This Staff Working Document presents the latest available statistical information on the drivers, barriers and potential impact of services innovation and identifies a number of policy challenges.

The lesson learned from the statistical analysis is that service companies, generally, do not innovate less than manufacturing companies but differently. Furthermore, great differences exist between knowledge-intensive and other services. Innovation in other services tends to be more of a continuous process consisting of a series of incremental changes rather than being radical. However, KIBS firms show similar innovation patterns to those of manufacturing
firms. This is supported by the fact that the R&D intensity of this type of services is even above the average of manufacturing companies. Overall, the percentage of service companies developing internal R&D activities is, on average, still much lower than in manufacturing or KIBS firms. Following the findings from a recent Swedish survey the most important sources for new ideas in service companies are employees and customers. Almost 50% of the
new ideas stem from interactions with users, whereas external research only accounts for about 3%.

In recent years, the interest towards services innovation policy has been increasing simultaneously with the growing economic weight and significance of services. At the same time, policies in support of services innovation have remained relatively underdeveloped in many Member States and regions. As innovation in services is less driven by research and publicly funded innovation projects, effective innovation support calls for different approaches than
those for technological innovation. There is also the challenge to better address the needs of fast growing innovative companies and to create a more favourable business environment for services in general so that services innovation happens at all levels more easily. Europe lacks innovative service companies with a global reach.

The European economy will obviously look different once the economic crisis is over, and innovative services will inevitably play a major role in this restructuring process. Services innovations can and need to be supported at different levels and by different instruments.

• At activity level, the main challenge is to broaden the knowledge base for services. This not only calls for more and better research on new service concepts, but also for the development of new skills that better address the needs of service companies. Furthermore, new forms of knowledge diffusion and better networking between the research and the business community need to be developed so that research results can spread more easily and be turned into new service applications.

• At firm level, innovation support mechanisms need to be better adapted to the specific needs of service companies, allowing for more customised advice and greater flexibility. As services innovation is predominantly user-driven, innovation support must be provided more directly and in different form, in particular with the view to facilitate the growth and internationalisation of service firms so that more innovation leaders are created in Europe. The current economic crisis would call for even stronger support for entrepreneurship and risk taking. This is the time to test as many new business ideas as possible in order to lay down the foundations for later recovery.

• At sectoral level, innovation clusters can help create entirely new service sectors, in particular by developing and promoting new technology-based services in close partnerships between larger firms, universities, innovative SMEs and local user groups. Such service clusters often need different forms of support, as users play a much stronger role in them and they are more often at the crossroads between different sectors, technologies and professions. Building strong “eco-systems” favouring services innovation needs to happen first at regional level, making regions attractive to creative people and linking them with strong knowledge institutions, investors and innovative SMEs.

• At market level, services innovation can best be stimulated by activating demand for innovative service concepts and removing barriers for their practical use. Building trust for consumers, and using public procurement as a catalyst for services innovation, helps develop the innovation potential created by technological development and innovative enterprises, supported by strong “eco-systems” at regional level. At European level, this approach is best represented by the LMI which aims to bring together relevant policy instruments in a more strategic manner in order to create more favourable conditions for new markets to emerge. This concept could be applied to services innovations more specifically, particularly where there is a societal challenge requiring a systemic response.

The main policy challenge is to bring these different elements together in a more consistent and strategic manner.

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