
7.63
8.30
10.91
17.57
14.11
Services
18.09
14.01
17.77
10.48
6.42
5.76
8.27
13.90
12.03
NACE 72-74.2-74.3
24.02
19.48
20.48
14.15
7.86
11.60
10.00
15.56
19.52
Note: Data for NACE 73 only include the following 11 countries: Belgium, Czech Republic, Spain,
France, Italy, Lithuania, Poland, Portugal, Romania, Slovakia and Sweden.
Source: Based on CIS2004 database, Eurostat.
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
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Map 1.1 Regional employment in high-tech KIS as a percentage of total employment, NUTS 2
regions, 2006
Note1: Exceptions to the reference year, BE, IE, IS and NO for 2005.
Note2: High-technological KIS refer to NACE Rev. 1.1 codes 64, 72, 73.
Source: Eurostat, 2008
As shown in Table 1.7, the region of London presents the highest share of employment in total KIS in
EU-15, followed by the regions of Berlin, Brussels, Stockholm and Paris, and present the highest
levels of specialization in technological KIS within the total European economy. Business
concentration is particularly relevant with regard to financial KIS. Here, Luxembourg and London
present the largest specialization indexes (more than doubling the European employment average in
this sector), followed by the regions of Hessen, Eastern and Île de France. Again, those regions
located in southern European countries (Portugal, Greece and Spain) present a minor number of
knowledge-intensive activities within the economy. Thus, differences observed in regions at NUTS1
level do not only exemplify the result of the fundamental role played by capital regions, but they also
show the effect of a national component, as indicated above. In this respect, nine regions from the
United Kingdom (London, the South East, Scotland, the East, the North West, the South West, the
West Midlands, Wales, and Yorkshire and the Humber) are included among the twenty leading areas
regarding the proportion of KIS comprised within their productive structures.
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
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Table 1.7 Most specialized regions in KIS, 2006, NUTS0 and NUTS1, EU-15, (%)
Rank
NUTS0
TOT
TEC
MKT
FIN
NUTS1
TOT
TEC
MKT
FIN
1
Sweden
47.5
5.1
10.9
1.9
London
UK
53.63
5.27
15.18
6.62
2
Denmark
43.8
4.2
8.7
3.4
Berlin
DE
49.35
5.6
14.48
2.94
3
United Kingdom
43.0
4.2
9.6
4.3
Brussels
BE
48.22
4.01
16.01
4.8
4
Netherlands
42.3
4.1
10.4
3.4
Sweden
SE
47.67
5.06
10.91
1.9
5
Luxembourg
42.0
3.3
8.9
11.3
Île de France
FR
46.72
7.18
13.98
5.63
6
Finland
41.1
4.6
9.8
2.0
South East
UK
45.57
5.97
10.83
4.88
7
Belgium
38.6
4.0
7.9
3.5
West Nederland
NL
45.55
4.46
12.53
3.82
8
France
36.4
3.7
8.8
3.1
Denmark
DK
43.5
4.39
8.31
3.32
9
Ireland
34.9
3.9
7.6
4.3
Luxembourg
LU
43.49
3.28
9.46
11.32
10
Germany
34.3
3.5
8.5
3.5
Scotland
UK
43.47
3.56
8.09
5.12
11
Austria
30.4
2.9
7.8
3.3
Eastern
UK
42.77
5.26
9.43
5.27
12
Italy
30.1
3.0
9.2
2.9
Hamburg
DE
42.47
5.14
13.91
4.37
13
Spain
27.0
2.7
8.4
2.4
North West
UK
41.59
3.34
9.57
3.95
14
Greece
24.9
2.0
6.4
2.6
Noord-Nederland
NL
41.16
2.93
8.3
2.65
15
Portugal
22.7
1.9
5.5
1.8
Manner-Suomi
FI
41.05
4.58
9.77
2.01
Note: TOT=Total KIS refer to NACE Rev. 1.1 codes 61, 62, 64 to 67, 70 to 74, 80, 85 and 92; TEC=
Technological KIS refer to NACE Rev. 1.1 codes 64, 72, 73; MKT=Market KIS refer to NACE Rev. 1.1
codes 61, 62, 70, 71, 74; and FIN=Financial KIS refer to NACE Rev. 1.1 codes 65, 66, 67.
Source: Based on the EUROSTAT, REGIO database
R&D expenditures and employment are highly concentrated in a few firms, most of which have formal
and distinct R&D departments, an organisational arrangement that is uncommon in the services
sector, although the share of R&D for services continues to grow (Salter and Tether, 2006).
Furthermore, R&D investments by large individual firms represent only a part of the total innovation
effort. This is particularly relevant for the services sector, which accounts for a greater number of
small- and medium-sized enterprises than the manufacturing industry. However, during the last
decade, R&D business expenditures grew faster in the service sector compared to the manufacturing
sector. This trend is influenced by some business services, particularly computer services and related
activities that experienced an outstanding growth during this period (Gallego and Rubalcaba, 2008).
Tables 1.8 and 1.9 shed some light on this phenomenon, presenting data for the top 15 European
computer service and software companies in regard to their R&D investments. The figures have been
extracted from the ‘2007 EU Industrial R&D Investment Scoreboard’, which presents data on the top
1,000 R&D investing organisations with registered offices in the EU. The figures are derived from
company accounts and represent the R&D invested by companies' own funds, independently of the
location of the R&D activity. The computer services sector includes 32 enterprises among the top
1,000 R&D investors. Their R&D efforts are greater than 900 million Euro and employ more than
190,000 workers in Europe. The top five ranking European firms within this sector are among the 10
world leading enterprises by R&D investments. On the other hand, almost 10 percent of the major
European R&D investors refer to the software services industry. Within this sector, there are 95 firms
among the top 1,000 R&D investors, whose R&D efforts reach 3,500 million Euro. This particular
service sector presents R&D investment levels above those achieved in more traditional
manufacturing sectors such as food and beverage production or industrial machinery.
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
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Table 1.8 R&D investment, net sales and number of employees of Europe’s largest computer
service activities/groups in Europe in 2006, ranked by R&D investments
Rank
Company
Country
R&D
Investment
Net Sales
Employees
€m
€m
Numbers
1
Telent
UK
206.30
1,452
9,000
2
Fujitsu Siemens Computers
The Netherlands
145.10
6,952
10,757
3
Indra Sistemas
Spain
96.44
1,407
10,611
4
Wincor Nixdorf
Germany
87.44
1,948
7,444
5
TietoEnator
Finland
72.50
1,782
14,414
6
LogicaCMG
UK
59.66
3,956
32,425
7
Sopra
France
31.10
898
9,602
8
Northgate Information Solutions
UK
24.26
494
3,232
9
F-Secure
Finland
23.38
81
439
10
Anite
UK
21.48
248
1,387
11
Torex Retail
UK
18.74
248
2,285
12
IONA Technologies
Ireland
12.09
59
351
13
Teleca
Sweden
11.51
327
3,940
14
SciSys
UK
10.38
93
770
15
Cegedim
France
9.87
541
4,968
Source: R&D Investment Scoreboard 2007, http://iri.jrc.ec.europa.eu/research/scoreboard_2007.htm
Table 1.9 R&D investment, net sales and number of employees of Europe’s largest software
enterprises/groups in 2006, ranked by R&D investments
Rank
Company
Country
R&D
Investment
Net Sales
Employees
€m
€m
Numbers
1
SAP
Germany
1,298.12
9,402
38,053
2
Dassault Systemes
France
281.04
1,158
6,840
3
Business Objects
France
147.91
951
5,402
4
Amdocs
UK
141.63
1,881
16,234
5
Sage
UK
140.85
1,389
10,510
6
Misys
UK
131.50
1,343
6,081
7
UBIsoft Entertainment
France
130.66
547
3,240
8
SCI Entertainment
UK
85.19
266
900
9
Symbian
UK
80.86
170
1,047
10
Infogrames Entertainment
France
65.50
391
982
11
Software
Germany
44.86
483
2,621
12
Autonomy
UK
41.60
190
903
13
Gameloft
France
41.21
68
2,635
14
IBS
Sweden
35.16
252
1,873
15
ISOFT
UK
34.55
299
3,224
Source: R&D Investment Scoreboard 2007, http://iri.jrc.ec.europa.eu/research/scoreboard_2007.htm
1.3 Common set of Indicators
Innovation performance analysis has been mostly focused on R&D expenditures and other forms of
knowledge acquisition, public funding, cooperation liaisons, and innovation outcomes such as patent
or copyright applications. Table 1.10 shows that the share of innovative firms is larger in the KIBS
sector than in the manufacturing industry as well as in comparison to the total CORE-NACE averages.
In this respect, KIBS companies undertake a greater volume of innovation expenditure as a
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
Europe INNOVA Sectoral Innovation Watch
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percentage of total turnover and engage in intramural and extramural R&D to a higher extent than
their counterparts in the manufacturing sector. Service companies, generally, do not innovate less
than manufacturing companies but great differences exist between knowledge intensive and other
services. Innovation in more traditional services tends to be a continuous process consisting of a
series of incremental changes, contrary to innovation in manufacturing which is often more radical. On
the other hand, in certain cases KIBS firms show similar innovation patterns as in manufacturing firms.
This is supported by the fact that the R&D intensity of this type of services is even above the average
of manufacturing companies (European Commission, 2007).
10
Nevertheless, the outcomes resulting from their innovation activities are more difficult to appropriate,
even if the percentage of sales of new or considerably improved products within total turnover is more
significant in the KIBS sector than in its analysed counterparts. The intangible nature of many service
innovations creates challenges for Intellectual Property Right systems. Many service sector
innovations do not meet the requirements for protection through patenting. This might be due to the
fact that the type of knowledge they generate, such as business methods, can not be protected
through patents (European Commission, 2007).
11
This is particularly relevant for software suppliers
since they must provide solutions to manage digital rights for other content providers and also take
into consideration their own protection rights (Eurostat, 2008).
12
This fact is reflected in figures
regarding the share of firms in KIBS that apply for a patent, which is lower than in other economic
sectors. In contrast, advanced services are expected to approach other types of property appropriation
regimes, as in the case of copyrights.
Furthermore, data contained in Table 1.10 also shows that the volume of firms engaging in any type of
cooperative activity for innovation is particularly relevant for KIBS companies in comparison to the
manufacturing industry and total CORE-NACE averages. As argued by previous researchers, services
activities are characterised by a prominent cooperation with external agents in the development of
innovation activities (European Commission, 2008a).
13
10
European Commission (2007) Towards a European strategy in support of innovation in services: challenges and key issues
for future actions. Commission staff working document SEC (2007) 1059, http://www.europe-
innova.eu/c/document_library/get_file?folderId=26355&name=DLFE-3710.pdf
11
European Commission (2007) Towards a European strategy in support of innovation in services: challenges and key issues
for future actions. Commission staff working document SEC (2007) 1059, http://www.europe-
innova.eu/c/document_library/get_file?folderId=26355&name=DLFE-3710.pdf
12
Eurostat (2008) European business 2007 – Facts and figures, Strasbourg, Eurostat,
http://epp.eurostat.ec.europa.eu/portal/page/portal/product_details/publication?p_product_code=KS-BW-07-001
13
European Commission (2008a) Study on Industrial Policy and Services, Directorate-General Enterprise & Industry, Contract
of Sectoral Competitiveness Studies – ENTR/06/054:
http://ec.europa.eu/enterprise/enterprise_policy/industry/doc/industrial_policy_and_services_Part_1.pdf
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
Europe INNOVA Sectoral Innovation Watch
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Table 1.10 KIBS industry innovation performance: results for innovative firms, in percentages
Innovation Indicator
NACE
72
NACE
73
NACE
74.2-
74.3
SECT
ORS
AVG *
MANF
GAP
TOTAL
GAP
Share of innovative firms
59.87
73.10
40.21
50.04
23.89
32.84
Firms innovation expenditure (% turnover )
7.39
51.74
5.34
6.36
60.10
119.01
Firms engaged in intramural R&D
64.79
91.24
51.96
58.38
19.38
36.67
Firms engaged in extramural R&D
24.42
53.05
25.62
25.02
13.79
17.19
Firms engaged in acquisition of machinery,
equipment and software
73.85
73.37
75.18
74.52
-5.76
-3.98
Firms that received any public funding
21.73
70.60
26.73
24.23
-4.20
18.43
Sales of new or significantly improved
products not new to the market (% turnover)
7.97
11.82
4.49
6.23
-28.68
-3.68
Sales of new or significantly improved
products new to the market (% turnover)
13.78
21.94
5.58
9.68
42.85
74.70
Firms engaged in any type of cooperation
41.65
76.08
36.02
38.83
26.39
24.14
Firms that applied for a patent
8.94
43.87
9.99
9.46
-30.01
-4.06
Note: KIBS AVG = Average value of NACE divisions 72 and 74.2-74.3; MANF GAP = Gap value
between the corresponding KIBS average and manufacturing industry values; TOTAL GAP = Gap
value between the corresponding KIBS average and total CORE-NACE values.
Source: Based on CIS2004 database, Eurostat.
Table 1.11 contains a more detailed analysis of the innovation performance variables distinguishing
subsectors on the basis of the 3-digit level of NACE Rev. 1.1. As can be seen, there are important
differences across the subsectors. Apart from those activities within the Sector 73, that by nature
present high expenditures on R&D, we find that activities related to computers software and
databases present the highest ratios of R&D expenditures over turnover among KIS industries.
Concerning the innovation results, we find that activities related to computers and financial
intermediation are the subsectors with the largest share of sales from new to the market products, as
well as the largest percentage of patent-appliers (again, within the subsector dedicated to R&D in
natural sciences and engineering).
Sectoral Innovation Performance in the Knowledge Intensive Services January 2011
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Table 1.11 KIS industry innovation performance: results for innovative firms, in percentage by subsector
(Extended list of KIS based on micro data from the Luxembourg safe centre)
Source: Based on CIS2004 database, Eurostat
Total expenditure
on R%D over
turnover
Intramural R&D
Acquisition of
machinery
Public funding
from any
authority
New or
improved
products that
were new to
the market
Unchanged or
marginally modified
products that were
new to the firm
Applied for a
patent
64
Post and telecommunications
10,7%
59,7%
91,9%
9,6%
12,1%
12,1%
10,0%
64.1
Post and courier Act.
3,1%
31,2%
61,8%
5,3%
6,0%
18,3%
4,4%
64.2
Telecommunications
7,8%
58,6%
72,7%
19,4%
12,4%
14,1%
13,6%
65
Financial intermediation, except insurance and pension funding
4,4%
58,0%
83,0%
15,1%
3,3%
20,8%
0,0%
65.1
Monetary intermediation
3,2%
43,7%
74,4%
7,2%
4,7%
8,8%
1,7%
65.2
Other financial intermediation
10,4%
55,1%
78,3%
4,1%
3,8%
20,9%
3,1%
66
Insurance and pension funding, except compulsory social security
11,2%
54,3%
73,2%
4,8%
3,5%
10,2%
1,4%
67
Act. aux. to fin. intermediation
4,4%
40,3%
100,0%
15,2%
20,2%
11,8%
15,2%
67.1
Act. aux. to fin. intermediation, except insurance and pension funding
5,7%
54,2%
81,7%
8,2%
7,4%
6,8%
4,5%
67.2
Act. aux. to insurance and pension funding
8,4%
42,4%
66,7%
12,9%
4,9%
11,2%
4,2%
72
Computer and related act.
16,5%
80,5%
84,9%
45,1%
18,0%
17,7%
9,7%
72.1
Hardware consultancy
9,8%
82,4%
43,6%
16,6%
11,4%
11,7%
10,9%
72.2
Software consultancy and supply
15,4%
80,1%
68,1%
22,4%
19,5%
14,8%
16,3%
72.3
Data processing
11,4%
63,5%
80,4%
19,7%
11,1%
13,0%
4,4%
72.4
Database activities
15,8%
71,8%
50,2%
22,6%
20,3%
14,2%
5,1%
72.5
Maintenance and repair of office, accounting and computing machinery
9,5%
76,7%
51,9%
19,6%
13,6%
15,4%
3,0%
72.6
Other computer related Act.
15,4%
57,3%
77,5%
22,3%
22,2%
22,1%
13,3%
73
Res. and dev.
56,1%
93,9%
88,3%
69,1%
23,8%
13,9%
42,3%
73.1
Res. and experimental dev. on natural sciences and engineering
71,0%
95,8%
65,4%
64,4%
20,1%
13,5%
48,9%
73.2
Res. and experimental dev. on social sciences and humanities
34,8%
92,6%
47,1%
38,3%
18,2%
6,5%
4,9%
74.1
Legal, accounting, book-keeping and auditing act.; tax cons.; market res. and public
opinion polling; bus. & mgmt. cons.; holdings
6,0%
48,0%
67,6%
11,7%
6,5%
9,6%
7,4%
74.2
Architectural and engineering Act. and related technical consultancy
10,1%
59,3%
68,5%
21,7%
8,5%
9,7%
12,0%
74.3
Technical testing and analysis
12,4%
69,8%
74,9%
30,8%
10,2%
9,2%
9,9%
74.4
Advertising
2,1%
38,4%
72,0%
9,2%
2,8%
12,7%
4,1%
74.5
Labour recruitment and provision of personnel
4,0%
36,7%
62,3%
10,2%
4,3%
18,1%
0,5%
% of turnover during 2002-2004
Engagement in
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2. Carriers of innovation
2.1 People
People have two different functions in a national economy. Firstly they serve as the workforce which
creates the innovation. Therefore, they need the necessary knowledge and skills, both of which are
gained through training and education. Depending on these individual factors, there is a certain level
of mobility of employees between the firms and sectors and between countries as well. Secondly,
people act as customers of service companies and as users and consumers of innovative products
and services. The following chapter is arranged according to this distinction.
2.1.1 Knowledge, Education, and Skills
What skills do people working in KIS and KIBS need? This is the question the current section deals
with. In 2006, approximately 70 million people within the EU27 were employed in the KIS sector, with
7 million in high-tech KIS, according to Eurostat (2008). Germany ranked first, with 12.7 million people
employed in KIS, followed by the United Kingdom with 12.1 million. However, as mentioned
previously, only one-tenth of the jobs in KIS were, in fact, in high-tech KIS. Germany and the United
Kingdom were the only Member States where employment in high-tech KIS added up to more than
one million people. As a percentage of total employment, Sweden had the greatest shares of
employment in KIS and high-tech KIS, with 47.7% and 5.1%, respectively. In high-tech KIS, Sweden
was followed by Iceland (5.0%), Finland (4.6%), and Denmark (4.4%). In general, employment in KIS
has more than tripled in OECD countries over the last thirty years. The move towards a service-
oriented society is accompanied by an considerable increase in jobs for skilled and highly qualified
personnel (Hipp and Grupp, 2005).
The results of the annual German reports on technological competitiveness show that the percentage
of professionals in the KIS industry grew from 1995 to 2000 by 5.4% annually, whilst the annual
change in the total number of employees was only 1.3%. This indicates a trend of increasing
employment among university graduates compared to those with lower levels of education, and
constitutes a trend towards knowledge intensification in industries and services (Grupp et al., 2002).
As shown in Section 1, the share of highly qualified employees within different industry sectors varies
greatly. How can this fact be explained? On the one hand, the increasing complexity of organisational
processes and stronger global competitiveness among enterprises have led to growing levels of KIBS
requirements, for both manufacturing and other service activities. On the other hand, different
knowledge intensive functions previously carried out in-house by manufacturing and service
organisations are currently externalised and outsourced to KIBS companies (Rubalcaba et al., 2008).
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The requirements for employees and their skills in KIBS are higher than in other fields. In a sector
classification of educational intensity conducted by Peneder (2007), the requirements are classified as
high or very high. They are even considered to be higher than in manufacturing sectors such as
mechanical engineering or automotive industries. According to this, the share of staff with tertiary
education among all employees is higher in KIBS than in most other sectors. The increase of highly
qualified staff within the service sector, particularly within KIBS, is a clear indicator of the increasing
interdependence of economic activities within different sectors (Miles et al., 1994). Companies
concentrate on their core competencies, which leads to specialisation, new organisational structures
and the increasing utilisation of information technologies. As a result, companies require more external
knowledge, and are aware of the generation and implementation of knowledge, that mainly raises the
demand for KIBS providers. These companies, in turn, play a central role in innovation processes and
networks (Hipp and Grupp, 2005).
If taking into consideration the characteristics of highly qualified human resources, around 80% of
science and technology jobs are in the services sector. In 2004, the services sector in the EU-25
employed most of the people working in science and technology, with about six times more than the
manufacturing sector. Within the services sector, the KIBS sector employed the highest number of
persons working in science and technology, an average of 73% for the EU-25. In addition, the KIBS
sector employed the largest percentage of graduates from science and engineering degree
programmes. Combining the KIBS sector with less knowledge intensive services sector can show that
three out of four scientists and engineers were employed in services (Wilen, 2006).
Evangelista and Savona (2003) showed that high skilled and qualified jobs replace low skilled jobs in
the long run. This effect is exceptionally strong in activities with a strong scientific and technological
base, such as KIBS. In capital intensive industries and financial-related sectors, a negative impact on
employment can be observed. This labour-saving effect of innovations is linked to the use of
information and communication technologies, as will be shown later.
People employed in KIBS need appropriate skills related to general management issues such as
project management needs. Other skills, especially so-called soft skills, are also crucial for business
success. The most important skill requirements are presented in Figure 2.1.
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Figure 2.1 Skills requirements for KIBS
Source: own illustration
Customer-specific skills are more heterogeneous because they depend on a special type of service
provided by KIBS companies. These customer-specific skills refer to business and engineering, and,
in special cases, to scientific skills, which are all shown to be connected to the customer’s needs.
Skills in the handling of information and communication technologies are a main condition, and have
to be assumed not only for hard- and software service firms, but for all KIBS. At any rate, the ability to
use the provided ICT-tools is crucial. Last, but not least, hybrid skills refer to the optimal combination
of technical know-how and knowledge about current customer demands.
Are some skills missing in the labour market, which may hamper the innovativeness of KIBS firms?
Mahroum (2007) showed that a number of studies have come to the conclusion that the lack of ICT
skills is a main hampering factor for the emergence of an information society in Europe and as a
consequence, for the low European productivity compared to the USA. Preissl (2000) argued that
qualification is not a sufficient condition, but that experience on the job is equally, if not more,
important for the success of the job. Another point seems to be some employees’ lack of management
thinking, which could be solved by providing training on management skills. Due to the partial sizable
cuts in public investments in education, the qualification levels are expected to become a larger
problem in the future, that should urgently be addressed from political side.
To our knowledge, statistical information and survey results about KIS and international job mobility
between different European countries do not exist, perhaps due to the relative recent implementation
in all EU Member States of the EU rules of freedom of movement of people. This lack of information
should be addressed by Eurostat. Concerning intra-national job mobility and company rotations within
KIBS, there are also no statistical data available.
Skills
requirements
forKIBS
General Management skills
ICT skillsHybrid skills
Customer specific skills
• project management
• communication skills
• soft skills
• user skills
• professional skills
• technical expertise
• customer relation skills
• market knowledge
• business skills
• engineering skills
• scientific skills
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2.1.2 Customers, Users, and Consumers
The customers, users, consumers, and clients of KIBS are as heterogeneous as the KIBS firms
themselves. As a result, an attempt to make generalisations is not trivial. Little is known about the
factors that explain why some firms use KIBS such as strategic consultancy, engineering services, or
technological advices more frequently than others. Garcia-Quevedo and Mas-Verdu (2008) analysed
the factors related to the use of KIBS by small and medium-sized firms. Their survey results, similar to
most other available studies, show that the demand for KIBS increases with the size of the user firms.
Another result of their study is that the spatial proximity between the KIBS user and supplier seems to
be a relevant factor. However, there is relatively little knowledge available on the profiles of firms using
KIBS. This could be linked to the complexity of the relations between the characteristics of firms and
their use of external services like KIBS. Garcia-Quevedo and Mas-Verdu (2008) concluded that there
is, on the one hand, the existence of a certain threshold value in terms of firm size in order for the firm
to be able to make efficient use of KIBS, and on the other hand, the importance of proximity in
geographical and sectoral aspects between the supplier and user of KIBS.
Den Hertog (2000) provided some insight on the interactions that take place between KIBS and their
clients. His analysis emphasised the importance of tacit forms of knowledge flows that are at least as
important as the codified forms of exchanges taking place during KIBS-consumer interactions. The
process is described as an enrichment of the client’s knowledge base through confrontation with the
knowledge base of the KIBS firm. This means much more than just a transfer of information, or the
provision of expertise. In contrast, KIBS can trigger and strengthen processes of knowledge
conversion in their client companies. They can provide new knowledge, but also act as catalysts,
which can improve internal communication and knowledge conversion.
Analysing the role of knowledge cycles in the interactions between KIBS and their clients, Muller and
Zenker (2001) put forward the hypothesis that these interactions stimulate the generation and diffusion
of knowledge within innovation systems. They believe that the appropriation of knowledge by
customers is not the result of a transmission from the KIBS firm to the client, but rather the result of a
re-engineering process performed by a KIBS firm in cooperation with the client. It is the recombination
of knowledge previously acquired by KIBS that enables them to create their own market. This takes
the form of an appropriation of this knowledge through integration into the client’s own cognitive
context.
Bettencourt et al. (2002) concluded that users play a critical role in helping KIBS firms co-create or co-
produce a knowledge-based service solution. The contribution of their clients to the service delivery
process is integral to service success, affecting both the quality of the service output and client
satisfaction with the service solution. Wood (2002) agreed with this argumentation, adding that KIBS
firms offer strategically significant technical or organisational knowledge that the client’s staff do not
possess or could not exploit without the consultancy support provided by KIBS. KIBS firms are
knowledge suppliers, with the knowledge in question resulting from a co-production process intimately
involving the clients of KIBS (Muller and Doloreux, 2009). Almega (2008), for instance, showed that
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the user-driven development of new services is often the result of client-supplier interfaces. The
conclusion is that user-driven demand leads to user-driven innovations, which are more driven by
consumers and tacit knowledge than by the research of several KIBS firms.
2.2 Organisations
There is no typical KIBS firm with a typical output value and an average employment rate. The KIBS
sector, by its definition, is very heterogeneous. Thus, it is difficult to analyse this sector and make
generalised statements or conclusions on the “optimal” organizational form and integration of KIBS
firms into the overall value chain. However, an average EU enterprise in the high-tech KIS sector
generated a production value of 1.3 million euro in 2005. The amount varies considerably between
different countries, as seen in Figure 2.2, where Germany is ranked first with an average production
value per enterprise of 2.42 million euro, followed by Finland with 2.31 million euro. At the lower end
are the Czech Republic (0.27 million euro) and Hungary (0.21 million euro).
Figure 2.2 Production value in EUR million per enterprise, high-tech KIS sector, EU-27, year
2005
Note: Exceptions to the reference year: 2004: CZ, IE, EL and SE; 2002: CY, LU and MT.
Source: Eurostat's high-tech statistics
In combination with the production value, it is interesting to observe the quantity of employees in KIBS
firms. Unfortunately, there is no average size of a KIBS company. Miles (2005) stated that KIBS
feature a higher share of small firms than the economy as a whole. As illustrated in the economic
literature, in an above-average way, the KIBS companies are concentrated on smaller companies
(Hipp, 2000). However, there are exceptions to this assumption, for instance IBM, which is a very
large company that has redefined itself from manufacturing of hardware to a KIBS company.
Muller and Doloreux (2009) concluded that a typical KIBS firm is mainly concerned with providing
knowledge-intensive inputs to the business processes of other organisations, including private and
public sector clients. As the public sector has recognised the important role of KIBS as a sector
responsible for job creation and economic growth, policy measures and instruments have been
introduced in order to increasingly address KIBS firms. According to Kuusisto and Viljamaa (2004),
various policy measures may influence the use of KIBS. This includes, for instance, public funding,
subsidies, and support for the use of various types of R&D-related services. Nevertheless, there is
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limited research on how policies facilitate the utilisation of KIBS or as facilitators of business growth by
providing small enterprises the needed complementary resources. Figure 2.3 shows how the public
sector could influence the use of KIBS.
Figure 2.3 Public sector influence on the use of KIBS
Source: Kuusisto and Viljamaa (2004)
If limited resources prevent potential consumers from using available KIBS, then public sector
intervention could play a role as an initiator of a positive cycle of innovation and growth. This could
occur through supporting the finding- and selection-processes of co-production partners and
influencing the formation of co-production relationships.
A considerable amount of studies (Sundbo and Gallouj (2000); Tether (2005); Camacho and
Rodriguez (2005); Freel (2006)) show that KIBS are more intensively engaged in innovation and
training activities than their manufacturing counterparts, but are less likely to collaborate with
international partners or perform internal R&D. In addition, KIBS innovativeness is strongly associated
with highly qualified employees and intense collaboration with local customers and suppliers as
compared to manufacturing firms.
Figure 2.4 presents a model to clarify the relation between the actors based on the use of knowledge
flows. The KIBS transaction involves three elements. First is the source (S) of the input knowledge,
which can be the client himself, but also the client’s environment. Even the processor can be seen as
a source. Due to the previous KIBS transactions, the processor can accumulate knowledge, save it in
a database, and therefore operate like a source. Second is the receiver (R) of the output knowledge,
which can be an individual client, but also a small group inside the organisation. Even the organisation
as a whole can receive the output knowledge. As explained earlier, the processor is also a receiver,
because it stores the knowledge emerging from each transaction, and can use this later as input
knowledge. The processor (P) is a connector between the source and the receiver, and is also a
converter of input and output knowledge. The main activity is transferring, as effectively and efficiently
as possible, the knowledge from a source to a receiver. Thus, the provider can also be called a
“service provider”. An individual, group, or organisation as a whole can function as a service provider.
The client itself is also a processor if the service is co-produced (the client helped to create
knowledge). Some of the components of a KIBS transaction may merge with one other. It is
Entry
Co-production
Outcome
Public sector
influence
• Client needs
• Client resources
• KIBS availability
• Situational factors
• External
connections
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comprehensible that, in small-sized companies, the processor and receiver of knowledge are the
same. For example, a group receiving input knowledge from a client can act like a processor while
forming output knowledge in a group discussion and, at the same time, can be a receiver of the
created knowledge in order to fulfil the client’s desires. However, in large firms, it is commonly the
case that the source is different from the receiver.
Figure 2.4 KIBS transaction as a form of knowledge processing
Source: Gallouj (2002)
In contrast to the outputs of manufacturing firms, which contain a high degree of codified knowledge,
KIBS outputs include a high degree of intangible or tacit knowledge. Consequently, KIBS companies
are no longer seen as transferors of specific information, but play the role of an interface between the
tacit knowledge base of their clients and the wider knowledge base of the economy in providing
interactive, problem-solving processes (Muller and Doloreux, 2009). It is widely acknowledged that the
interaction processes between KIBS and their customers is the central mechanism of knowledge
creation and processing (Bettencourt et al (2002); Den Hertog (2000); Miles (2005); Wood (2002)).
Considering the structure of the relationship between business service firms and their clients, the
allocation of control rights to the intellectual assets is what is created in joint projects, which is not a
trivial task, as Leiponen (2006) showed in her survey.
2.3 Clusters and Networks
Cooperation forms the basis of clusters and networks, and can always be perceived as a form of
organisation between the two extreme cases of hierarchy and market. On the one hand, cooperation
S
Source
R
Receiver
P
Processor
Client itself (difference levels)
The client‘s external environment
Service provider (processor)
Service provider can be regarded as:
- individual
- a project group
- an organization
Client itself
Client can be regarded as:
- individual
- a group within the organization
- a client organization as a whole
Service provider itself
Knowledge-
input
Knowledge-
output
Transmission
qualities
Receptive
qualities
Competences of knowledge processing
- Logistical competences
- Form competences
- Scope competences
- Architectual competences
S
Source
R
Receiver
P
Processor
Client itself (difference levels)
The client‘s external environment
Service provider (processor)
Service provider can be regarded as:
- individual
- a project group
- an organization
Client itself
Client can be regarded as:
- individual
- a group within the organization
- a client organization as a whole
Service provider itself
Knowledge-
input
Knowledge-
output
Transmission
qualities
Receptive
qualities
Competences of knowledge processing
- Logistical competences
- Form competences
- Scope competences
- Architectual competences
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has the typical characteristics of market coordination based on voluntary collaboration between
interacting companies. On the other hand, cooperation can be interpreted as coordination, which is
formed by hierarchy and the involved fixedly defined competences and functions (Jansen, 2001).
As shown in Table 1.10, the volume of firms engaging in any type of cooperation activity for innovation
is particularly relevant for KIBS companies in comparison to the manufacturing industry and total
CORE-NACE averages. As a consequence, Miles (2000) and Rubalcaba (2007) concluded that
service activities are characterised by a prominent cooperative nature with respect to external agents
in the development of their innovation activities. Furthermore, the question has to be raised whether
cooperation is a preliminary stage of networking.
Sydow (2006) showed that, in most cases, innovation results from the collaboration of different
companies while concentrating their competences in order to manage the technological challenges of
complex modernisation efforts. This collaboration is often based on a type of network presenting itself
as an organisational form of economical activities realised by gaining competitive advantages and
utilising common interests. In general, networks are characterised more by cooperative than by
competitive and relatively stable relationships between legally autonomous, but often economically
dependent, companies.
The advantages arising from networking activities are an improvement of the economic situation of all
members, an increase in economic competitiveness, better achievement of aims compared to
individual actions, and advantages of rationalisation by concentrating on the particular core
competences. Another aspect is the common responsibility for and share of costs, which minimises
risk for every participant (Schmidthals, 2007).
As shown in Table 1.3, KIBS firms cooperate with clients or customers, competitors or other
enterprises of the same sector, and with universities or other higher education institutions that will be
elaborated upon in depth in the following section. To reach the intended goals of the cooperation,
there must be internal coordination processes and an intensive exchange of information before the
production of services takes place. Small and medium-sized businesses are particularly suited for
cooperation or fusion in order to integrate networks in this way (Sydow, 2006).
2.3.1 The Role of KIBS in Innovation Networks
Companies belonging to KIBS operate in a specific network of actors. They have, on the one side,
very tight links with the scientific base and, on the other side, close customer relationships. This
signifies the relevance of KIBS firms as intermediaries between knowledge producers and users (Hipp
and Grupp, 2005). Traditional R&D oriented trajectories are not applicable within service industries.
Instead of service-specific innovation, collaborative behaviour can be observed. In this context,
Sundbo and Gallouj (2000) differentiate between two innovation subsystems, the “institutional” and the
“loosely-coupled” system. In a normal case, KIBS providers belong to the latter, because of the lack of
coherence in terms of technological and professional trajectories as well as the weak science base.
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This means that there is no fixed or contract-based constellation between the actors. As a result, the
integration of external knowledge is less formalised and institutionalised. Similarly, the knowledge
diffusion process does not follow a straight line.
KIBS firms not only interact with similar firms but also with companies from other sectors such as
manufacturing. Therefore, one has to keep in mind that innovation and market trends in one sector
deal with innovation and market trends in other sectors. The survey from Drejer and Vinding (2005)
shows that the collaboration of KIBS and manufacturing firms has a positive effect on employment
development at least for firms located in the periphery areas. Another finding to be taken into account
is that the existence of local innovation networks is more important for KIBS firms than for
manufacturing firms (Koschatzky, 1999).
In this context, we have to distinguish between horizontal and vertical cooperation. Vertical
cooperation exists if the participating companies originate from downstream and upstream production
stages and their value chain activities are jointly interlinked. The relationship between the supplier and
consumer is an example. Horizontal cooperation is an incorporation of businesses, where firms are
producing the same products. This is what indicates that their commodities compete.
In general, this network-based structure of cooperating companies is not commonly advantageous in
regards to the provision of innovative services (Brockhoff, 1999). In fact, these structures are only a
possible reaction of the product complexness and the way knowledge is spread. Concerning the work-
sharing services, the organisational units are often too small to economically guarantee the
coordination of the many activities and the utilisation of resources in the market. Thus, alternatives to
the absolute market solution are required. Cooperation could be a practical possibility to solve this set
of problems. Considering the fact that companies want to draw a profit, flexibility, which is typical
within cooperative environments, can also lead to an optimal arrangement of jobs between the
interacting companies, because all concentrate on the branches and functions where they have an
advantage. Cooperation between different companies ought to be a promising way, particularly among
medium-sized businesses.
Loosely-coupled collaboration and external knowledge sourcing strategies foster research
collaborations with, for instance, universities. It can be assumed that KIBS innovators engaged in
loosely-coupled innovation activities have a strong focus on knowledge building, and learning
capabilities, which also require a strong internal knowledge generation process through research and
development capabilities. This means that KIBS firms are both processors and producers of
knowledge and innovation (Gallouj, 2002).
KIBS businesses play a particularly important role as knowledge brokers in collaborative or network
activities (Hipp, 1999). For example, they absorb knowledge from their environment and pass it on to
their partners and customers for innovation activities. One can say that looking at KIBS firms as
interaction agents or brokers leads to an acceleration of the diffusion of the respective innovation and,
in this context, the KIBS firms can be described as drivers of the entire innovation process. Garcia-
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Quevedo and Mas-Verdu (2008) observed that KIBS have a key role in the creation and
commercialisation of new products, processes, and services. To summarise, one can state that the
function of KIBS in the innovation system is as purchaser, provider, and carrier of knowledge.
2.3.2 Clusters
Better understanding the relationship between knowledge, innovation, and spatial proximity requires
systematically sorting out the connections between the three dimensions, as they are interrelated and
constitute a basis for innovation in KIBS. In spite of the fact that the economy is global, innovation is,
in many aspects, a regional phenomenon in which services, and in particular KIBS, have acquired a
central role. Some past studies assume that innovation rates are greater in regions where a high
concentration of KIBS exists. It is argued that, despite technological changes such as the rise of ICT,
inter-regional trade in KIBS is not possible in the majority of cases because of the need to establish
“face to face” contacts in order to transmit tacit knowledge (Meri, 2008). In the same way, there is a
local character of supplier/provider relationships in services (Wood, 2002). As a result, it can be
concluded that the regional level becomes the most adequate scope in which to study the role of KIBS
in innovation.
One approach to examine more closely existing clusters in Europe is the European Cluster
Observatory, which has the mission to provide neutral and comparable data on the strength of clusters
and their regional distribution throughout Europe. In order to achieve this target, an common approach
with quantitative statistical data is used (European Commission, 2008).
In order to better visualise the issue of cluster building, Map 1.1 was introduced. The areas on the
NUTS 2 level are shaded in proportion to the measurement of regional employment in high-tech KIS
as a percentage of total employment. To analyse the relationship between the activities of KIBS and
their spatial distribution, it can be assumed that KIBS firms concentrate in metropolitan areas. A few
studies document this fact, such as the study by Aslesen and Isaksen (2004), indicating that KIBS
firms are usually highly concentrated in large urban areas.
After dealing with the static picture of Map 1.1, a more dynamic view is presented in Map 2.1,
prepared by the European Cluster Observatory (2009). The annual growth rate of employment in KIBS
between 2001 and 2006 is presented in this map. The average annual growth rate of KIBS
employment was 1.7% compared to an 1.2% increase in total employment in Europe. KIBS are, in
general, a predominantly urban activity. However, the fastest growing regions are mostly small ones
with little KIBS employment.
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Map 2.1 Average annual growth rate of employment in KIBS between 2001 and 2006
Source: European Cluster Observatory (2009)
Overall, the cluster concept offers a better understanding of the eco-system in which innovative
services may flourish best. For example, correlation analyses by the European Cluster Observatory
show that the existence of cluster strengths in services is highly correlated with GDP per capita, which
is most evident for clusters in business and financial services. Overall, strong service clusters are not
strongly related to patent applications to the European Patent Office (EPO), with the exception of IT
and financial services. Most of the services industries also show a high but weaker correlation to
education levels in terms of the share of population with tertiary education (among people older than
15 years). In particular business services have a very strong correlation.
These first results from the European Cluster Observatory provide an indication of which framework
conditions for services clusters are most important. Simultaneously, it cannot be assumed that
services clusters are driven by the same institutional links as research or manufacturing-led clusters.
The quantitative analysis carried out by the European Cluster Observatory needs, therefore, to be
further developed and complemented by a more qualitative analysis of the drivers of services clusters,
in particular those relevant for innovation.
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A survey conducted by Koschatzky (1999) showed that the innovation activities of KIBS reflect their
ability to interact with their partners and that this ability is not spatially neutral. The existence of a
relationship between KIBS firms’ innovation intensity, its integration in networks, and the spatial range
of its interactions are crucial. The influence of geographical area on KIBS firms’ activities is shown by
the fact that firms in central regions show a higher probability of interregional interactions, while rural
areas are dominated by intraregional contacts. One can recognise interregional differences in KIBS
networking behaviour. Heraud (2000) also advanced this view because complex cognitive processes
need not only large flows of codified scientific and technical information, but also a lot of tacit
knowledge for using and interfacing that information. As a result, proximity does matter since building
common tacit knowledge implies close contacts, at least in the beginning of cooperation processes.
Koch and Stahlecker (2006) observed the interrelationship between establishments of KIBS and their
innovation and production systems in some German metropolitan regions. They concluded that,
especially in the early stages of developing a new service, geographical proximity to suppliers,
cooperation partners, and clients seems to play a crucial role. In addition, the structure and
configuration of the regional knowledge base could play an important role in the growth of these new
firms. Depending on the specific techno-economic and institutional structure, regions can be
incubators for the foundation of KIBS. Key factors of the foundation activities in this particular sector
relate to the quality of regionally bound entrepreneurial social networks and the structure and
configuration of the regional knowledge potential. Keeble and Nachum (2002) commented that KIBS
clusters are a consequence of the need for, and benefits of, proximity and accessibility to clients.
Simultaneously, their survey results provide strong evidence for the existence and importance of
localised processes of collective learning and networking involving KIBS.
It has been argued that there is no need for such spatial proximity. Some researchers, based on
surveys, conclude that the exact location of the firm does not matter because of the current rise in
information and communication technologies. For instance, Antonelli (1999) summarised that the
remote access of potential customers to KIBS made possible by new information and communication
technologies provides these firms with a global scope of action. In this way, multinational KIBS firms
can gradually emerge, combining the advantages of proximity and variety. This is particularly true for
standardized services that can be delivered over long distances without problems.
It cannot be denied that new technology solutions have provided various new ways of introducing
services over distances, which may help KIBS firms to enlarge their geographical range of delivery.
However there are some factors which hamper this phenomenon. For instance, many KIBS are
characterised by an intense interaction between the client and service provider. In this exchange
process, trust and common understanding is essential. Naturally, both are easier to establish in
geographical proximity and in face-to-face contact than over a long distance. Geographical proximity
also helps service firms to understand the context in which their clients are working and to exchange
more tacit pieces of knowledge, especially if their services consist not only of standardized
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components. All of these factors contribute to a strong local basis of KIBS firms, which is elaborated
upon in depth with prospective developments in the Foresight Report of Task 2 (Dachs, 2010).
3. Sectoral Innovation Futures
3.1 Emerging and future drivers of innovation
between S&T and (market) demand
As analysed before, service providers innovate in a customised way. They are simultaneously
supported by high skilled, knowledge intensive employees. In the KIBS sector, increasing patterns of
globalisation of production and technology have led to increased international competition, which
makes it necessary to discuss current trends in services. The KIBS sector face several challenges and
must deal with these challenges accurately. The main drivers of service innovation, as discussed by
Rubalcaba et al. (2008) and Dachs (2010), include the following:
Industrialisation of services: The standardisation of work procedures and the production of
standardised services on a large scale (mass production) reflect a certain form of
industrialisation which leads to standardisation of the service itself.
ICT, technology, and R&D: The relationship between technology and service innovation is
not trivial, but complex and multifaceted. There is no doubt that technology is a driver of
innovation, but other types of relationships are also involved. Technological change provides
new opportunities for product and process innovation to KIBS firms in a very general sense
because it stimulates demand for new types of knowledge. Moreover, growing technological
complexity also creates growing demand for technical advice, and a number of KIBS have
emerged to help clients deal with technologies. ICT are certainly the most important class of
technologies for innovation in KIBS and in services in general. ICT allows KIBS firms to
develop new services and producing existing services more efficiently. The codification of
previously tacit knowledge, in combination with ICT, is a major driver of new services. Modern
ICT considerably lowers the price of codification of knowledge and give way to a codification
of various parts of knowledge. Also, ICT can alter the way existing knowledge-intensive
services are provided. ICT provides new ways of service provision over distance and can
relax the requirement that service producer and the client have to be in the same place. As a
consequence, the use of ICT increases the tradability of services, in particular of services
dealing with the exchange, storage, processing and retrieval of standardized, digitized and
codified information. This opens new ways for service providers to meet the growing demand
for services due to offshoring and to serve clients outside their town or region.
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Globalisation: The service sector can no longer rely on a public monopoly, which was
originally used to protect against international competition. Through liberalisation and
deregulation, this approach has resulted in new opportunities for innovative services. Despite
the local character of many KIBS, some authors argue that international outsourcing in KIBS
will become considerably more prominent in the future. Their main argument is that ICT have
created new ways for communication between service firms and clients and service provision
over distance. As a consequence, ICT changed the local character and the tradability of
many services. These types of services, as Blinder (2005) puts it, " have more in common
with manufactured goods that can be put in boxes than they do with personal services”.
Outsourcing, as a consequence, increasingly gets an international dimension with a growing
share of outsourcing taking place between partners in different countries. International
outsourcing, like domestic outsourcing, has a strong cost component, but is also fuelled by
the effects from serving a larger range of clients such as economies of scale and increasing
specialisation at the KIBS provider’s side.
Demography and increasing knowledge-intensity in the economy: In sophisticated
European countries, the most important demographic variable affecting innovation is ageing,
which leads to new niches for the development of specific services. Another major demand-
side driver of KIBS growth is the increasing knowledge intensity of a number of economic
activities and, as a consequence, a higher need for special expertise. Society is becoming
increasingly differentiated, knowledge-intense and complicated which raises the need for
advice and consultancy.
Outsourcing: Outsourcing means that manufacturing and service firms buy services which
were previously provided in-house from external service providers. KIBS predominantly are
consumed by other businesses and outsourcing has been a major driver of KIBS growth in
the past. Outsourcing is cost-driven to a certain degree, but also has to be seen in a larger
context of corporate restructuring where firms increasingly focus on their core competencies
and handle other activities to external suppliers. Outsourcing enables KIBS to gain dynamic
learning effects, increasing returns from scale and specialisation, and benefit from
experiences with different clients.
Customisation and Open Innovation: Adaptation to clients needs is more important for the
success of the service sector than for the manufacturing sector. Enterprises increasingly
make use of external scientific and technological knowledge in their innovation process. Many
innovative enterprises have shifted to an ‘open innovation’ model where they exploit ideas
and knowledge not only provided by internal R&D, but also from a broad range of external
sources and actors. In the context of KIBS, this could further boost demand for R&D services
and other KIBS providing scientific and technological expertise. Hence, from the KIBS point of
view, Open Innovation could be seen as an extension of the general trend towards
outsourcing for R&D.
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Deregulation: Through several waves of liberalisation transposed in the past years, new
chances and opportunities were created for service innovations.
Local character of KIBS: Technology has provided various new ways of delivering services
over distance. These tools may help KIBS firms to enlarge their geographical reach. There
are, however, considerable hampering factors to such an expansion which are a result of the
very nature of the process of service production in KIBS. As a result, these factors are
negative drivers to outsourcing and the internationalisation of services. Differences in culture
and language between countries can hamper internationalisation, since a number of KIBS
industries are characterised by an intense interaction between the client and the service
provider. Geographical proximity also helps service firms to understand the context of the
client and to exchange more tacit pieces of knowledge with the client. All these factors
contribute to a strong local character of KIBS and many KIBS remain local even if
technological change provides ways to deliver these services over distance.
Of course, there are other drivers and challenges that KIBS deal with in addition to those mentioned
above. In general, it can be stated that the innovation processes and structures of the KIBS Sector are
changing, so it is essential to examine future prospects. The different drivers and challenges lead to a
number of so-called megatrends, which result from the interactions and combinations of the diverse
issues mentioned before (Rubalcaba et al., 2008). The following areas must be analysed in this
context: the relationship between industrialisation and customisation; service regression, which means
that there is a trend of cost reduction in services; the rising significance of product-related services,
the general population ageing; and the challenge of sustainable development.
In general, these findings support the observation that the KIBS sector as a whole should be politically
supported by the implementation of an appropriate innovation policy. Creating framework conditions
for the emergence and growth of KIBS will generate employment growth and more flexibility in the
labour market (Evangelista and Savona, 2003).
3.2 Sector scenarios
The following scenarios build on some general trends which constitute the background for the
scenarios proposed below. These general trends are:
Economic growth is expected to continue at a rate similar to the past.
Technological change in information and communication technologies is expected to proceed
at considerable speed which means that new technological opportunities will open up.
Policy measures such as regulation and restrictions to market access will not hamper service
growth, outsourcing and international trade in services.
Possible scenarios are considerably shaped by the heterogeneity of KIBS. It is extremely
different to find a common trajectory for all KIBS sectors.
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The approach is to develop scenarios of possible states of KIBS along two drivers. The future state of
these drivers remains uncertain, but each driver nevertheless should be regarded as highly relevant
for the future development of the sector. Each driver has two states; the combination of these two
states results in four scenarios of possible future KIBS development. KIBS firms co-operate with their
clients in service production, so the mode of co-operation with the client and the business
environments of KIBS is used as the first driver. This first driver is called the state of the business
environment. The driver has two possible states; it can be a stable, traditional environment, or a
dynamic, flexible, virtual environment. To expand the scenario space, a second dimension is
introduced which describes the degree of codification of the knowledge base of the
individual/project/firm/sector. The codification dimension ranges from pure tacit knowledge, that can
reproduced and transferred only at very high cost, to highly codifyable knowledge which can easily
stored, reproduced and transferred, often via ICT.
Scenario “Customized delivery”: The first scenario, which is characterized by a combination of a
high degree of tacitness and a stable environment, is closest to established picture of consultants:
internal experts who contribute to innovation and the provision of services at their clients. A
characteristic of this scenario are stable supplier-client relationships which may be a good
environment to codify knowledge. In the scenario, innovation is very much ad-hoc, involving co-
production and creativity-based activities, so the opportunities for codification remain low despite the
favourable environment. Growth of KIBS in this scenario will be a prolongation of the trend we have
observed over the last 30 years; KIBS will play an increasing role in the innovation processes of their
clients, fuelled by specialisation and cost advantages, and by the trend towards outsourcing. KIBS are
provided by firms, rather than individual experts, who have a along-term relationship with their clients.
Scenario “Creativity & innovation”: The combination of a high degree of tacitness and a dynamic
environment results in a scenario where innovation activity is very much interactive and an industry
structure that is fluid. Co-operation is often not very deep – information rather flows through ‘weak ties’
rather than year-long co-operation. Activity is mostly project-based and rests on individual people and
their expertise rather than on the institutionalized firms. This scenario may be close to what is currently
discussed as “open innovation”. KIBS are often facilitators, by providing platforms to support
exchange. This scenario implies a high degree of openness and a vivid exchange of ideas, which may
bring forward new solutions to problems and a higher innovativeness in general. One can assume that
this scenario will bring considerable growth potentials for KIBS because their integration into the
innovation processes of client industries is easy in this scenario.
Scenario “R&D”: This scenario is characterized by the combination of a low degree of tacitness and
a dynamic environment. As a result, we see more opportunities for codification and a more decisive
role of ICT for service provision. This will lead to a considerably higher degree of automatisation in this
scenario. Growth prospects for KIBS are again favourable in this scenario, because it assumes a high
degree of openness, user involvement and a more user-driven mode of innovation. Moreover, there
may also be considerable growth prospects from the technology side, because the scenario assumes
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rapid progress in the codification of services which may lead to increasing returns to scale and
decreasing unit costs of service provision.
Scenario “Automated delivery”: This scenario results from a combination of a low degree of
tacitness and a stable environment. It shares the importance of ICT for service provision with the
previous scenario. Co-operation in this scenario, however, is much more closed, the number of
partners is smaller, and R&D and creativity proceeds in more stable, routinized way. This scenario is
very similar to the “R&D” scenario with respect to growth prospects of KIBS. In contrast to “R&D”,
growth will mainly arise from codification, facilitated by the use of ICT. It will benefit considerably from
cost degression, and only to a lesser extend from an expansion of KIBS involvement in the innovation
processes of client industries.
KIBS are a heterogeneous group of service industries. Therefore, the four scenarios are not mutually
excluding variants of possible futures, but as existing side by side. Firms that are characterized by
different scenarios may even be found in one sector. Hence, one scenario may be a plausible future
for service industry A, but quite impossible for service industry B. To take this heterogeneity into
account and further illustrate the quadrants, KIBS industries that represent the ‘spirit’ or dominant
mode of innovation of each scenario have been identified. The “Creativity & innovation” scenario, for
example, is best represented by the branding/advertising sector, while the current mode of service
provision in professional and consultancy services fits best with the “customized delivery” scenario.
There may be also combinations of the scenarios, for example in the form of services based on a
range of highly automatized standard products which can be customized to a certain extent. Banking
is a good example for such a co-existence. There are internet-based standard accounts with a high
degree of automatisation and almost no labour input, but also asset management with almost no
industrialisation and a lot of personal contact between the service provider and the client. Gallouj
(2002) has called this the ‘dialectic between industrialisation and customisation’: firms, on the one
hand, provide highly standardized automated services in some areas, and labour-intensive, tailor-
made services in the other areas.
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Figure 3.1 The sectoral dimension of the KIBS scenarios
Source: Europe INNOVA Foresight workshops, June and December 2009
3.3 Future innovation themes and corresponding
linkages with other sectors
Identifying innovation themes and new products and processes in KIBS is considerably more difficult
in services than in manufacturing for various reasons; first, services are often not well-defined,
indistinguishable products; KIBS in contrast, are often tailor-made, created as a response to the
specific problems of the client and in interaction between client and service provider (Miles 2005).
Second, the service is essentially co-produced with the client and very much content-specific. As a
result, differences between singular service cases can be huge and it cannot be said if a particular
product variation is an innovation or not. Because of this heterogeneity, it is not feasible to identify a
complete list of generic emerging innovation themes that are relevant in all KIBS.
Nevertheless, some examples for emerging innovation themes in KIBS can be given. Increasing
computing capabilities as well as advances in describing and analyzing natural and social systems will
provide new technological opportunities for computer simulations in all types of KIBS. Services based
on these simulations will, for example, provide new ways of virtual testing.
In order to develop new service innovations, KIBS serve as key users and often as a lead user of new
information and communication technologies (ICT), initially working as absorbers and adopters of
innovations of the ICT sector. The influence of technological development on service products and
processes and the specific use of ICT was first analysed by Quinn (1987). Ebling et al. (1998)
demonstrated the empirical relevance of certain technologies for German service companies,
dynamic
environment
stable
environment
tacit
knowledge
codified
knowledge
customised delivery automated delivery
creativity & innovation R&D
sustai-
nability
branding / advertising
marketing
new media
broadcasting
utilising the web
innovation agencies
research services
education and training
research establishments
contract organisation
professional services
sustainability consultancy
business model development
maintenance
system development
system engineering
market research services
logistics
space downstream services
data processing services
automated maintenance
automated responses
online / web based services
e-government
e-procurement
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showing, for example, that 87% of all innovative service companies regarded computer, electronic
data processing, and other hardware as important for their innovation activities, closely followed by
software application. In addition, 45% of the innovative service providers used high performance
communication networks for the same reason (Hipp, 2008).
Recruiting the highly qualified staff that KIBS need is not easy and involves heavy search costs. In
order to reduce the costs, electronic databases can be used. In general, it can be observed that the
use of the Internet offers a growing range of new possibilities for services with high information input.
KIBS and technology intensive services have higher expenses on electronic transactions than, for
instance, retail trade or real estate services (Preissl, 2003). Also, Tether and Hipp (2002) showed that
KIBS firms invest more heavily in ICT compared to other service firms.
By using new information, communication, and related technologies, KIBS enhance productivity in the
whole economy by improving their own productivity figures. In particular, KIBS taking advantage of
ICT plays an important role as a converter or broker of technological information. These KIBS act as
providers, purchasers, and partners in the context of innovation. Windrum (2002) concluded that there
is a positive association between KIBS and new, innovative technologies. For that reason, Czarnitzki
and Spielkamp (2003) characterised KIBS as bridges for innovation because of their knowledge,
creativity, and management skills. The increasing tradability of services and innovations in the field of
communications and information technology promotes decentralisation, specialisation, and the division
of labour in service and industrial activities. The prominent role of KIBS as an innovation broker leads
to associated spillover effects on the whole productive system. In this sense, the introduction of ICT
has unleashed important productivity enhancing effects in many service industries, for instance in
service industries using ICT (van Ark et al., 2003).
Another generic emerging innovation theme in KIBS is convergence. Convergence implies that service
activities and service products which have their origins in two or more different KIBS industries are
becoming increasingly entangled (Toivonen 2004). Convergence can promote service innovation
because it offers new markets for service firms, but may also intensify competition. It leads to new,
hybrid service offers that incorporate characteristics of various services. Another consequence is that
sectoral boundaries inside the KIBS sector, but also between KIBS and some other service industries,
are increasingly blurred. Future opportunities for KIBS will emerge to a considerable degree where
boundaries between different sectors blur. Convergence can also be observed at a higher level. Some
observers see blurring boundaries also between manufacturing and services (Pilat et al. 2006).
Manufacturing firms are increasingly offering supplementary services to their products and raise the
share of services on their turnover. Some firms even redefine themselves as KIBS – IBM being the
most prominent example.
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3.4 New requirements for sectoral innovation: new
forms of knowledge, organisational and
institutional change, regulatory frameworks
Due to the rising complexity of organisational processes, KIBS have to change and adapt along with
other enterprises. KIBS provide services based on a level of professional knowledge with transactions
made up of knowledge and often intangible output. In this context, innovations do not always have to
have a technological background. Also, non-technological innovations play an important role.
Examples of non-technological innovations are new marketing concepts, new client interfaces, new
types of delivery organisations, and new smart combinations of service and product elements or new
organisational concepts (Rubalcaba et al., 2008).
It can be concluded that there are, next to product and service innovations, other types of innovations
of high importance for KIBS, namely marketing and organisational innovations. The changes in
marketing and organisational re-structuring are often continuous processes and essential activities to
maintain the firm’s competitiveness (Schubert, 2009). In the Community Innovation Survey (CIS2004),
marketing innovations were split into changes to design and packaging, product promotion, product
placement, and pricing, whereas in the area of organisational innovation, distinctions were made
between changes to business practices, knowledge management, the organisation of work
responsibility and decision-making, and the organisation of external relations. Over two-thirds of KIBS
Firms introduced organisational innovations during the survey period.
Innovations usually result from a new combination of knowledge and not from a new combination of
physical products (Amara et al., 2008). According to the survey of Czarnitzki and Spielkamp (2003),
KIBS are more likely to co-operate in innovation projects than other companies in the service sector,
as mentioned previously. KIBS not only use external information sources, but are also active
contributors to the innovation process itself. In this context, KIBS are able and willing to co-operate
with other firms.
A number of studies that compare skills intensity across the economy have pointed out that skills
requirements in KIBS are considerably higher than in many other sectors. Business services are
classified as “high” or “very high” in a sectoral classification of educational intensity brought forward by
Peneder (2007). According to Peneder, skills requirements in KIBS are also higher than in most
manufacturing sectors including automotive, chemicals or mechanical engineering. Additional figures
are presented by Miles (2005) who shows that a total of 40 per cent of business services personnel in
the EU15 and 36 per cent in the EU10 were classified under high skills. Moreover, compared to the
business sector, personnel cost account for twice the share on total cost in KIBS (EUROSTAT 2008).
The high importance of skills for KIBS in combination with the heterogeneity of the sector, however,
makes it also difficult to say exactly what skills are important for future development.
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3.5 Sectoral innovation policy in a scenario
framework
The future development of KIBS will be driven by various factors – developments in technology,
changes in clients sectors, but also social factors and influences from the general economic and
political level. Four scenarios of future development of KIBS based on technology (codification) and
the environmental factors were sketched. The four scenarios describe possible future developments of
various KIBS sectors – they are not exclusive, but allow different possible futures to exist side by side
in various sectors. This section will discuss policy issues related to the four scenarios. Each of them
includes different hampering factors for development and poses its own challenges and opportunities
to policy.
Policies to support the “Automated delivery” scenario: Growth in the “Automated delivery”
scenario is mainly driven by codification of knowledge, the use of ICT, and the automated provision of
services which allows considerable economies of scale and scope. The prominence of codification in
this scenario points to the importance of measures to protect intellectual property rights (IPRs) in this
scenario. Measures to ensure a high degree of IPR protection and encourage firms to make use of
IPRs can create incentives to innovate, because it allows firms to reap a higher benefit from their
innovations. Differences between the private and the social returns to innovation are an important type
of market failure. IPRs are less frequently used in the service sector compared to manufacturing (van
Cruysen and Hollanders 2008), which may justify policy intervention. However, critics also argue that a
too strict protection of IPRs may also have the opposite effect, by hampering knowledge diffusion and
circumventing innovation that build on prior discoveries.
Scientific knowledge, in particular information technologies and computer sciences, is an important
source of innovation in the “Automated delivery” scenario. A considerable number of market entries
are supposed to be technology-based start-ups with a university background. To further spur
innovation, an increased exchange of information and knowledge between service firms and the
science sector could be advantageous. Empirical evidence suggests that service firms co-operate less
frequently with science than manufacturing firms. This can be partly explained by a lack of resources
in small firms necessary to co-operate and asymmetric information. Policy could stimulate this
exchange with programmes that target particular fields in the service sector.
Another potential field for policy intervention is standardisation of services. More standards for
services may allow a higher degree of transparency and comparability in services. Companies and
governments in Europe spend a huge amount of money on KIBS each year. In many cases, however,
it is difficult to tell what you get for the money and if services offered by one company are better than a
service offered by another company. Firms find it difficult to compare the quality of services ex-ante
because there is information asymmetry between the buyer and the seller. Moreover, many services
are very much customer-specific and hardly a well-defined, distinguishable product. A lack of
transparency even becomes more pressing for service clients with the liberalisation of many service
industries, which leads to a rise in the number of service providers and in variety of services offered.
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Transparency may be increased by more standardisation of services and a common terminology to
describe the contents and functionalities of services.
Policies to support the “R&D” scenario: In contrast to “Automated delivery” scenario, the “R&D”
scenario is characterised by a stable environment with a mature market where big companies
dominate. Service challenges include internationalisation and international outsourcing. As a
consequence, issues related to the International regulatory frameworks for KIBS come into focus for
policy in this scenario. Regulation can remove legislative barriers that hamper the mobility of KIBS and
KIBS workers. This includes, for example, regulation concerning market access. Policy can facilitate
internationalisation and trans-border operations of KIBS by new international regulatory frameworks. A
new protectionism, which may arise as a consequence of the current economic crisis, may have the
adverse effect on internationalisation and growth prospects of KIBS. If countries start to increasingly
protect domestic markets from foreign competition, the internationalisation trend and associated
welfare gains from increased specialisation and increasing returns to scale may come to an abrupt
stop. KIBS service providers may instead focus on their domestic markets.
Another challenge related to asymmetric information is privacy and data security. In the outsourcing
process, clients have to reveal key sensible information to external service providers. An increased
public awareness of security issues may lead to more opposition against outsourcing. Firms may
become more sceptical to hand over central business processes to third parties, even at the
consequence that costs for in-house provision become higher. As a result, firms may see limits to
outsourcing, which pose, at an economy-wide stage, barriers to the process and may even reverse the
level of outsourcing in the economy. Policy initiatives that help increasing trust may overcome this
hampering factor.
Policies to support the “Creativity and innovation” scenario: The “Creativity and innovation”
scenario is characterised by a high degree of openness, a fluid, dynamic environment with
considerable opportunities for market entrants and a high number of small companies. Services are
based on highly experienced individuals rather than on ICT and automatisation, which sets limits to
automatisation and economies of scale. The paramount importance of skilled individuals in this
scenario points to the importance of policies towards increases in qualifications and skills that help
firms to overcome problems from a lack of qualified personnel. According to CIS results, al lack of
qualified personnel is one of the most severe hampering factors for innovation in KIBS (van Cruysen
and Hollanders, 2008). This includes, on the one hand, individuals with tertiary education. However,
as van Cruysen and Hollanders point out, there is also demand for other, non-tertiary jobs due to the
considerable heterogeneity of the service industries. A wide range of skills can be acquired through
vocational training and training on the job. Policy intervention in the supply of qualified personnel
should target measures to increase the number of people who take up tertiary education, support
training on the job, but also labour mobility which may help to overcome regional shortages in skilled
personnel. In the “Creativity and innovation”-scenario, a public policy may therefore have a strong
focus on overcoming the market failures related to start-up financing. There is massive asymmetric
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information between entrepreneurs and financiers of new ventures, which may call for public
intervention. In addition, small businesses are mostly bound to operate in domestic markets and in
certain sub sectors after the start-up phase because they lack the capital and resources for expansion.
Policies to support the “Customized delivery” scenario: This scenario is closest to established
picture of consultants; a high degree of tacitness and a stable environment creates conditions where
the favourite organisational form are firms with highly knowledgeable internal experts who contribute
to innovation and the provision of services at their clients. Innovation in firms in this scenario may
suffer from a number of hampering factors already discussed for other scenarios. In addition, firms
may also suffer from a lack of support from innovation programs in general. There is evidence from
the CIS reported by van Cruysen and Hollanders (2008) that a considerably lower share of service
firms receive public funding for innovation compared to manufacturing firms. This may point to a bias
in national as well as EU funding schemes which may lead to a situation where many potential
innovations in services are not realized. Policy should be aware of the peculiarities of services and
service innovation and how they may interfere with the design of policy measures.
Another field for policy intervention in the “Customized delivery” is the access to external funding. It
has already been discussed that support for start-ups in KIBS may be even more important than in
manufacturing because of the higher share of start-ups and a potential lack of funding. The same is
true for access to external funding for later stages in firm growth. Problems of finance may arise due to
underdeveloped venture capital markets within Europe. It may be even worsened by the fact that the
production factors of most KIBS are intangible in nature and difficult to offer as a deposit to a bank.
Again, the problem of external funding is related to market failures from information asymmetries.
4. Barriers to innovation
4.1 Market factors affecting innovation
As analyses of CIS4 data has shown, the most important drivers for KIBS to innovate are benefits for
the reduction of cost labour, ability to respond fast to clients, improved product flexibility, likely
increases in market share and collaboration with external partners. Also ranking within the top ten
drivers are the need for increased range of products and their quality, employee satisfaction and
access to European funds for research. The need to reduce materials and energy usage might be
hindering innovation in the KIBS sector.
In the KIBS sector, the survey results suggest that firms clearly engage more in innovation related to
services and products. Remarkable, KIBS firm rank top of the list in service innovation. In opposition,
innovation in manufacturing methods, design and logistics are lower in KIBS compared to the average
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value in all other sectors. Survey respondents perceive innovations as having an overall positive effect
on their company’s competitiveness, brand image and technical risk, so it has to be investigated which
market factors affect service innovation primarily.
Summarizing, the survey results confirmed the factors stressed by literature as positive drivers for
innovation, and in addition, found a number of variables that are also contributing to innovation in
KIBS firms. These additional factors include: increased demand for products and inputs in Asia and
Eastern Europe, market expansion in new emerging and transition economies, life cycle of goods,
products, machinery and equipment, and heterogeneity of customer base. In contrast to the literature,
the results found that competition originated inside Europe is also a positive factor to innovation. In
general, literature on the effects of specific factors of the business environment affecting KIBS firm’s
innovation responses is difficult to be found. Survey results show, that in-house know-how and access
to information are factors driving innovation efforts, being the former variable the most important factor
fostering innovation in KIBS firms. The survey results also suggest that collaboration and open
innovation of KIBS firms with customers and suppliers is seen as a positive driver for innovation.
4.2 Regulation and innovation
Regulation and standards in the KIBS sector do not play an important role regarding innovation
issues. Literature on innovation in services suggests that firms face an increasingly dense regulatory
framework. The field of environmental, hazardous materials, health and safety regulation, taxation or
other fields where KIBS firms provide advice are examples of this. Regulations are in turn regarded as
positive drivers for innovation (Dachs 2010). However, the literature also reports that excessive
regulations may hinder innovation in the service sector as a whole (Rubalcaba 2007). It is also
suggested that differences in rules and regulations in different countries may hinder innovation in KIBS
across national boundaries (Dachs 2010). Interoperability between old and new standards and setting
up industrial standards are additional factors fostering innovation. Protection through IPR can
constitute an additional incentive to innovate, but monopoly protection hinders the diffusion of new
technologies and services (Amara et al. 2008). Finally, differences in judicial and regulatory systems,
communications regulations, price regulations and fiscal and taxation regimes across Europe also
constitute important innovation barriers in the KIBS sector (Dachs 2010). The survey results only find
‘setting up new industrial standards’ as a clear driver to innovation in KIBS firms, but this variable is
not associated with any of the innovation types. Overall, the results of the correlation analysis
suggested a rather moderate association between regulation and the different types of innovations in
KIBS industries. There are only very few regulations, which are strongly correlated to innovation in
KIBS firms.
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4.3 Systemic failures
The most important factors hampering innovation in KIBS industries are grouped under market and
regulatory failures. The market factors having a negative effect on innovation in this sector includes
globalisation and international competition. For the KIBS sector, increasing patterns of globalisation of
production and technology have led to increased international competition. KIBS firms often have to
struggle with competitors in a worldwide contest.
In addition, labour costs and relocation of labour outside Europe, market protectionism, trade
agreements, and insufficient government expenditure and procurement are also perceived as
hampering factors for innovation in this sector. Furthermore, insufficient access to capital and
information has always been considered a factor that may slow down innovation activities of firms.
The regulation factors having a negative effect on innovation in this sector comprises particularly IPR.
For example, patent protection often is denied to service innovations. Also, protection through IPR can
constitute an additional incentive to innovate, but monopoly protection hinders the diffusion of new
technologies and services. Other hampering factors of regulation effects on KIBS innovation are
stated to be the predominant fiscal & taxation regime and market regulations.
5. Horizontal issues relevant to the sector
In the present chapter, the main issues of five horizontal reports relevant for the services sector are
presented and discussed.
Impact of technological specialisation on economic performance: In the Task 4 analysis on
national specialisation, KIBS were excluded from patent based analysis. But the analysis of innovative
performance covered services. In order to measure innovative performance at the country level, the
following indicators have been used:
Share of product innovators
Share of process innovators
Share of turnover due to new products in 2004
Cost reductions due to process innovations relative to turnover in 2004
Results show that some countries are specialised in certain types of innovation. For example Portugal
primarily reduced costs, while its product palette is (relatively) dominated by products older than 3
years. The same holds true for Latvia. On the contrary, Bulgaria has the highest share of turnover with
new products (16%), while it is only slightly above average with respect to cost reduction. The choice
between different types of innovation is probably driven by the position on foreign and domestic
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markets. Inasmuch the positions differ, also the innovation paths differ. In general, cost reductions
play a less decisive role in KIBS than in most other sectors of production. On the contrary, turnover
with new products is quite high in services. This most likely reflects product intangibility of services,
and low potentials for cost reduction.
Impact of innovation on high-growth companies: Considering the growth rates of firms, it appears
that there are many KIBS companies which are considered to be high-growth. Within the Task 4
Horizontal Report 5 on gazelles, the investigation focused on whether high-growth companies are
more likely to be found in growing industries such as knowledge intensive business services, than in
stagnating industries. The results of the report tend to support this thesis. From a practical point of
view, the authors conclude that high firm growth is most likely affected by industry.
Impact of organisational innovation: Results show how advances in innovation in the services
industry are more intimately connected with the introduction of new organisational arrangements than
their counterparts in the manufacturing sector, which are more technological product/process related.
Additionally, organisational innovation increases progressively with the size of enterprises, thus
turning large firms within the services sector into major originators and adopters of organisational
improvements in the economy.
The more intangible nature of non-technological-based organisational innovations encourages
significant impacts related to quality and client/provider/employee satisfaction, rather than those purely
focused on costs and savings, which are more important in goods-related innovation. However, a
variety of organisational innovations also impel increasing business productivity gains in terms of costs
and savings, the effects of which may be underestimated. Thus, to better approach and assess those
potential benefits coming from the introduction of organisational innovations, it is essential to not only
enquire as to whether companies implemented organisational innovations at all, but also to discover
which particular kind of organisational innovation was implemented.
Technological and non-technological innovations should not be considered in isolation, but as
complementary forces that, in combination, may lead to firms’ improved productivity, flexibility and
quality gains. Analysis has proved relevant correspondences between the introduction and use of ICT
business tools and organisational innovation developments. In this respect, an effective exploitation of
new technologies often involves complementary changes in administration and organisational
structures within companies; whereas investment in ICT turns out to be more productive when
organisational changes have been implemented in the firm. Moreover, the personnel training input
factor has revealed a positive and significant relationship with respect to the introduction of new
organisational progresses by service firms, which may also be highlighting a relevant policy action in
searching for increasing innovation developments and performance in service-related activities.
Impact of Eco-innovation opportunities: The environmental impact from traditional services is
mainly attributed to travelling, buildings and tools. Although Knowledge Intensive Business Services
have limited CO2 emissions as compared to other industries, countries with a strong orientation
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towards services are considered in the top global polluters. It has been argued that the
dematerialisation of the economy does not necessarily leads to a reduction of the environmental
impact of a country. Yet, this environmental pressure is only indirectly related to the service industry.
Therefore, opportunities for the reduction of environmental impact partially lies within the scope of the
way services are offered (Gadrey 2009).
KIBS services are perceived as a solution to the environmental problems in other sectors. Consulting
services can implement ICT applications which reduce energy consumption in other industries and
products through energy saving applications such as smart homes, smart buildings, or smart
transportation systems (OECD 2009). Little is said of the environmental impact of KIBS so identifying
eco-innovation opportunities that may alleviate its carbon footprint is difficult. Eco-innovation
opportunities which are related to the environmental impacts of KIBS organisations themselves may
entail implementation of new communication technologies, improvements in logistics and
technological improvements to decrease the environmental impact of tools. In the case of
organisational and process innovation, eco-innovation opportunities which are directly related to the
environmental and energy efficiency impacts of KIBS entail the implementation of new communication
technologies or improvements in logistics and technological improvements to decrease the
environmental impact of tools. For the case of service innovation, opportunities for eco-innovation for
KIBS organisations mainly lie in the development of environmental services which help other
companies to reduce their environmental impact.
In the KIBS sector, relationship of environmental regulation with different types of innovation activities
was found weak. Product innovation is associated with environmental and energy regulations,
innovation in designs is associated with hazardous and alternative materials regulations as well as
with waste regulations. Weak associations were found also between waste regulations and REACH
and innovation in services and sales and distribution methods respectively.
Impact of innovation on new lead markets: Only one out of six sectors identified as lead markets by
the lead market initiative (LMI) includes activities which are usually regarded as services (e-health).
But it is argued that this fact is due to some propensities of service goods that make them difficult to
address with the instruments of the LMI. Services differ from material products, therefore the concept
of lead markets have to be extended to services. Four service characteristics (industrialisation,
tradeability, service specitity and standardization, innovativeness) are used as a set of criteria to judge
if a certain service meets the basic requirements for lead market development. In order to evolve into
a lead market, it should be possible to codify automatize and/or modularize the service in order to reap
cost advantages with increasing production size; the service should be tradeable, tangible and
storable to a certain degree; if should have a certain level of specifity and allow to compare it before
consumption; a certain level of innovativeness should be inherent to the sector which offers this
service.
The lead market report suggests that the most promising industries for the evolvement of new lead
markets in services are communication services, financial services and computer services, which are
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all part of the knowledge intensive services sector. These industries combine a high degree of
tradeability and innovativeness with opportunities for industrialisation. Moreover, the degree of
specifity is high, at least in some types of these services. Other industries like business services, R&D
services, insurance, renting and real estate share with the former group a high degree of tradeability
and opportunities for industrialisation. The degree of customized or bespoke services, however, is
higher in these sectors.
6. Policy analysis and conclusions
Deregulation as a process by which governments remove, reduce or simplify restrictions on business
activities with the intent of encouraging the efficient operation of private markets, can offer
opportunities for business services. In this context, government is seen as a key actor which must
provide a policy and regulatory framework to encourage innovation and the competitive edge of
economies. Policies to set better framework conditions for innovation are even more relevant. It is
clear that the design of policies that facilitate the creation of new markets must be underpinned by
smart regulation which promotes innovation and foster competitiveness.
Results of the study show that KIBS are more intensively engaged in innovation and training activities
than their manufacturing counterparts, but at the same time are less likely to collaborate with
international partners or perform internal R&D. In addition, KIBS innovativeness is strongly associated
with highly qualified employees and intense collaboration with local customers and suppliers as
compared to manufacturing firms. In the following, the most promising policy implications, which take
into account the mentioned specifities, are presented :
Holistic approach for goods and services: Processes have to be considered across the whole
supply and value chain. A clear separation between goods and services is no longer suitable. Also, in
policy analysis and consulting, a holistic approach has to be preferred. Thereby, a service culture in
companies and a service paradigm in society could be established.
Education of qualified personnel: Knowledge, innovation and willingness to learn, will be crucial to
differentiate european firms from asian competitors in the long term. In this context, KIBS are playing a
particularly important role and should be increasingly integrated into the teaching, transfer and
knowledge generation process. The paramount importance of skilled individuals in KIBS points to the
importance of policies towards increases in qualifications and skills that help firms to overcome
problems from a lack of qualified personnel. According to CIS results, a lack of qualified personnel is
one of the most severe hampering factors for innovation in KIBS. This includes, on the one hand,
individuals with tertiary education. However, there is also demand for other, non-tertiary jobs due to
the considerable heterogeneity of the service industries. By means of supporting the knowledge
generation and qualification in service education, a new generation of workforce which is and more
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sensitized in service peculiarities, could enter the labour market. This next generation has to be
trained according to new challenges. They have to learn how to aquire knowledge, to process a better
understanding, to actively and creatively apply their knowledge in order to develop new service
applications and technologies. In contrast to many Asian countries, where mainly memorizing and
factual knowledge is taughted, employees in Europe must be able to deal with interfaces creatively
and develop solutions situationally. A wide range of skills can be acquired through vocational training
and training on the job. Policy intervention in the supply of qualified personnel should target measures
to increase the number of people who take up tertiary education, support training on the job, but also
labour mobility which may help to overcome regional shortages in skilled personnel.
Public funding and financial incentives for service innovation: Various policy measures may
influence the use of KIBS. This includes, for instance, public funding and subsidies, as well as support
for the use of various types of R&D-related services. Service firms may suffer from a lack of support
from innovation programs in general. There is evidence from CIS that a considerably lower share of
service firms receive public funding for innovation compared to manufacturing firms. This may point to
a bias in national as well as EU funding schemes which may lead to a situation where many potential
innovations in services are not realized. Policy should be aware of the peculiarities of services and
service innovation and how they may interfere with the design of policy measures. Most of KIBS firms
are relatively small, and therefore they have to deal with typical problems of SME´s like complicated
access to capital and financial funding. The introduction of innovation vouchers, which can be spend
very flexible and only if necessary, would help to deal with KIBS´s heterogeneity and offer incentives
to innovate. A similar approach would be, to give taxation reductions to certain innovation activities of
small firms.
Cooperation programmes: To further spur innovation, an increased exchange of information and
knowledge between service firms and the science sector could be advantageous. Empirical evidence
suggests that service firms co-operate less frequently with science than manufacturing firms. This can
be partly explained by a lack of resources in small firms necessary to co-operate and asymmetric
information. On the other hand, loosely-coupled collaboration and external knowledge sourcing
strategies foster research collaborations with universities and other institutions. Policy could stimulate
this exchange with programmes that target particular fields in the service sector.
Access to international markets: Service challenges include internationalisation and international
outsourcing. As a consequence, issues related to the international regulatory frameworks for KIBS
come into focus for policy. Regulation can remove legislative barriers that hamper the mobility of KIBS
and KIBS workers. This includes, for example, regulation concerning market access. Policy can
facilitate internationalisation and trans-border operations of KIBS by new international regulatory
frameworks.
Appropriate protection through IPR: The prominence of codification in several scenarios points to
the importance of measures to protect IPRs. Arrangements to ensure a high degree of IPR protection
and encourage firms to make use of IPRs can create incentives to innovate, because it allows firms to
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reap a higher benefit from their innovations. IPRs are less frequently used in the service sector
compared to manufacturing, which may justify policy intervention. However, critics also argue that a
too strict protection of IPRs may also have the opposite effect, by hampering knowledge diffusion and
circumventing innovation that build on prior discoveries. Through integration of the ongoing open
innovation discussion in the current IPR regime, an integrative approach could be found, which sets
framework conditions for innovative service firms. Each firm would have coverage for its own flexible
composition of individual innovation activities. These involves not necessarily IPR regulation, but
furthermore consulting in strategic protection mechanisms or support in the exemplary design of
cooperation with suppliers and customers.
Standardisation of services: Another potential field for policy intervention is standardisation of
services. More standards for services may allow a higher degree of transparency and comparability in
services. Firms find it difficult to compare the quality of services ex-ante because there is an
information asymmetry between the buyer and the seller. Moreover, many services are very much
customer-specific and hardly a well-defined, distinguishable product. A lack of transparency even
becomes more pressing for service clients with the liberalisation of many service industries, which
leads to a rise in the number of service providers and in variety of services offered. Transparency may
be increased by more standardisation of services and a common terminology to describe the contents
and functionalities of services. With the help of a European-wide service quality standard, service
firms could try to achieve this award and use its reputation to send signals of quality to potential
customers. Trust and assurance of consumers in new innovative service products would be increased.
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Annex 1. Statistical classification of activities
and the Knowledge Intensive Services sector
Categorisation shifts occurring between NACE Revision 1.1 and Revision 2 are briefly regarded as a
way to see the similarities and differences in the two forms of classification. Apart from changes in the
categorisation numbers, some differences may be observed between the classification forms. In this
respect, the NACE 72 sector (in NACE Rev. 1.1) has been mainly differentiated into ‘computer
programming, consultancy and related activities’ and ‘information service activities’, although other
minor activities included in the previously aggregated NACE sector have been transferred to more
specific NACE groups, such as the case of ‘publishing activities’ and ‘repair of computers’ as observed
in Table 8.1. On the other hand, the ‘other business activities’ sector (in NACE Rev. 1.1) has been
disaggregated into various activity levels in NACE Rev. 2. This is particularly true for professional
services such as legal, accounting, auditing activities, tax and management consulting, and market
research, among others, which form a NACE group of their own. This may reflect the increasing
importance, in terms of employment and added value, of such services in modern economies.
NACE 1.1
NACE 2
61 Water transport
61.1 Sea and coastal water transport
61.2 Inland water transport
50 Water transport
50.1 Sea and coastal passenger water transport
50.2 Sea and coastal freight water transport
50.3 Inland passenger water transport
50.4 Inland freight water transport
62 Air transport
62.1 Scheduled air transport
62.2 Non-scheduled air transport
62.3 Space transport
51 Air transport
51.1 Passenger air transport
51.2 Freight air transport and space transport
64 Post and telecommunications
64.1 Post and courier activities
64.2 Telecommunications
53 Postal and courier activities
53.1 Postal activities under universal service obligation
53.2 Other postal and courier activities
61 Telecommunications
61.1 Wired telecommunications activities
61.2 Wireless telecommunications activities
61.3 Satellite telecommunications activities
61.9 Other telecommunications activities
65 Financial intermediation, except insurance and
pension funding
65.1 Monetary intermediation
65.2 Other financial intermediation
64 Financial service activities, except insurance
and pension funding
64.1 Monetary intermediation
64.2 Activities of holding companies
64.3 Trusts, funds and similar financial entities
64.9 Other financial service activities, except insurance
and pension funding
66 Insurance and pension funding, except
compulsory social security
65 Insurance, reinsurance and pension funding,
except compulsory social security
65.1 Insurance
65.2 Reinsurance
65.3 Pension funding
67 Activities auxiliary to financial intermediation
67.1 Activities auxiliary to financial intermediation,
except insurance and pension funding
67.2 Activities auxiliary to insurance and pension
funding
66 Activities auxiliary to financial services and
insurance activities
66.1 Activities auxiliary to financial services, except
insurance and pension funding
66.2 Activities auxiliary to insurance and pension
funding
66.3 Fund management activities
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70 Real estate activities
70.1 Real estate activities with own property
70.2 Letting of own property
70.3 Real estate activities on a fee or contract basis
68 Real estate activities
68.1 Buying and selling of own real estate
68.2 Renting and operating of own or leased real estate
68.3 Real estate activities on a fee or contract basis
71 Renting of machinery and equipment without
operator and of personal and household goods
71.1 Renting of automobiles
71.2 Renting of other transport equipment
71.3 Renting of other machinery and equipment
71.4 Renting of personal and household goods
77 Rental and leasing activities
77.1 Renting and leasing of motor vehicles
77.2 Renting and leasing of personal and household
goods
77.3 Renting and leasing of other machinery,
equipment and tangible goods
72 Computer and related activities
72.1 Hardware consultancy
72.2 Software consultancy and supply
72.3 Data processing
72.4 Database activities
72.5 Maintenance and repair of office, accounting and
computing machinery
72.6 Other computer related activities
62 Computer programming, consultancy and
related activities
62.0 Computer programming, consultancy and related
activities
63 Information service activities
63.1 Data processing, hosting and related activities;
web portals
95 Repair of computers and personal and
household goods
95.1 Repair of computers and communication
equipment
58 Publishing activities
58.1 Publishing of books, periodicals and other
publishing activities
58.2 Software publishing
73 Research and development
73.1 Research and experimental development on
natural sciences and engineering
73.2 Research and experimental development on
social sciences and humanities
72 Scientific research and development
72.1 Research and experimental development on
natural sciences and engineering
72.2 Research and experimental development on
social sciences and humanities
74 Other business activities
74.1 Legal, accounting, book-keeping and auditing
activities; tax consultancy; market research and public
opinion polling; business and management
consultancy; holdings
74.2 Architectural and engineering activities and
related technical consultancy
74.3 Technical testing and analysis
74.4 Advertising
74.5 Labour recruitment and provision of personnel
74.6 Investigation and security activities
74.7 Industrial cleaning
74.8 Miscellaneous business activities
69 Legal and accounting activities
69.1 Legal activities
69.2 Accounting, bookkeeping and auditing activities;
tax consultancy
70 Activities of head offices; management
consultancy activities
70.1 Activities of head offices
70.2 Management consultancy activities
71 Architectural and engineering activities;
technical testing and analysis
71.1 Architectural and engineering activities and related
technical consultancy
71.2 Technical testing and analysis
73 Advertising and market research
73.1 Advertising
73.2 Market research and public opinion polling
74 Other professional, scientific and technical
activities
74.1 Specialised design activities
74.2 Photographic activities
74.3 Translation and interpretation activities
74.9 Other professional, scientific and technical
activities
77 Rental and leasing activities
77.4 Leasing of intellectual property and similar
products, except copyrighted works
78 Employment activities
78.1 Activities of employment placement agencies
78.2 Temporary employment agency activities
78.3 Other human resources provision
80 Security and investigation activities
80.1 Private security activities
80.2 Security systems service activities
80.3 Investigation activities
81 Services to buildings and landscape activities
81.2 Cleaning activities
82 Office administrative, office support and other
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business support activities
82.1 Office administrative and support activities
82.2 Activities of call centres
82.3 Organisation of conventions and trade shows
82.9 Business support service activities
85 Education
85.6 Educational support activities
80 Education
80.1 Primary education
80.2 Secondary education
80.3 Higher education
80.4 Adult and other education
85 Education
85.1 Pre-primary education
85.2 Primary education
85.3 Secondary education
85.4 Higher education
85.5 Other education
85 Health and social work
85.1 Human health activities
85.2 Veterinary activities
85.3 Social work activities
86 Human health activities
86.1 Hospital activities
86.2 Medical and dental practice activities
86.9 Other human health activities
87 Residential care activities
87.1 Residential nursing care activities
87.2 Residential care activities for mental retardation,
mental health and substance abuse
87.3 Residential care activities for the elderly and
disabled
87.9 Other residential care activities
88 Social work activities without accommodation
88.1 Social work activities without accommodation for
the elderly and disabled
88.9 Other social work activities without
accommodation
92 Recreational, cultural and sporting activities
92.1 Motion picture and video activities
92.2 Radio and television activities
92.3 Other entertainment activities
92.4 News agency activities
92.5 Library, archives, museums and other cultural
activities
92.6 Sporting activities
92.7 Other recreational activities
90 Creative, arts and entertainment activities
90.0 Creative, arts and entertainment activities
91 Libraries, archives, museums and other cultural
activities
91.0 Libraries, archives, museums and other cultural
activities
92 Gambling and betting activities
92.0 Gambling and betting activities
93 Sports activities and amusement and recreation
activities
93.1 Sports activities
93.2 Amusement and recreation activities
