Roundtable on Innovation in Services Lisbon Council, Brussels, 27 November 2008 Factors and policies affecting services innovation: some findings from OECD work Dirk Pilat Head, Science and Technology Policy Division dirk.pilat@oecd.org 1
The context: the services sector remains underdeveloped in many OECD countries Services account for the bulk of employment growth in the OECD, but growth has been weak in several OECD countries. Share of the working-age population employed in services, 2002, in % Low employment in services accounts for most of the variation in overall employment rates in OECD countries. 2
... notably for women Employment/population ratios in services and for women, 2002 High employment in services goes hand-in-hand with high employment for women 3
with productivity growth lagging The services sector makes a small contribution to productivity growth in several OECD countries, despite its large weight in the economy. Contribution of the services sector to productivity growth, 1990-2003, in % In other OECD countries, such as Australia and the United States, services now account for the bulk of productivity growth, showing that the sector can be a dynamic source of growth and innovation. This large difference in performance suggests that some factors and policies constrain productivity growth and innovation. 4
Services can be as innovative as manufacturing firms Service firms are potentially just as innovative as manufacturing firms (in particular in some sectors). Innovative firms in Europe as % of all firms in an industry, by selected industry, 2002-2004 But their innovative capacity is often constrained by inadequate policies. Many governments do not yet sufficiently consider services firms in their policies to foster innovation. 5
and are involved in both product In-house product innovators by sector (as a percentage of all firms), 2002-04 OECD, based on Eurostat, CIS-4 (New Cronos, May 2007), National data sources. 6
and process innovation In-house process innovators by sector (as a percentage of all firms), 2002-04 OECD, based on Eurostat, CIS-4 (New Cronos, May 2007), National data sources. 7
Services are also heavily engaged in nontechnological innovation Non-technological innovators by sector (as a percentage of all firms), 2002-04 OECD, based on Eurostat, CIS-4 (New Cronos, May 2007), National data sources. 8
including marketing and organisational innovations Firms having introduced a marketing or organisational innovation, 2002-2004 (as % of all firms) OECD Innovation Micro-data Project, 2008. 9
The degree of innovation differs across countries Output-based modes of innovation in services, 2002-2004 OECD Innovation Micro-data Project, 2008. 10
Some factors may hold back innovation in services Trade in goods and services as a % of GDP Services are still less tradable across borders than goods (although this is changing) are often more sheltered from foreign direct investment regulations are higher. and are typically characterised by a smaller size of firms (though with large variation). 11
although international competition in services is growing (exports of business, computer and information services) 12
Other factors may spur innovation Share of high-skilled employment in total employment. 2003 Services invest relatively more in information technology use relatively more high-skilled workers than manufacturing firms and have higher rates of new firm creation than the manufacturing sector. 13
Surveys indicate several barriers for services innovation Percentage of European services firms identifying a factor as highly relevant, as a share of all firms expressing relevance, 1998-2000 14
The growth of services is accompanied by growing investment in intangible assets Estimates for the United States show that intangible investment (software, R&D, training and organisational factors) is now larger than investment in machinery, equipment and buildings this is increasingly how firms create value. Intangibles are often not included in firm (& national) accounts. Improved corporate reporting of intangibles and business models can help lower the costs of capital this may be particularly important in the services sector. Source: Corrado, Hulten and Sichel (2007). 15
Opening markets can help create new services OECD case studies of successful services firms point to three common factors (Erocal, 2005): Market opening allowed new firms (e.g. low-cost airlines, or firms offering new digital services) to enter new markets and expand, offering new services (innovate) and creating jobs. These firms are often innovative, provide new services, use modern technology, and open up new areas of consumer demand. These firms often apply new work practices, focusing on the organisation of work (e.g. decentralised responsibilities), motivation of workers (e.g. profit sharing), and improvements in skills. 16
Opening markets also acts as a spur to innovation Opening up also: Acts as a spur to innovation and strengthens incentives to adopt best practices. Can bring new products to markets and create new market possibilities, enabling firms to exploit economies of scale. Can further stimulate economic activity and increase employment by reducing costs, which can stimulate demand. Allows entrepreneurship to flourish. Opening of markets, e.g. through regulatory reform and trade liberalisation, has to be carefully designed to avoid creating important adverse effects. 17
Creating a new firm is still difficult in some countries (index of product market regulations affecting entrepreneurship, 2003) Note: The index ranges from 0 (least restrictive) to 6 (most restrictive). Source: OECD Product Market Regulation Database, March 2005. 18
Services markets are also affected by barriers to international trade and foreign direct investment (indices of restrictions on foreign direct investment, 2003) Note (1): Restrictions refer to limitations on foreign equity, screening and approval rules, and other restrictions on FDI (e.g. restrictions on the composition of boards). Source: Kongsrud and Wanner (2005). 19
Labour market policies play and important role Low tax burdens may encourage workers to offer their services in the formal economy and encourage demand for personal services. High tax burdens may discourage demand for personal services (hours of work required to pay for one hour of service, 2003) Overly strict employment protection legislation may inhibit hiring in services and slow down mobility and organisational change. Structural change requires active labour market policies and supportive social security systems that promote reintegration. 20
as do human resources policies Services firms may require new skills: For specific trades and activities. Specific needs, e.g. ICT skills and qualifications for innovation. Skills are essential to the interaction with customers. Education policies adapting the curriculum. Training policies workers will change jobs and activities more frequently than in the past: Develop frameworks to foster training and life-long learning, e.g. through cofinancing by workers, firms and governments. Develop systems to credit such training, e.g. through quality certificates and skills accreditation mechanisms. 21
Some of the variation in services sector performance is linked to the application of information and communications technology (ICT) ICT is a catalyst for innovation and change in the services sector. But impacts still differ considerably across countries. Policy can help seize greater benefits from ICT. Annual average contribution of ICT-using services to productivity growth, in percentage points 22
Countries with less product market regulation have seen a stronger pick-up in productivity in ICT-using services 23
Firm dynamics: more reallocation in the United States productive companies gain, poorly performing firms lose resources Source: Ministry of Economic Affairs: Fostering Excellence, 2004 24
Factors that affect the lack of ICT-induced services innovation in many European countries Europe has invested less in ICT than some other OECD countries: Structural differences play a role. But OECD work shows that product market regulation and lack of market integration also play an important role: they have lowered the amount of investment in ICT in heavily regulated EU countries. Europe also trails in the complementary changes that are needed to implement ICT effectively: Organisational changes are sometimes difficult (e.g. due to strict employment protection legislation), The business environment for innovation is still inadequate competition in some services markets is still limited New firms and experimentation are important, but new innovative firms often stay small and barriers to entrepreneurship are still too high. Reallocation to more productive sectors is relatively slow in Europe. 25
Policies to seize greater benefits from ICT Some elements: Development of efficient, low-cost broadband networks, which requires effective competition in telecom markets. Regulatory frameworks to enhance trust and security in the use of ICT. Reform of regulations and rules that act as a barrier to the digital delivery of services, the development of digital content, or the innovative use of ICT. Providing the right environment for Internet-driven innovation. E-government much scope for progress remains. 26
What policies for innovation in services? Existing policies for innovation and technological change should be made more relevant to services sectors, e.g. by: Refocusing government innovation programmes to also address the needs of the services sector. Raise awareness of public policies among services firms. Fostering links between service firms and scientific research institutions and within the supply chain. Addressing the long-term knowledge requirements of services firms, e.g. by involving services firms more directly in long-term (basic) research. Intellectual property rights: Not considered a major problem for services firms in most surveys, but some extension of patent protection to services has occurred. Keeping a balance between innovation and technology diffusion strengthening IPR too far may affect the diffusion of innovation. 27
For example, manufacturing firms currently benefit more from public support than services firms Share of innovative firms benefiting from public support 28
What can governments do? Further opening and integration of services markets to strengthen competition and foster innovation. The development of lead markets, e.g. through public procurement. Strengthen policies and institutions to support innovation financial markets, venture capitalists, excellent science and education, a more favourable business environment, etc. Provide greater scope for entrepreneurship, new firms and experimentation: enable failure, rapid growth and changes within firms. Broadening human resources policies to address skills needs in the services sector. Adapt policies for innovation and technological change to the growing role of the services sector, e.g. by: A better accounting for intangible assets. Broadening the scope of innovation policies. Seizing the benefits of ICT for innovation. 29
Conclusions Services-related issues are now at the core of policies to strengthen overall economic performance: They are key to increasing employment, and to strengthening innovation and productivity. They will also help in adjusting to the globalisation of services. A stronger services sector will also benefit other industries, such as manufacturing. There are costs in adjusting to change, but these can be overcome by a comprehensive policy mix. Not adjusting will be more costly in the long run. Further work on innovation in services and non-technological innovation is planned in the context of OECD s work on an Innovation Strategy, see www.oecd.org/innovation/strategy. 30