Services and the Knowledge-Based Economy

Mark Boden, Ian Miles

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9780826449528
• eBook ISBN: 9781317954057
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 2000. Over the past two decades, the service sector have increased dramatically and now occupy the largest share of the economy of advanced industrial societies. Certain business services are regularly cited as evidence for the emergence of a "knowledge economy". In this pioneering book, leading researchers in the fields of service industries and innovation studies investigate the reasons for the growth of the service sectors and this emergent knowledge economy. Drawing on material as diverse as macroeconomic statistics and firm-level case studies, the contributors demonstrate that services are often important innovators in their own right, as well as contributing to innovation and economic performance in their user industries. The question of how far services are special cases, and what specific processes and trajectories characterize their innovative activity is treated systematically. Additionally, a variety of original analyses and information resources are presented. This book should be of value to the student of the modern industrial society, to those seeking to forge policies appropriate to the new context of economic development, and to researchers who are confronting the challenges of the knowledge economy.

Chapter One

Introduction: Are Services Special?

Ian Miles and Mark Boden

Introduction

This book is about the changing characteristics of industrialized societies as they enter the twenty-first century. It explores the interplay of two highly important developments: the rise of the service sector (the coming of the ‘service economy’ or ‘post-industrial society’) and the growing role of knowledge, especially in the generation of technological and social innovations (the emergence of the ‘information society’ or ‘knowledge-based economy’). Each is the subject of considerable attention in its own right, while the relationship between them remains largely unexamined. Yet, as the following chapters demonstrate, this relationship is of central significance to the future development of these societies.

The first of the developments concerns the changed economic role of the service sectors. It has been common to describe these as ‘Cinderella sectors’, largely ignored by economists, industrial relations researchers and students of innovation. As the share of services in national economies continues to grow, and the linkages of these elements of the economy with other economic sectors are extended, this tendency to overlook services has become less tenable. There has been increasing effort to understand service activities since the early 1980s. However, there has been relatively little attention to services’ role in innovation processes. They are generally assumed to be laggards in terms of innovation, as essentially ‘supplier-driven’ industries. This book demonstrates that this assumption is seriously misleading. Services’ innovative activity plays a significant role in the development of services and of other sectors. The chapters that follow, authored by some of Europe’s leading researchers into the innovative role of services, move beyond the ‘supplier-led’ stereotype to ask and answer questions concerning this role.

The second of the developments is the growing attention being paid to innovation itself in the process of economic change. Related to this is recognition that innovation depends upon the production and organization of knowledge of various sorts by various people and organizations.¹ Technological innovation, in particular, is seen as having underpinned the long-term economic growth of industrialized societies, and as being one of the main factors accounting for the different performance among these societies and among the firms which are the main sources of new products and processes. The recognition of this relationship has prompted considerable policy interest in innovation issues, to the extent that in addition to science, technology and industries policies, it is now common to hear of innovation policy. Among the issues addressed in such policies are Research and Development (R&D), the transfer of technological knowledge and the building of technological capabilities, human resources development and skills, and the like. These issues are all connected with the growing centrality of knowledge in economic life, and have led commentators to talk of the ‘knowledge-based firm’, ‘knowledge-intensive industries’, and the ‘knowledge economy’. Alongside this, the rapid development and diffusion of information technology (IT), and the emergence of new information industries, such as multimedia and database firms, have given rise to the term ‘information economy’.

To date, there has been little systematic analysis of the relationships between these two classes of development. This is surprising, since the simplistic assumption that services do not play a substantial role in innovation would have an alarming corollary. This is, that as the economic basis of industrial societies shifts further towards services, their innovative capacity would falter. This might provide opportunities for ‘catch-up’ on the part of poorer countries, but would run the risk of economic stagnation in the industrial world, which in turn would depress the prospects for export-led growth in the developing world. The strategy for industrial countries is therefore ‘re-industrialization’, since the growth of services is interpreted as ‘de-industrialization’.

However, as this book demonstrates, this assumption is wrong and many services, most notably those in which knowledge occupies a central position, do play an important role in innovation processes. Indeed, we anticipate that this role will grow. But to adequately understand it may mean challenging many received views as to what the features of services actually are, how the innovation process works and how it can be measured.

This chapter provides a starting point for the detailed analyses that follow in later chapters. It examines various perceptions of services and their roles in the economy, and considers some of the key relationships between services and innovation processes, between the service economy and the knowledge-based economy.

Thinking about services

Services as residual

Early writers on services tended to treat the sector as unproductive, referring (as in the case of Adam Smith) to domestic servants and priests as examples. This view was followed by most of the classical economists. Interestingly, though many subsequent Marxists regarded services as unproductive, Marx himself was quite clear that their productivity depended upon their location in the circuits of capitalist production and exchange. In the early development of political economy there were many who argued that only agriculture was the source of real wealth, a view which was widely held until manufacturing industry had developed to such a degree that it could no longer be ignored.

For a long time the bulk of service activities were apparently marginal phenomena (in terms of economic activity, the number of domestic servants employed by the middle and upper classes was actually huge). Thus, when the great wave of activity in defining, mapping and measuring categories of economic activity began in the middle decades of the twentieth century, services received little attention or regard. A ‘service(s) sector’, or ‘tertiary sector’ was distinguished as the third of the three great sectors identified in this wave of activity by Clark and Fisher, and most subsequent economists.² In particular, it has provided a convenient statistical classification for accounting for economic development, allowing comparisons to be made across countries and over time.

The first two of these sectors are relatively easily defined. The primary sector extracts raw materials (and sometimes goods) from the environment via activities such as mining and agriculture; the secondary sector transforms raw materials into goods, buildings, infrastructure, and physical utilities like water and electricity supplies. For early commentators, the third great sector could simply be seen as the residual sector, and often it was discounted as an unproductive residuum. In any case, it warranted no great definitional effort. Because it counted for very little, it was seen as something which could be treated as homogenous. Consequently, little attention was paid either to defining its common constitutive features, or to examining the variety within it.

However, as time passed, the three sector schema revealed that Western countries had moved to the point where agricultural employment and (to a lesser extent) output constituted a declining share of their economies over time. Manufacturing employment and output had grown steadily and rapidly over a long period, and it became common to talk about industrialized societies. What is more, several countries, the USA leading them, were becoming ‘service’ economies³ in the sense that the growth of manufacturing industry seemed to have flattened out, while the service sector was continuing to grow rapidly, with services employment becoming equal to and surpassing manufacturing industry employment. Attitudes to this development from economists were quite ambivalent, but still services attracted relatively little attention in their own right. While they may have been responsible for distribution of the products of the primary and secondary sectors, and for dealing with some of the welfare problems created by industrialization, the real action, the driving forces of the economy, resided in manufacturing industry.

Post-industrial society

In the 1960s and 1970s a new, and now classic, account of the rise of the services sector emerged and became very popular. It is of interest that it was mainly developed outside the discipline of economics, by sociologists, political scientists and geographers. This theory of post-industrial society was developed largely in response to the trends evident in Western industrial societies, although similar features and diagnoses were also noted in some of the more advanced Eastern European countries. In particular, it sought to grapple with the legacy of post-war Keynesian economic policies, the welfare state and the growing importance of innovation. It suggested that, with growing affluence, people’s needs become more sophisticated. Consumer expenditure shifts to services, perhaps because these are ‘superior products’, or perhaps because people become satiated with material consumption. This evolving pattern of expenditure leads to a shift in the overall pattern of demand in the economy, away from goods and towards services (in relative terms).⁴

Employment becomes increasingly centred on services, in part because of this shift in demand. Additionally, this trend in employment reflects innovation processes in the primary and secondary sectors, notably the automation of manufacturing and agriculture. Increased employment in the tertiary sector leads to a ‘march through the sectors’. Jobs move from being located in the primary to the secondary and the tertiary sectors, in turn; and societies evolve from agricultural to industrial to service economies. The growth in services employment was welcomed, particularly since it absorbed both the workers displaced from manufacturing and women newly entering the labour market. An upgrading of the labour force was also expected to result from this process, with more white-collar and professional workers, since service jobs were typically seen as skilled interpersonal work, if not as professional jobs.

This view portrays services as superior products. It is not overstating the case to say that they were seen as representing the wave of the future. Given this, it is perhaps not surprising that this account was favoured by many public sector administrators, educationalists and professionals in other services. It anticipated continued growth in demand for their services, and for services more generally.

De-industrialization

A contrary line of analysis returned to popularity in the 1980s, especially as the economic crises of the early and late 1980s led to large-scale reductions in manufacturing employment in several Western economies. For those writers in the UK and USA who see the growth of services as a burden on the manufacturing economy, the analysis becomes one of de-industrialization, with re-industrialization being seen as a matter of re-stimulating manufacturing industry.⁵

De-industrialization arguments are often little more than a reassertion of the view that only the production of tangible goods constitutes productive work. However, a number of more substantial criticisms of the post-industrial view can be identified. In particular, the view that the growth of services reflects their superiority as products, for which demand increases as affluence increases, was taken to task. One line of argument is almost moralistic: if consumer demand is shifting to services, this is a symptom of cultural decadence, the growth of a hedonistic consumer culture, or welfare dependency, rather than a creative and production-oriented society. An alternative perspective (though the accounts are not incompatible) sees the growth of the services sector as reflecting a failure to modernize (taking a narrow perspective on modernity), rather than pointing to shifts in consumer demand. There is empirical support for at least part of this view. Econometric analyses yield little evidence for a shift in consumer demand from goods to services. The elasticities of demand for goods and services seem roughly equivalent.

Why, then, does the service sector grow? The share of employment in services may increase even if demand for services grows at average or even lower rates, if productivity growth is lower in the services. This would be reflected in a relative increase in the price of marketed services as compared to goods.⁶ Examples might include the increasingly cheap prices of motor cars relative to railway season tickets, of washing machines relative to laundry services, and of televisions relative to concert tickets.

The trends in relative prices in turn reflect variations in labour productivity: while goods are produced with fewer workers, this is the case to a lesser degree in the case of services. Thus, as both services and manufacturing industries expand their output, services take on relatively more workers, producing a shift in the distribution of employment. The reason for low productivity growth remains controversial, but one argument was that it reflected the relatively low level of the workforce, in terms of skill and training.⁷ The image of service work is thus the converse of that portrayed in the post-industrial analysis: services are stuck in the past rather than the wave of the future.

Innovation plays an additional role: as well as goods becoming cheaper as compared to services, it is suggested that product innovation also means more rapid improvements in quality, convenience and reliability for goods than for services. This is harder to establish systematically, though there is strong evidence that some services suffer quality declines, as in the reduction of bus services when competition from private transport renders them less financially viable.

Beyond the received accounts

Neither of these two classic views of services (presented in very stark form in Table 1.1) gives an adequate grasp on the role and significance of service activities....

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• List of Contributors
• 1. Introduction: Are Services Special?
• 2. Neo-Schumpeterian Perspectives on Innovation in Services
• 3. Dynamic Innovation Systems: What Is the Role of Services?
• 4. European Service Sectors
• 5. Indicators of Innovation Activities in Services
• 6. Organization and Innovation Strategy in Services
• 7. Beyond Technological Innovation: Trajectories and Varieties of Services Innovation
• 8. Supplier-User Interaction in Knowledge-Intensive Business Services: Types of Expertise and Modes of Organization
• 9. Innovation Agents and Technology Transfer
• 10. New Information Technology and Localized Technological Change in the Knowledge-Based Economy
• 11. Knowledge-Intensive Business Services and Productivity Growth: The Greek Evidence
• 12. Information and Technology Flows from the Service Sector: a UK-Japan Comparison
• 13. The New Knowledge Infrastructure: The Role of Technology-Based Knowledge-Intensive Business Services in National Innovation Systems
• 14. Conclusions: Beyond the Services Economy
• Bibliography
• Index