German report 2002

In Germany, the starting points for the scientific discussion of the role of services for innovation processes - and the role that innovations play for the development of the service sector - came from the discussion on the international level on one hand and from the availability of statistical data on the microeconomic and sectoral level on the other hand. The first studies on services and innovation in the second half of the nineties mainly dealt with questions like the general assessment of the role of innovation in services and the definition and scope of services by contrasting them to the definitions that had initially been made for innovations in the manufacturing sector.
From this starting point, the scientific development has taken many directions, especially in respect to empirical analyses. Therefore, the basis lies in the availability of reliable data sets for innovation and R&D both on the microeconomic and the sectoral level. On this basis, the discussion has developed into manifold directions:
- The annual report on Germany's technological performance discussed several aspects of service innovation with focus on the competitiveness of the economy as a whole.
- One strand of the microeconomic analyses looked at ways to cope with the diversity of services by classifying them in several ways.
- There have been some studies on the role of knowledge-intensive business services on the firm level, on their role in regional innovation systems, as well as their potential role for the eastern part of Germany.
- Some empirical studies were concerned with research cooperations and networks in the German service sector.
- Also the effects of innovations on employment and skills in the service sectors have been analysed.

menu
Measurement of Innovative Activity and Research in Services: What is the Situation in Germany?
Firm level and sectoral data of innovative activities in the service sector are supplied by the Stifterverband Wissenschaftsstatistik (Donors' Association for the Promotion of Sciences and Humanities in Germany - Science Statistics) (Sifterverband 2001) and the ZEW (Centre for European Economic Research) in cooperation with the Fraunhofer Institute for Systems and Innovation Research (ISI) by a survey that h been financed by the Federal Ministry of Education and Research (BMBF /Federal Ministry of Education and Research). The ZEW-data for the service sector which have intensively been used for microeconometric analyses of innovation behaviour in the service sector were collected for the first time in 1995 (Janz/ Ebling/ Gottschalk/ Niggemann 2001). In the year 1999, 2500 firms responded to the survey.

It covers the sectors wholesale and retail trade, transportation, storage and communication, financial intermediation, real estate, renting and business activities, sewage and refuse disposal. Not included are the sectors public services and most consumer related services. The methodology of the survey is based on the Oslo manual in order to ensure international comparability of the data. Access to the data is possible also for external users, however, only within the premises of the ZEW.
While the Stifterverband also raises data on innovation activities, the emphasis lies on research and development activities. In this context, also the service sector is covered. The data for the 1990s display considerably lower R&D efforts in the service sector in Germany than in other OECD countries. While only 2.5 percent of the overall research expenditures of the business sector in Germany were reported for the service sector in 1980, this number increased to 4.3 percent in 1998. In comparison, in the United States, research expenditures in the service sector were not less than about 20 percent of overall research expenditures in 1998 (Löbbe/Rothgang 2001). A part of these differences may be explained by different propensities of big firms to outsource service departments in the U.S. rather than in Germany, but also by a different classification of big multinationals as production or service firms. But also the difficulties in measurement of research activities may play a certain role. In order to adjust the survey for the new knowledge of innovation processes in service sectors in comparison to the production sector, and reach better coverage of the business service sector, the questionnaire and survey has recently been improved (Revermann, Schmidt 1999).

menu
What is the Anatomy of Service Innovations in Germany?
The first analyses of innovative activities in the service sector in Germany were based on the examination of two surveys - one for the Berlin area (Preissl 1998a), the other for Germany as a whole (Licht/ Hipp/Kukuk/Münt 1997). Based on the survey in the Berlin area complemented by case studies for selected service firms, different aspects of innovation in the German service sector were analysed in the context of an EU-project (Preissl 1998a). In that project, different aspects of innovation performance were discussed, among others
- the problem of defining and typing innovation in the service sector in comparison to manufacturing,
- the role of R&D in the service sector,
- barriers to innovation in service,
- the relationship between qualification of employees and innovations.
In respect to barriers to innovation as one focal point of the study, no clear picture arises because of the heterogeneity of the sector. However, important barriers that could be identified were

- financial restrictions,
- deficits in innovation management,
- technical problems,
- lacking demand for new services,
- state regulations in form of barriers to market entrance and a concentration of technology policy measures in the industry sector.
The results were brought together for six different country studies to explore questions such as important barriers to innovation (Preissl 1998 b) do exist, or whether differences in mentality are able to explain backwardness in innovative behaviour of firms (Preissl 1998 c).
The study by Licht/ Hipp/Kukuk/Münt (1997) finds all three main types of innovation in the German service industries in the last years: product, process and organisatorial innovations. The last type of innovation has been described as restructuring the organisation of the company by creating profit centres for example. The study estimates that one eight of the innovations in the German service sector occurred in this domain. As the main effects of innovations in services the study lists the enhancement of the productivity of employees and the more flexible adaptation to the preferences of clients. Also the speed of production and the availability of the services have been improved to a great extent.

menu
Technological Performance, Competitiveness and Innovation in Services
The role of services for innovation performance has been investigated in the report on Germany's technological performance which is conducted on a annual basis. In these reports, several aspects of service innovations have been discussed in the context of the role of service industries for economic competitiveness of Germany within the last few years:
- The complementarity between industry products and services and the related necessity to encourage networking (BMBF 1998: 60-61).
- The role and development of knowledge intensive business services for economicdevelopment. Knowledge-intensive services have been identified by the extent to which highly qualified personnel is employed by the firms of the service sectors and by the characteristics of their functions (like planning, research or development) as they are identified by household surveys (BMBF 2002: viii, BMBF 2000: 65 f., BMBF 1999: 26-28, BMBF 1997: 14-19).
- The competitiveness of the service sector in Germany in respect to international trade in services (BMBF 1998: 62-63, 1996; 17-18).
- Self-employment and newly established knowledge-intensive business firms (BMBF 2002: 34-36.
- Indicators for innovation performance of the service sector, like protection of brand names, R&D in the service sector (BMBF 2002 xiii, xiv, BMBF 1998: 66).
Within the framework of the annual reporting, a further study which analyses the sector of public and private R&D services more in depth is being conducted. First results concerning the development of R&D expenditures of business firms and the structure of the market for R&D services have already been published (BMBF 2002: 11-15). Within the study, the results of questionnaires sent out to R&D service providers as well as their customers in the business sector, supplemented by interviews, are to be analysed.
One area in which policy initiatives have been launched to encourage research on innovation in the service sector are innovative services in crafts. Crafts sectors are under pressure from competition from industry and have mostly been reluctant to adapt to new customers' needs (Cupok 2000: 21). One possibility to escape this pressure is the combination of handcrafts with complementary innovative services. The Federal Ministry of Education and Research has been promoting practical research done by the Institut für Technik und Betriebsführung to
generate innovative business service packages (Baumann/ Heinen/Holzbach 2001). One aspect was the building of innovative clusters of different craft enterprises.

menu
Diversity in Service Firms and Innovation Performance
One strand of the international discussion on innovations in the service sector which has been analysed with data on German service firms concerns the diversity of services and the significance of this diversity in explaining innovation behaviour. Several taxonomies have been proposed for classifying service firms according to their innovation behaviour, which refer, among others, to knowledge intensity, market characteristics and technical factors (Tether/ Hipp 2000, Hipp 2000). Within this context, Tether/ Hipp/ Miles (2001) examine the role of standardisation for innovation performance on the firm level. Based on micro data, firms could be identified in respect to the extent of their supply of either completely standardised services, or partially customised services adapted to the needs of their clients, or else taylor-made services. The study came to the results that
- In the whole sample 24 percent of the firms stated to gain all their sales fromstandardisedservices, while 17 percent of the firms reported that more than two thirds of their sales were in the form of taylor-made and partially customized services; thus, a large portion of the service output tend to be standardised in German service firms.
- The firms that report the biggest fraction of their sales on standardised services are to be found in trade services, followed by transport and communications and banking and insurance. On the other end of the spectrum, more specialist suppliers with a larger fraction of partially customized and completely tailor-made services are to be found in the sections technical services and other financial services.
- In general, the proportion of highly qualified employees increases with the particularisation of the firms' output with some qualifications in respect to the sectors under examination.
- The standardised service providers in Germany are significantly less innovative than the service firms adapting their services to the individual needs of their customers. However, the interpretation of this result leads to some difficulties in respect to the question why certain services are more standardised than others. Possible explanations could be that these firms have longer service life cycles with less necessity to change services and production processes or that they represent successful business models.
The analysis of the diversity in services can be extended into several directions. Blind and Hipp (2002) analyse the probability and rationale of implementing the ISO 9000 service standards in innovative business firms with the same data set. Besides showing the marked sectoral differences in respect to the use of ISO 9000 ff. and the differentials in respect to firm size, their results basically confirm the expectations on the rationales for implementing service standards like obtaining a quality seal for customers and reaching quality aims in respect to management objectives.

menu

Innovation in Knowledge-Intensive Business Services (KIBS)
Lately, the role of knowledge-intensive business firms has become the main focus of the international discussion about the functions of services for innovation processes. In the literature, they are often labelled as “bridges to innovation”, assigning them a central importance for the creation and diffusion of knowledge in a national innovation system. Their main links to innovative activity are
- being purchaser of embodied knowledge in investment goods from the manufacturingsector,
- providing services and knowledge for companies in both the manufacturing and the services sector,
- delivering services and knowledge complementary to the manufactured products or to other services.
The perception of innovation processes that has emerged from this new focus can be characterized by a strong interdependence and networking of services and manufacturing as opposed to the traditional separation of these two sectors that had traditionally prevailed (Meyer-Krahmer/Lay 2001).
The characteristics of the business service sector in Germany are analysed by using the ZEW micro data by Czarnitzki and Spielkamp (2000). They classify business services into knowledge-intensive and non knowledge-intensive services. Knowledge-intensive services include technology-intensive services like computer-services (computer hardware consultancy, software consultancy, data processing etc.), technical services (research and development, architectural and engineering activities, technical testing) and non-technology-intensive business services such as consulting and advertising. Non knowledge-intensive services include real estate activities, labour recruitment, investigation and security activities, industrial cleaning etc.
The main result that are derived by Czarnitzki and Spielkamp are:
- KIBS in Germany show in general a high percentage of innovators.
- The employees in KIBS firms possess on average a high degree of education. In computer, technical and consultancy services, only 7 to 13 percent of the employees are unskilled workers. In computer and technical service firms, about 50 percent of the employees possess a university degree.
- A whole range of information sources is used by KIBS, including customersinthemanufacturing and service sectors, suppliers, competitors, consultants and universities.
- The turnover with different clients shows some of the interrelations that are relevant for innovations. While technical services prove to be mainly linked to manufacturing,computer services and consulting are more closely associated to both the manufacturing and the service sector.
- KIBS firms are more often engaged in innovation cooperations than the average service firm. While computer service firms cooperate more often with competitorsanduniversities, technical services cooperate more often withthemanufacturing sector.Other business services cooperate most often with their suppliers.
- By using the export-sales-ratio as indicator of international market success and adjusted toindustry and size effects, the authors show that firms with R&D activities or product innovations show significantly higher export activities.
The role of KIBS as bridges of knowledge for SME in metropolitan areas in Germany and France is explored by Muller and Zenker (2001). They find that SME interacting with KIBS are more oriented towards innovation than others. They come to the result that KIBS seem to play an important role in regional innovation systems. They enhance the knowledge capacities of their client firms and at the same time learn from the cooperation and receive stimuli for their own innovative activities. The authors stress the possible role of KIBS for creating economic stimuli.
The regional distribution of innovative KIBS in Germany is analysed by Motzkus (2000). He identifies a tendency in direction of a concentration of headquarter-functions for multinationals around metropolitan areas, accompanied by a specialisation on the national level (for example financial services in Frankfurt). Furthermore, he identifies a trend of networking between headquarters of innovative industry firms and service companies with complementary economic functions. On the other hand, an uncoupling of industry and financial services can be observed (Motzkus 2000: 269). Within the metropolitan areas, a complementary relationship between centre and hinterland can be observed, with a concentration of knowledge-intensive business services in the centre, supplemented by a tendency towards the periphery.
Spielkamp et al (1999) highlight the differences between the employment situation in business-related services in West and East Germany: in West Germany 5.8 % of the workers are employed in services whereas in East Germany only 4.3 % are employed in this sector. In knowledge-intensive services, the difference is even more distinctive: 4.2 % in the West and only 2.5 % in the East. A further marked difference has to be noted in business-related services: in West Germany the share of self-employed workers is by 40 % higher than in East Germany. Furthermore, the productivity of the service sector in the East is only at 55 % of the level in West Germany. Although the service sector in Eastern Germany in general and especially in business-related services has significantly adapted to Western Germany, there still remain important deficiencies which are the result of the structural neglect of services in a centrally planned economy of the kind that the GDR had been.

Research Cooperation and Networks in the Services Sector in Germany
Up to now, studies on networks of service firms in Germany in respect to research and innovation are not abundant. Kaiser (2000, 2002) analyses the determinants of research joint ventures in services. His considerations are based on the experience that research cooperation constitutes one possibility for firms to protect their tacit knowledge. While manufacturing firms often possess the possibility to protect their technical knowledge by patenting, this means is often not available to service firms because in many cases their knowledge cannot be patented.
Within a research joint venture, the jointly produced knowledge can be utilized by all the firms involved. Additionally, the costs of R&D can be shared by the participating firms. Against this background, there has been a scientific discussion on the question whether research joint ventures would lead to an increase or to a decrease in research expenditures (Kaiser 2002: 22-28).
According to the literature reviewed in this survey, that this depends on the magnitude of research spillovers present in a firm's markets. If spillovers are large, i.e. a large fraction of the knowledge of one firm can be costlessly absorbed by another firm, then cooperating firms spend more on research than non-cooperating firms. Kaiser affirms that, intuitively, this result arises from two opposing effects of research joint-ventures on research efforts. The first one is the positive internalisation effect that occurs due to firms' ability to internalise spillovers in a joint-venture of that kind. The second one is the negative cost sharing effect which arises from the pooling of research resources. Based on the firm level data for the service sector in Germany, Kaiser comes to the result, that firms in research joint ventures invest more than firms which are not involved in research cooperation. Horizontal spillovers, i.e. knowledge flows from rivals, have a significant positive effect on research efforts but do not affect firms' propensity to cooperate in research. Hence, research joint ventures should be pursued further by economic policy.

menu

Innovation and Employment in the Service Sector (is there a skill bias of technical change?)
The controversial question what impact innovations in technology have on the demand for heterogeneous labour has been addressed by Kaiser (1998, 2002). Based on the hypothesis that new technology is said to favour high skilled labour and to substitute low skilled labour he presents empirical evidence for business related services, which is an increasingly important sector in the German economy. He uses cross-sectional data from an innovation survey and panel data from a quarterly business survey in the service sector to test his hypothesis. The data allow to distinct directly among five different skill groups: university grad. Nat. sc., university grad. Soc. Sc., technically skilled, skilled and unskilled. The micro-level data allow as well to analyse the shifting employment patterns for single economic units. Ordered probit models are employed to study the determinants of skill shifts in business related services.
Kaiser finds that investment in information and communication technology is a complement for university graduates and a substitute for workers with completed vocational training in the German dual system. New capital goods are substitutive to low unskilled workers, whereas the demand for technically skilled labour remains unaffected by investment decisions. Kaiser finds it puzzling that labour costs do not play an important role in the demand for university graduates, technically skilled and unskilled labour but turn out to be highly significant for skilled labour. Interestingly, expected foreign competition has a significantly positive effect on the demand for both university graduates and unskilled labour alike while present foreign competition is only positively significant in the demand for university graduates.
The conclusion is that there is structural econometric evidence for the existence of skill-biased technical change in the business-related services sector in Germany and hence helps to explain the fact that this kind of services did not generate as many jobs for low skilled workers as expected by German economic policy.

menu

BIBLIOGRAPHY

Baumann, M., Heinen, E., Holzbach, W. (2001), Innovative Dienstleistungen im Handwerk, Konzeptentwicklung und Praxisbeispiele, Institut für Technik der Betriebsführung.
Blind, K., C. Hipp (2002), The Role of Quality Standards in Innovative Service Companies: An Empirical Analysis for Germany, Working Paper.
Czarnitzki, D., A. Spielkamp (2000), Business Services in Germany: Bridges for Innovation, ZEW Discussion Paper No. 00-52.
BMBF (Bundesministerium für Bildung und Forschung / Federal Ministry of Education and Research) (Hrsg.) (2002), Zur technologischen Leistungsfähigkeit Deutschlands 2001, Bonn.
BMBF (Bundesministerium für Bildung und Forschung / Federal Ministry of Education and Research) (Hrsg.) (2001), Zur technologischen Leistungsfähigkeit Deutschlands, zusammenfassender Endbericht 2000, Bonn.
BMBF (Bundesministerium für Bildung und Forschung / Federal Ministry of Education and Research) (Hrsg.) (2000), Zur technologischen Leistungsfähigkeit Deutschlands, zusammenfassender Endbericht 1999, Bonn.
BMBF (Bundesministerium für Bildung und Forschung / Federal Ministry of Education and Research) (Hrsg.) (1999), Zur technologischen Leistungsfähigkeit Deutschlands, zusammenfassender Endbericht 1999, Bonn.
BMBF (Bundesministerium für Bildung und Forschung / Federal Ministry of Education and Research) (Hrsg.) (1998), Zur technologischen Leistungsfähigkeit Deutschlands, Aktualisierung und Erweiterung 1997, Bonn.
BMBF (Bundesministerium für Bildung und Forschung / Federal Ministry of Education and Research) (Hrsg.) (1997), Zur technologischen Leistungsfähigkeit Deutschlands, Aktualisierung und Erweiterung 1996, Bonn.
Cupok, U. (2000), Lokales Handwerk: Dienstleistungen und Unternehmensnetzwerke, WZB Papers P00-513. Berlin: WZB.
Hipp, C. (2000), Innovationsprozesse im Dienstleistungssektor, Eine theoretische und empirisch basierte Innovationstypologie, Springer Verlag Heidelberg.
Hipp, C., B. Tether, I. Miles (2000), The Incidence and Effects of Innovation in Services Evidence from Germany, International Journal of Innovation Management Vol. 4, No. 4: 417-454.Janz, N., G. Ebling, S. Gottschalk, H. Niggemann (2001), The Mannheim Innovation Panels (MIP and MIP-S) of the Centre for European Economic Research (ZEW), Schmollers Jahrbuch 121: 123-129.
Kaiser, U. (2002), Innovation, Employment and Firm Performance in the German Service Sector, ZEW Economic Studies 16, Physica.
Kaiser, U. (2000), Research Cooperation and Research Expenditures with Endogenous Absorptive Capacity, Theory and Microeconometric Evidence for the German Service Sector, ZEW Discussion Paper No. 00-25.
Kaiser, U. (1999), Measuring Knowledge Spillovers in Manufacturing and Services: An Empirical Assessment of Alternative Approaches, ZEW Discussion Paper No. 99-62.
Kaiser, U. (1998), The Impact of New Technologies on the Demand for Heterogenous Labour: Empirical Evidence from the German Business-Related Services Sector, ZEW Discussion Paper No. 98-26.
Koschatzky, K. (2001), Innovation und Kooperation bei unternehmensnahen Dienstleistern in Baden, Gironde und Südholland, Ein Vergleich zwischen jungen und alten Betrieben, Fraunhofer-Institut für Systemtechnik und Innovationsforschung (ISI), Arbeitspapiere Unternehmen und Region Nr. R1/2001.
Kukuk, M., M. Stadler (2001), Financing Constraints and the Timing of Innovations in the German Services Sector, Empirica 28: 277-292.
Licht, G., C. Hipp, M. Kukuk, G. Muent (1997), Innovationen im Dienstleistungssektor - Empirischer Befund und Wirtschaftspolitische Konsequenzen, Baden-Baden: Nomos.
Löbbe, K., M. Rothgang (2001), Wandel von “Old” zu “New Economy”, Forschung und Innovationen in unternehmensbezogenen Dienstleistungen, Stifterverband für die Deutsche Wissenschaft (Hrsg.), FuE-Info, No. 2.
Meyer-Krahmer, F., G. Lay (2001), Der Stellenwert innovativer Dienstleistungen in der Modernisierungsdebatte, WSI Mitteilungen 6: 396-400.
Motzkus, A. (2000), Zur Bedeutung der höherwertigen unternehmensorientierten Dienstleistungen für die Entwicklung der Metropolregionen Westdeutschlands, Raumforschung und Raumordnung 4: 265-275.
Muller, E., A. Zenker (2001), Business Services as Actors of Knowledge Transformation: The Role of KIBS in Regional and National Innovation Systems, Research Policy 30: 1501-1516.
Preissl, B. (2000), Service Innovation: What makes it different? Empirical Evidence from Germany, in: Metcalfe, S., I. Miles (ed.) Innovation Systems in the Service Economy: Measurement and Case Study Analysis, Boston: Kluwer, 125-148.
Preissl, B. (1998a), Innovationen im Dienstleistungssektor, DIW Wochenbericht 29/98.
Preissl, B. (1998b), Barriers to Innovation in Services, SI4S Topic Papers No. 62 Project Services in Innovation, Innovation in Services - Services in European Innovation Systems.
from the Internet: http://www.step.no/Projectarea/si4s/start.htm (20 July 2002).
Preissl, B. (1998c), Innovation in Services in Germany - a question of mentality?, SI4S Topic Papers No. 6, Project Services in Innovation, Innovation in Services - Services in EuropeanInnovation Systems.
from the Internet: http://www.step.no/Projectarea/si4s/start.htm (20 July 2002).
Preissl, B. (1997), Services in Europe, Patterns of Growth and Development, SI4S working paper, Project Services in Innovation, Innovation in Services - Services in EuropeanInnovation Systems.
from the Internet: http://www.step.no/Projectarea/si4s/start.htm (20 July 2002).
Revermann, C., E. Schmidt (1999), Erfassung und Messung von Forschungs- und Entwicklungsaktivitäten im Dienstleistungssektor, Abschlußbericht, Essen.
Spielkamp, A., D. Czarnitzki, R. Schüssler, H. Berteit, S. Ransch (1999), Forschung, Entwicklung und Innovation in produktionsnahen Dienstleistungsbereichen, Endbericht zum Forschungsvorhaben 37/98 für das BMWi, Mannheim.
Stifterverband (Stifterverband für die Deutsche Wissenschaft) (2001), FuE-Datenreport 2001, Forschung und Entwicklung in der Wirtschaft 1999-2000, Essen.
Tether, B., C. Hipp (2000), Competition and Innovation Amongst Knowledge-Intensive and Other Service Firms: Evidence from Germany, in: B. Andersen (ed.), Knowledge and Innovation in the New Service Economy, Cheltenham: Elgar, 277-303.
Tether, B. S., C. Hipp, I. Miles (2001), Standardisation and Particularisation in Services: Evidence from Germany, Research Policy 30: 1115-1138.