Towards a theory of innovation in services Richard Barras Review by Petri Klinge

Introduction Major new technology in capital goods sector and subsequent development according to product life cycle theory How these technologies are transmitted to user industries of consumer goods and service sectors Delays of adoption and realisation of potential Trajectories which emerge in user industries A reverse product cycle user and service industries & Normal product cycle in the capital goods sector. Capital and consumer sector out of phase innovation cycles

Origins and development of new technology Origins of a major new technology in the capital goods sector, and its subsequent development according to the normal product cycle theory. If an innovation has grounds to thrive in other economic settings than its original one it can be a foundation of a major new technology

Origins and development of new technology Three phases (actually four, but one is transitional): Indroduction phase Major product innovation Establishment of new industries Rapid technical advances and diversity of products Labour intesive: relatively high cost, but flexible Competitive advantage in product performance Growth phase Competitive advantage in major process innovation designed to improve quality Product range decreases Standardized production methods Product market grow and markets expand

Origins and development of new technology Maturity phase: Competive advantage searched in incremental process improvements designed to reduce unit costs Few standard products Market saturating Larger production units and high level of automation Cost of further innovation increse Transitional phase: Whole cycle begins again with new industries as old ones decline

Transmission of technology A process in which new technologies of capital goods sector are taken up through applications in the consumer goods and services sector. Occurs slowly over a long period of time

Transmission of technology Two types of delays: A) adoption delays: how fast new capital goods are taken up by the users Three factors of adoption delays: Trade-off between price and tech. performance Risk and uncertainty of investment Market structure of adopter industry B) realization delay: how fast from installation of capital goods until the emergence of useful application Three factors of realization delays: Opportunity Usability Adaptability

Transmission of technology Trajectories: S-shaped logistic diffusion curve. Different trajectories in different user industries reflect a combination of common price performance charasteristics of technology and different market structures and types They define the selection of environment for user adoptation and innovation Adoption of new technologies: Two sets of factors Factors concerned with transmission of technology: Technology push: Associated with tje capital goods embodying the technology Price-performance charasteristics, uncertainty about performance, usability Demand pull: Factors stem from the user industries and their application of technology Market structure of industry, opportunity to apply technology and adaptability of the user organisation Factors concerning innovation process within the user industries How the technology is applied in the production of consumer goods ands services Results fromtechnology push pressures origination within these industries and demand pull pressures origination within the consumer market for their products

Reverse product cycle A reverse product cycle (describes the innovation process in user and service industries. At the same time normal product cycle in the capital goods sector is parallel to it. Three phases: 1) Desing of innovation to increase the efficiency the existing service Quantitative 2) Technology is applied to better the quality of the service 3) Technology to assist in generating wholly new services After the three phases the cycle begins anew!

Innovation and the growth cycle Kondrative 1.: Steam, textile; K2.: iron, steel, engineering and railways; K3.: electric power, automobiles and chemical manufacture K4.: post war boom in consumer electronics, synthetic materials and pharmaceuticals K.5: new service activities based on information technologies

Innovation and the growth cycle Major new technology has a central role in successive growth cycles Dispute about the mechanism by which innovation causes regular fluctuation in the securlar trend of economic growth Barras introduces a mechanism derived from the dynamics of technology transmission process, whereby technology is transferred from the capital goods sector to the consumer goods and services sector creating a disecquilibrium in technical progress due to the juxtaposition of two out-of-phase innovation life cycles in the two sector. Mechanism helps to explain the cyclical fluctations in capital productivity and profitability which occurs during the long wave and which have themselves been employed as explanatory factors in some long wave theory

Innovation and the growth cycle The model can be explained schematically in terms of four stages of the long wave: prosperity, recession, depression and recovery Growth cycle phase Capital sector(normal product cycle) Consumer sector (reverse product cycle) Stage in Innovation cycle ProductsStage in Innovation cycle Products Prosperity TransitionEmergent 4.GrowthImproved RecessionIntroductionNew 1.MaturityCheaper DepressionGrowthImproved 2.TransitionEmergent RecoveryMaturityCheaper 3.IntroductionNew

Innovation and the growth cycle Consumer goods industries grow and quality is being improved through process innovations with technologies origination in the previous growth cycle. Output and labour productivity are growing strogly to meet the growing demand. Strong growth of capital investment. Rate of profit stabilizes. Technical progress is concertrated in consumer sector Capital sector is in transition between successive technological paradigms. Little improvement as technology is in R&D phase. Generated products are technologically but not economically feasible. Growth cycle phase Capital sectorConsumer sector Stage in Innovation cycle ProductsStage in Innovation cycle Products Prosperity TransitionEmergentGrowthImproved

Innovation and the growth cycle When emergent technologies become economically feasible, consumer sector starts to adopt these technologies. Focus of technical progress is in capital goods sector where new products are introduces. Capital goods start to cheapen and consumer expand to the consumer sector New technologies are used to cheapen the existing consumer sector products Rapid rate in technology is labour saving. Thus, labour productivity increses but employment, capital productivity and profitability drop. Growth cycle phase Capital sectorConsumer sector Stage in Innovation cycle ProductsStage in Innovation cycle Products RecessionIntroductionNewMaturityCheaper

Innovation and the growth cycle Growth in capital sector shifts to process innovation which by improving quality of product ranges sustain continued market growth among consumer industries consolidating the position of capital goods industries themselves Consumer sector of using technology shifts towards improving the quality of services and products These products are not ready in the phase of depression and their economical feasibility just develops over this transitional phase Not enough growth in new product offering (despite the new technology from the capital sector) brings the industries to depression as markets are saturated Unemployment is high. Capital investment is broadly neutral thus halting decline in profitability and capita productivity. Average labour productivity gets a boost from underused capacity Growth cycle phase Capital sectorConsumer sector Stage in Innovation cycle ProductsStage in Innovation cycle Products DepressionGrowthImprovedTransitionEmergent

Innovation and the growth cycle New products now economically feasible. This leads to a major new phase of product innovation. New products and consumer industries are established and create a base for sustained economic recovery. New products use now mature capital sector products extensively. Capital goods industry produces dominant technology. Transmission is accelerated adn new markets open up. Investment is predominantly capital. Relative price of technology increases. Thus output levels need to be expanded, and so employment, capital productivity and profitability increse. Now established technology in consumer sector drives further product and process innovation within new industries Growth phase begins anew and the cycle continues! Growth cycle phase Capital sectorConsumer sector Stage in Innovation cycle ProductsStage in Innovation cycle Products RecoveryMaturityCheaperIntroductionNew