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Focusing on the service industries, this paper relates the theory of innovation in services to the participation of service providers in standardization committees.. In response to the g

The relationship between innovation

in services and standardization: Empirical evidence of service

providers’ involvement in

standardization

Paul Wakkea, Knut Blinda, b, c, Henk J de Vriesb

aChair of Innovation Economics, Berlin University of Technology (Postal address: VWS 2, Mueller-Breslau-Straße 15, 10623 Berlin, Germany)

b

Endowed Chair of Standardization, Rotterdam School of Management, Erasmus University (Postal address: Burgemeester Oudlaan 50, 3062 PA, Rotterdam, The Netherlands) c

Fraunhofer Institute for Open Communication Systems (FOKUS) (Postal address:

Kaiserin-Augusta-Allee 31, 10589 Berlin, Germany) Email addresses: p.wakke@googlemail.com, knut.blind@tu-berlin.de, hvries@rsm.nl

Corresponding author: Paul Wakke, p.wakke@googlemail.com, Tel: +493031476631, Fax:

+493031476628

Abstract

Extant research suggests a positive and bidirectional relation between innovation and

standardization Focusing on the service industries, this paper relates the theory of innovation

in services to the participation of service providers in standardization committees For this purpose, we review the literature and identify three different patterns of service innovation Subsequently, we analyze the committee structure of the national standards bodies of the Netherlands (NEN) and Germany (DIN) by applying the industry classification NACE and the standards classification ICS The analysis reveals that standardization is of vital

importance for the service industries Interestingly, the service industries in both countries use standardization primarily for technology-related service innovations rather than for service standardization in consequence of “innovation in services” Doing so, service providers largely focus on standardizing technologies from the manufacturing industries in order to expedite “supplier dominated innovation” Moreover, certain service industries develop technologies themselves and perform “innovation through services” These service industries are strongly overrepresented in the standardization committees As for these industries,

standardization represents an appropriate mean to speed up market access and diffusion of their innovations Our findings suggest that policy makers can stimulate innovation in

services by promoting the service industries’ participation in standardization

Keywords: Innovation in services, standards, standardization, technology transfer and

diffusion

1 Introduction

Innovation implies the successful creation of something new, and standards by definition

“freeze” a solution for a certain amount of time, so there is an inherent tension between standards and innovation Standardization may be accused of hindering innovation

Nevertheless, research provides evidence that standardization may also stimulate innovation Hence, companies may innovate more successfully by participating in committees that

prepare standards, and policy makers may promote standards as instruments to stimulate innovation

So far, research on the relation between standardization and innovation focused on technical standards and technical innovation Indeed, most standards are technical standards and

innovation performance measured using patents as an indicator finds a vast majority of

technical innovation However, services have a major and growing share in most economies Therefore, this paper seeks to investigate the relation between innovation and standardization

in service industries In response to the growing significance of the service industries,

standardization has extended its so far rather technical scope towards services and set up several service standards at national, European, and international levels for different service industries, such as transport, translation services or maintenance Thereby, service standards may be used to improve the service process, the communication between provider and

customer as well as the service result However, also technical standards are relevant for the service industries

The provision of services is often effectuated by technologies or even leads to technologies as

in the case of engineering services Accordingly, the service industries might be interested not only in standardizing services but in technical standardization as well We recognize that technological innovations also apply to service providers upon which they improve or even

build their services The well-known MP3 audio format, specified within the international standards ISO/IEC 11172-3 and ISO/IEC 13818-3, led to several service innovations (e.g., online stores for music or podcasting) The radio-frequency identification (RFID) technology represents a similar example within logistics and retail However, some service industries, such as certain engineering services, provide the service of designing technologies As for these companies, standardization might be used as an appropriate mean to speed up market access and diffusion of their technologies

The paper on hand seeks to take these different types of innovation and standardization activities in the service industries into account by relating the companies’ industry

classification (manufacturers vs service providers) to their involvement in standards

committees (focusing on product and service standardization) Thereby, we focus on the

involvement in de jure standardization at national standards bodies (NSBs) as opposed to de facto standardization In the latter case, the standard arises from a standardization struggle

(and sometimes from a standard war) between different solutions of different firms or

coalitions (Chiesa and Toletti, 2003) In contrast, de jure standardization is defined by the

existence of independent organizations and partly by the promulgation of standards by

legislative bodies as in the case of mandated standards (David and Greenstein, 1990) More detailed, we consider the committees of the Dutch (NEN1) and German (DIN2) NSBs and

apply the industry classification NACE3 and the standards classification ICS4 to distinguish

service industries from other industries and service standards from other standards

The paper’s contribution stems from bridging two existing disciplines, standardization and innovation, in the realm of services Therewith, it responds to the significance of the service

industries within today’s modern economies and tries to provide new insights concerning the

“assimilation/demarcation/synthesis” discussion (Gallouj and Windrum, 2009) about whether service innovation is fundamentally different to innovation in manufacturing industries or not Furthermore, new insights into the promising and new field of service standardization are expected

The remainder of the paper is structured as follows: Section 2 theoretically considers the relation between innovation and standardization (2.1) and elaborates different patterns of service innovation from the extant literature (2.2) Section 3 provides the empirical analysis and starts with introducing the methodology used to identify the different patterns of service innovation within standardization (3.1) Subsection 3.2 analyzes to what extent the different service industries participate in standardization Subsequently, the different patterns of service innovation are related to standardization in Subsection 3.3 and 3.4 Thereby, Subsection 3.3 focuses on the committee structure and Subsection 3.4 on the output of these committees (i.e., the standards) using the standards classification ICS

Finally, Section 4 discusses the empirical findings, while Section 5 derives implications and provides the limitations of the paper’s findings

2 Theoretical considerations

2.1 The relation between innovation and standardization

The extant research suggests a positive relation between standardization and innovation As for standards (the output of standardization), Blind (2003) provides hints for the

complementarity rather than the contradiction between innovation and standards Swann (2010) offers a comprehensive summary of literature dealing with the question of whether standards enable or constrain innovation Basically, the codification and diffusion of the current state of technology assists the translation of research results into marketable products and services so that standards may foster innovation However, standards might also constrain

at the same time (Allen and Sriram, 2000; Swann and Lambert, 2010), while sometimes constraints are useful to “reduce undesirable outcomes” (Swann, 2010, p 9) As for service standards in particular, De Koning and De Vries (2009) conclude that standards may

positively impact innovation in services based on a case study in Facility Management

However, hardly any studies are available for the effect of service standards on innovation

As for the standard setting process, innovation can also be regarded as necessary precondition for bringing in own knowledge into standardization or more generally for the engagement in collaborations (Fritsch and Lukas, 2001) In principle, standard setters aim at adapting the standard content to their benefit in order “to minimize the technical distance between the standard itself and the present technical specifications of each firm’s current product and processes” (Antonelli, 1994, p 200) Moreover, Berger et al (2011) evidenced the use of standardization to have own intellectual property rights (e.g., patents) included in the

standard In any case, innovation activities foster standardization for reasons of diffusion and commercialization of these innovations Accordingly, Blind (2002 & 2006a) proved a positive effect of innovation activities on standardization for the manufacturing industries using patent

applications at industry level in 2002 and research and development (R&D) expenses at firm level in 2006 as indicator for innovation Regarding the participation of service providers, Blind et al (2012) as well as Blind and Mangelsdorf (2010) evidenced a positive relationship between innovation activities and standardization Thereby, Blind et al (2012) extended this linear relation towards an inversed U-shape so that highly innovative service providers are rather reluctant to standardize probably due to intellectual property concerns An alternative explanation for this behavior would be a strong market position so that these highly

innovative companies do not need the support of standards to market their products

successfully (Blind and Thumm, 2004)

A third line of argumentation is the effect of participation within standardization on the innovativeness of the participants Within standards committees, companies’ delegates meet colleagues from competitors, customers, suppliers, testing organizations, governments, non-governmental organizations, and other stakeholders in a rather informal setting Hence, standardization can be regarded as collaboration between the different participants (Tether, 2002), which promotes knowledge exchange or even knowledge generation According to the relational view (Dyer and Singh, 1998), this generates interfirm resources leading to more innovation (Love and Roper, 1999) and resulting in “interorganizational competitive

advantages” Therefore, standardization might foster the innovativeness of its participants However, only very few and rather anecdotal evidence of this argumentation can be found within literature (Blind 2006a; Wakke and Blind, 2012), while several scholars highlighted the general role of networks, communities, and linkages as alternatives to internal innovation activities (von Hippel, 1988; Chesbrough, 2003)

In conclusion, there is a bidirectional relation between innovation and standardization in theory Thus, we assume that the service providers’ involvement within standardization is related to some sort of innovation in services The following section aims at reviewing the

literature on innovation in services in order to elaborate different patterns of service

innovation Drawing upon the theory of innovation in services, we then apply the

standardization behavior of the service industries to this theory

2.2 Different patterns of service innovation

Innovation activities in the service industries is a rather young and largely unexplored

research field to date The following paragraphs summarize different schools of thought within extant literature Barras (1986) proposed the “reverse product cycle” to shed some light

on the transmission process by which a new technology is taken up by the service industries Based on an empirical study of the adoption of information technology in different service industries, he suggests that, firstly, existing services become more efficient due to the

adoption of a new technology, then the quality improves, and finally, wholly transformed or even new services arise

Droege and Hildebrand (2009) provide a review of the literature in the field of innovation in services and call this thinking of Barras and other scholars (Gallouj and Weinstein, 1997; Miozzo and Soete, 2001) the “technologist perspective” Basically, this perspective is

comparable to the assimilation viewpoint that calls for assimilating service innovation to existing theories derived from manufacturing industries (Gallouj and Windrum, 2009)

Indeed, there are several examples for the interaction between product and service innovation With new materials it was possible to innovate several service industries such as shipping or surgery New appliances enabled ATMs5, automated washing systems or car parks (Meiren,

2009) Information technology and appropriate infrastructures have made telemedicine an increasingly viable health care service delivery alternative (Sheng et al., 1999) A new field of research developed around the so-called self-service technologies (SST) including the

5

Automated teller machines

analysis of technology-based service encounters (Meuter et al., 2000) Additionally, providers

of learning services offer web-based lectures; remote services or cloud computing are other examples that blur the inherent characteristics of services (e.g., the perishability or the

inseparability of production and consumption) more and more (Moeller, 2010)

Miozzo and Soete (2001) developed a taxonomy with regard to the source of technologies for the service industries aiming at substantiating the service-specific research of Pavitt (1984) The supplier-dominated sectors, which is their first group, largely use technologies from manufacturing industries Within the second group, the scale-intensive physical networks and information networks sectors, innovation still originates in manufacturing firms, however,

“the nature of these innovations will be strongly determined by service use” (Miozzo and Soete, 2001, p 162) The science-based and specialized supplier sectors, which make up the third group, mainly develop their technologies themselves by means of more or less

traditional R&D activities Thus, service providers can broadly be subdivided into either

“technology-using” (supplier-dominated sectors and scale-intensive physical networks and information networks sectors) or “technology-producing or -developing” (science-based

and specialized suppliers) (Droege and Hildebrand, 2009; Miozzo and Soete, 2001)

Vence and Trigo (2009) developed a typology of innovation patterns based on the existing literature and came up with three different types: low innovation intensive sectors (wholesales and commission trade as well as transport and communication), technology-intensive and moderately innovation-intensive sectors (financial intermediation), and knowledge and

innovation-intensive sectors (business services) With regard to the main source of

innovation, the first two types heavily rely on the acquisition of machinery and equipment (technology-users) while the third type solely relies on “intramural R&D” (Vence and Trigo,

2009, p 1652) and thus can be regarded as technology-developing

However, in recent years several scholars criticized this technological view as being to insular and not taking all forms of service innovation into account (Hipp and Grupp, 2005; Gallouj,

2002, Gadrey et al., 1995) Thus, alongside the “technologist perspective”, scholars

meanwhile argue that service innovations are not necessarily linked to technology (Toivonen and Tuominen, 2009; Hipp et al., 2000) or R&D (Miles, 2007) Barcet (2010) considers this non-technological type of service innovation “service-based innovation” and states that

“relationships with clients and their consumption processes are becoming central” to this concept of innovation (Barcet, 2010, p 54) Djellal et al (2003) emphasize the importance of the social sciences and humanities alongside organizational aspects All this thinking can be combined within the demarcation viewpoint suggesting the existence of service-specific innovation patterns as opposed to the assimilation view (Gallouj and Windrum, 2009)

Den Hertog (2000) considered service providers as co-producers of innovation and

highlighted their increasing importance in the innovation process Thereby, he identified five basic service innovation patterns that combine the “technologist perspective” and the

“service-based innovation perspective” The first pattern is called “supplier dominated innovation”, which corresponds to the first group of Miozzo and Soete (2001) and thus can

be regarded as technology-using The second pattern is named “innovation in services” and

responds to the “service-based innovation” concept of Barcet (2010) The third pattern led innovation) focuses on the client interface, which is included in the “service-based

(client-innovation” concept of Barcet (2010) The fourth pattern is called “innovation through services” and responds to the technology-developing aspect of Droege and Hildebrand

(2009) Finally, the fifth pattern (paradigmatic innovation) of Den Hertog (2000) particularly deals with complex innovations affecting whole value chains However, these paradigm shifts are not considered in this paper We relate service innovation to standardization in a rather cross-sectional manner so that it would not be appropriate to explore dynamic paradigm

shifts Considering all the above mentioned and following a rather broad and integrative approach, three patterns of service innovations (including the types of service providers) are distinguished:

 Pattern 1: Supplier dominated innovation (service providers using technology to

innovation activities within one company The next section empirically investigates the service providers’ involvement in standardization in order to substantiate the three different patterns of service innovation within standardization using different data

6

Computer-aided design

3 Empirical evidence of service providers’ involvement in

standardization

3.1 Methodology

The empirical part of our study uses the databases of all participants of standards committees

of the NSBs of Germany (DIN) and the Netherlands (NEN) Information about the dataset is provided in Table 1 Basically, 14,211 organizations (service providers and manufacturers) active in 4,207 standards committees and holding 44,307 committee seats entered the

analysis

Table 1: Overview of the two datasets and the respective NSB

Average Committee Size (in data) 9.8 Seats 10.7 Seats

Staff (Annual report 2011) 315 568 (including subsidiaries) Turnover (Annual report 2011) € 32 million € 100 million (including

subsidiaries)

These committees may develop national standards, but the major part of their work is to prepare the national input for standardization at the European and international level so that all levels of standardization are grasped In order to link the elaborated patterns of service innovation with the standardization behavior of service providers, the industry affiliation of all committee members is considered using the industry classification NACE (Eurostat, 2011) Therewith, some general insights into the extent of the service providers’ involvement within standardization are gained (see 3.2) Subsection 3.3 furthermore analyzes this extent for each committee Finally, the standards classification ICS is applied to the committee structure That way, we aim at determining which standards – technical standards or service standards – are elaborated in which service industries (see 3.4)

We regard the use of the industry classification as an appropriate mean to differentiate

between the first (supplier dominated innovation) and the second (innovation through

services) pattern of service innovation Miozzo and Soete (2001, p 162) state that software and specialized business services can be considered as industries in which “the main sources

of technology are the research, development, and software activities of firms in the sector itself” Thus, we assume that this kind of service providers perform “innovation through services” and can be assigned to our second service innovation pattern According to Miozzo and Soete (2001), all other service industries rely more or less on technologies provided by the manufacturing industries so that the remaining industries can be assigned to the “supplier dominated innovation” pattern

After differentiating between the first two service innovation patterns, the standards

classification ICS is applied to differentiate between service standards and all other, rather technical standards The European standard EN 45020:2006 defines a service standard as a

“standard that specifies requirements to be fulfilled by a service, to establish its fitness for purpose” Several standards explicitly specify requirements to be fulfilled by different

services such as the European standards for media services (EN 15707), translation services (EN 15038), and facility management (EN 15221-1/-2) Thereby, the share of service

standards amounts for less than five percent of the overall standard stock (Blind, 2003;

Wakke, 2012) meaning that the vast majority of standards are technical by nature

However, with regard to the above elaborated patterns of service innovation, service standards more or less reflect our third pattern “innovation in services”, whereas the first (supplier dominated innovation) and second pattern (innovation through services) heavily rely on technical standards and reflect the technologist’s perspective within the theory of service innovation Thus, we utilize the committee structure of the two NSBs under investigation as well as the definition of service standards provided by ICS in order to substantiate our third

pattern “innovation in services” Table 2 summarizes our discussion above and provides the methodological frame of our analysis

Table 2: Three patterns of service innovation and relevant characteristics

providers

Typical service industries

Typical standards type

Pattern 1: Supplier

dominated innovation

Technology users

All service industries except those of Pattern 2

Product or technology standards

Pattern 2: Innovation

through services

Technology developers

Software and specialized business industries

Product or technology standards

Pattern 3: Innovation

in services

Service-based innovators

All service industries Service standards

3.2 Patterns of service innovation related to the service industries within

standardization

The organizations active within NEN and DIN are classified using the industry classification NACE, Rev 2 gathered from the REACH7 database for the organizations active within NEN

and from the Hoppenstedt8 database for the organizations active within DIN In case of

several classifications for one organization, only the primary NACE classification is

considered The industry classification is available for 92.8 percent of the organizations active

in NEN and for 46.2 percent of all organizations active in DIN The low data availability for the German organization is mainly caused by the fact that the Hoppenstedt database does not provide data for all German organizations

In order to identify possible shortcomings caused by the low data availability, we additionally use the almost exhaustive classification of DIN, which differentiates between 32

“organization types” that can be interpreted as sectors or industries Detailed results can be found in Table A1 in the Appendix Basically, two thirds of the organizations not included in the Hoppenstedt database are service providers according to the DIN classification

The biggest organization type of the not included organizations is called “Other Services” with 1,413 of 2,226 organizations not included; the second biggest type is called “Science, research and education (public)” with 937 of 1,045 organizations not included Putting these worries aside, Figure 1 provides the percentages of the three main economic sectors within NEN and DIN together with the structure of the Dutch and German economy as reference Thereby, organizations classified within NACE divisions 01-09 are considered as being active within the primary sector, organizations classified within division 10-43 as being active in the secondary sector, and organizations classified within division 45-96 as being active in the tertiary sector, respectively

Figure 1: Percentage of committee seats within DIN and NEN and percentage of total gross value added within the German and Dutch economy by sector in 2009

Source: Eurostat, national accounts by 60 branches – aggregates at current prices (name_nace60_c); own estimations

The results indicate that service providers (tertiary sector) within NEN are represented in accordance with the structure of the Dutch economy, while within DIN the manufacturing

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% Tertiary Sector

industries (secondary sector) hold the majority of committee seats (61.7 percent) Albeit a higher share of service providers within standardization when using the already mentioned classification of DIN (almost 50 percent; see Table A1 in the Appendix), this result is not in line with the economic structure of Germany The relation between the secondary and tertiary sector is rather inverse within standardization compared to the economic structure

A reason for this phenomenon might be the fact that standardization has been developed within the manufacturing industries over the last 90 years so that standardization was less attractive for service providers for several decades (Blind, 2006b) Apart from that, within Germany, 80.9 percent of all small and medium sized enterprises (SMEs) provide services (Statistisches Bundesamt, 2011) Since SMEs face more difficulties in providing the

personnel as well as financial resources for participating in standardization (Blind, 2006b), the high share of SMEs within the service industries might be an explanation Finally, regulation within several service industries such as telecommunications or several fields of transport services may stifle standardization activities (Wakke, 2012) However, Dutch service

providers face similar conditions, which partly annuls the explanations above Thus, the fact that the German economy relies more heavily on the secondary sector compared to the Dutch economy could partly explain the imbalance

Coming back to our three patterns of service innovation, the share of service providers within standardization exceeds the share of service standards, which amounts to less than five

percent of the overall standard stock within European NSBs (Blind, 2003; Wakke, 2012) Thus, the conclusion can be drawn that the service industries use standardization primarily for technology-related service innovations rather than for service standardization in consequence

of “innovation in services”, which highlights the significance of our technology-related

service innovation patterns (Pattern 1 and 2) within standardization

Figure 2 provides a more detailed analysis of the committee seats based on a two-digit

industry level (NACE division level) allowing for a first impression of the extent to which the different patterns of service innovation emerge within standardization As mentioned in Subsection 3.1, software and specialized business industries are typical for performing

“innovation through services” (Pattern 2) More precisely, Hipp and Grupp (2005, p 523) identified technical service industries and electronic data processing/telecommunication industries as being “comparable to the manufacturing sector when reviewing their R&D activities” Likewise, Sirilli and Evangelista (1998) took the innovation expenditure per employee as reference and identified engineering, technical consultancy, computing and software as the most innovative service sectors Within the typology of innovation patterns from Vence and Trigo (2009), the following industries focus on developing technology themselves: computer and related activities, R&D, architectural and engineering activities and related technical consultancy as well as technical testing and analysis

With regard to the industry classification NACE, we draw upon the definition of Glueckler and Hammer (2011), who developed a pragmatic service typology providing a complete classification of all service industries Within this typology, the technological knowledge-based business services (T-KIBS) responds to our technology-developing service industries that perform “innovation through services” (Pattern 2) According to Glueckler and

Hammer (2011), T-KIBS providers can be found within the following four NACE divisions:

 Computer programming, consultancy and related activities (NACE 62),

 Information service activities (NACE 63),

 Architectural and engineering activities; technical testing and analysis (NACE 71) and

 Scientific research and development (NACE 72)

With respect to the standardization activities of these industries, Figure 2 illustrates the

importance of especially the third industry (NACE 71), which is the most important service

industry in both NSBs in quantitative terms As for the other service industries that typically perform “innovation through services”, a still remarkable share of seats indicates the

importance of standardization for these technology-developing service providers More detailed, 32.0 percent of all service providers at NEN and 37.7 percent of all service providers

at DIN can be assigned to our second service innovation pattern “innovation through

services” The fact that only four out of forty-four service industries (see Figure 2) focus on developing technology underlines the relevance of this service innovation pattern within standardization

In conclusion, service providers are not only involved in standardizing services but also in technological standardization They use standardization for performing technology-related innovation (Pattern 1 and 2) Thereby, “supplier dominated innovation” (Pattern 1) appears to

be the most important service innovation pattern in quantitative terms However, the service industries that typically perform “innovation through services” are the most active service industries within standardization Within the following subsections, we try to substantiate these results and deepen the insights into the relation between service innovation and

standardization