NCPA - National Center for Policy Analysis

Service Success

October 16, 2002

Services represent 60 to 70 percent of Organization for Economic Cooperation and Development (OECD) economies. The mainstream view is that services are not very dynamic and that they do not innovate. An OECD finds that services do innovate, perhaps more than manufacturing industries.

The main problem is that no one fully understands how the services sector works. Innovation in services more often relates to changes in how, where and when a service is delivered, rather than how fast and how much is delivered. For example:

  • Electronic banking does not increase the amount of service, but makes it more convenient for consumers.
  • Fast-food chains, like McDonalds, have applied innovative techniques to boost customer turnover.

Additionally, research and development (R&D) in the service industry has been growing:

  • Services R&D has risen from less than 5 percent of total business enterprise R&D to more than 15 percent in 1995.
  • In some countries, such as Canada and Denmark, service R&D reaches 30 percent of total business enterprise R&D.

The R&D has been paying off. In 1997, 55 percent of all firms in the knowledge-intensive services in France showed evidence of innovation, compared with 45 percent of manufacturing firms.

The study credits two trends for the rise in service sector innovation. First, the rush of technology over the past two decades was a key factor. Second, the service sector deregulated heavily over the past twenty years. Several nations severely regulated key industries like railways, air transport, and telecommunications. Since the 1980s, nations have rolled back these regulations, allowing competition to force innovation and change.

Source: Dirk Pilat, Directorate for Science, Technology and Industry, "No longer services as usual," OECD Observer, No. 223, October 2000.


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