Innovation Europe > News > Innovation EU Vol1-1 > Knowledge-intensive business services

In this respect, knowledge-intensive business services are an interesting halfway house between services and manufacturing.

Services are becoming increasingly important as an engine for Europe’s economic growth. Innovation policies have, for a long time, focused on technological innovation, in particular that driven by R&D. In service firms, by contrast, most innovation is of a non-technological nature; firms innovate by way of organisational and marketing innovations rather than developing new technology. These firms face similar market and systemic failures as firms in manufacturing, but have received much less attention within innovation policies. There is a growing consensus, however, that services innovation is in need of similar support mechanisms so as to raise investments and ensure firms remain competitive.

Although the services sector has low R&D budgets, innovation comes from a wide range of sources. As well the service concept (service as a “product”), there is also innovation in the service process, service infrastructure, customer process, business model, and commercialisation (sales, marketing, delivery).

To these should be added hybrid innovation (serving several user groups in different ways simultaneously) and service productivity innovation. Because of the diversity of innovation activity, we lack reliable indicators and methodologies to measure services innovation, making it even more difficult to determine the need for and to develop appropriate policies.

One area that is receiving particular attention is Knowledge-Intensive Business Services (KIBS). This is a sort of “super-cluster” that embraces four other leading service-based clusters: Education and Knowledge Creation, Business Services, Financial Services and Information Technology. KIBS includes 25 industries in total.

KIBS differs from traditional services sectors in that it does rely on technological innovation. What’s more, KIBS firms are highly innovative. In fact, they are more likely than those in the manufacturing sector to introduce either a product or process innovation. Moreover, KIBS has shown not only strong productivity growth of its own, but it also contributes significantly to productivity growth in other sectors.

A recent report by the European Cluster Observatory provides a detailed picture of KIBS in Europe region by region1. It notes, for instance:

• KIBS is a strong driver of innovation and growth. Regions with strong KIBS sectors exhibit the highest prosperity levels in Europe, and the presence of a strong KIBS sector positively affects regional innovation performance (patenting).
• Regional performance in KIBS varies widely. Certain European regions have a KIBS sector larger than expected (Zürich, Stockholm, Oxford, Inner London, Brighton, Frankfurt-am-Main, Berlin, Munich, Stuttgart and Athens). Regions where KIBS is underrepresented include: Katowice, Palermo, Bari, Naples, Marseille, Valencia, Antwerp, Seville and Venice.
• As a share of regional labour market employment, KIBS accounts for the largest shares in Brussels (16.0%), Inner London (15.2%) and Zürich (14.6%).
• Most growing KIBS regions are small. However, Ireland is a region with a large KIBS sector which is also growing rapidly. The largest growth in KIBS employment is found in Austria, Estonia, Lithuania and Northern Spain/Southern France. Some leading innovation regions in Europe, such as Stockholm, Prague and Frankfurt-am-Main, are experiencing shrinking KIBS employment.

This debate is important because as well as services accounting for an ever-larger share of the European economy, the division between services and manufacturing is becoming increasingly blurred. Manufacturing firms increasingly provide services together with their products and consequently face the same type of regulatory obstacles as service sector firms when trading. Innovation policies directed to the service sector also have an impact on the manufacturing sector when performing or consuming services activities, affecting manufacturing firms’ competitiveness.

While we’re still at an early stage, there are already some clear pointers towards a more sophisticated policy framework to support innovation in services:

• Increased competition in services is a key means to raise innovation. Competition could be stimulated, for instance, by increasing cross-border tradability and by an increased use of public procurement aimed at provoking creative solutions.
• Intercultural and language skills are particularly important in service firms. These should be supported by more (and targeted) training and mobility programmes.
• Non-technological innovation needs to be recognised within innovation support programmes. Organisational and marketing innovations should be supported, in the same way that R&D programmes have supported technological innovation.
• Services firms need to be encouraged to make more use of intellectual property rights. Also, IP systems may need to account better for the specificities of services and services innovation, such as their reliance on non-technological innovation and the fact that many services are credence goods where reputation plays a determining factor for achieving market success.

Mike Sharpe