CRIC Project - Analysis of Innovation Survey Data (Project completed)

• The Problems Addressed
• Empirical Work and Data Sources
• Significance of Results and Outcomes
• Key Publications

The Problems Addressed

The problem of generating data on the level and character of innovative activity in an economy is a familiar one. The two enduring features of the problem are that the most reliable data available relate only to either inputs to innovation such as R&D expenditures, or intermediate outputs such as patents, and secondly that these indicators are relevant mainly for technological innovation in manufacturing; services tend to be overlooked. Despite the limitations of this data many useful insights have been gained from using it. Patel and Pavitt, in a series of studies have used patent data to demonstrate, for example, industrial sector differences in international competitiveness; patterns of accumulation of firm-specific technological competencies; and the enduring 'national' character of the technical activity of multi-national firms. Correlating R&D expenditures with other economic parameters has always been more difficult. But whatever the merits of work based on R&D expenditures and patents, there is still a strong need for data on direct innovation outputs, especially in services. The earliest traditions of academic studies of innovation placed great emphasis on analysing samples of actual innovations.

This work was vital to the development of our understanding of the innovation process at the micro level. Latterly however, attention has shifted to the innovation outputs of particular firms as the unit of analysis, since this permits a more direct connection to theories of economic change and growth. In CRIC's work on the measurement of innovation alternative data sources to those used in traditional studies have been analysed. Below, we report the main results from a series of studies we have undertaken using large data-sets that measure innovative activity.

The first of these is the CBI's 'Innovation Trends' survey which has been collected annually throughout the 1990s and was made available to CRIC for deeper analysis than that undertaken by the CBI themselves. The data were also useful in that it had comparable indicators of innovative activity for both manufacturing and service firms enabling the measurement of innovation in somewhat neglected sectors of the economy in terms of the 'measurement question'.

The second is the 1995 survey of innovation in German service firms. We analysed this survey in conjunction with Christiane Hipp, a German visitor to CRIC. At that time there was no comparable survey of innovation in UK service firms, and indeed the German survey was one of the pioneering studies that applied to services tools for understanding innovation essentially developed within a manufacturing context.

The third is the UK response to the Second European Community Innovation Survey (CIS II), which was carried out in 1997 and which the Department of Trade and Industry made available to CRIC for a detailed study of the patterns of innovative activity in the UK.

Empirical Work and Data Sources

1. The CBI's 'Innovation Trends' surveys

The CBI annually collects data on innovation trends (in collaboration with the NatWest Innovation and Growth Unit) by administering a postal questionnaire to manufacturing and non-manufacturing firms . Around 700 firms responded in 1996 and 1997 (about 200 of which are non-manufacturing firms). The same questions are asked to both sets of companies. The CBI produce an annual report from the data using basic univariate statistics (see, for example, CBI, 1996).

There are three features of the CBI survey which have particular significance for the statistical analysis we have conducted:

1. It asks a series of questions about different aspects of innovative behaviour, rather than simple questions about specific innovations and numbers thereof
2. It phrases many of these questions in the form of trends ( "are you increasing or decreasing this type of expenditure?") rather than as questions requesting actual levels of expenditure.
3. It covers service firms as well as manufacturing firms, but does not use any differentiated definitions of innovation or different questions for the two sectors

There are 15 topics asked about that have the merit that they go beyond R&D spend, which has long been recognised as an incomplete indicator of innovativeness, and embrace many aspects of the broader 'innovative posture' of the responding companies. The problem is how to make sense of this portfolio of additional pieces of information about each responding firm. In this situation the statistical technique of factor analysis is useful. It acts as a data-reduction technique by revealing which of the 15 trends tend to be associated with each other across the sample of firms. The result is a reduced set of factors which form statistical summary indicators of groups of related topics.

Factors analysis of trends in the last year's innovation inputs

Factor 1 These topics cover process cost reduction; process innovation; process control; process flexibility; and organisational re-structuring to promote innovation. We characterised this factor as:

• Incremental Process Change, including 'soft' or organisational change

Factor 2: the spending on all types of R&D, capital, market research, licenses etc. plus new products based on new technology. We therefore characterised factor 2 as:

• Major Product and Process Innovation

Factor 3: covers minor product improvements, new product variants, and new products based on existing technology. We therefore characterised this factor as:

• Incremental Product Innovation

These three factors then, are a key feature of our analysis. They represent distinct and independent postures towards trends in resourcing innovation amongst the surveyed firms. These postures are combinations of technical and commercial behavioural patterns. The Factor 1 posture can be thought of as perhaps a cost-oriented posture, in which incremental technical process improvements and organisational innovations are combined. The Factor 2 posture is an aggressive innovation stance embracing new products, new technology, supporting market analysis, licensing, training and process change. The Factor 3 posture is an incremental product improvement approach, in which trajectories are exploited around existing dominant designs.

For shorthand purposes we will henceforth call these three factors three innovation styles. The incremental process style (1), the radical innovation style (2) and the product improvement style (3). The procedure of factor analysis allows us to compute a standardised score for each factor representing each firm's propensity to follow one style rather than another. The scores that different firms have for the three factors enable us to assess the degree to which increases in the various postures are associated with which types of firm or which sectors. Hence we can compare manufacturing and services, say, or foreign versus domestic firms. A breakdown of the radical factor 2 posture between 'foreign' and 'domestic' firms are shown in the next figure.

In the context of the discussion of services and manufacturing, we can now show several interesting results. If we look at the 1-digit SIC level, we find several service sectors which exhibit the radical innovation style to significantly greater extent than many of the manufacturing sectors. This confirms what we already suspect of the increasingly innovative posture of service firms. It is clearly no longer appropriate to regard manufacturing as intrinsically a technologically leading and more innovative sector of the economy, and services as a technology-using, and less innovative sector. These data show aggressive innovative behaviour to be almost equally evident in some of the service sector parts of the sample.

2. The 1995 German Survey of Innovation in Services

The 1995 survey of innovation in German service firms returned a sample of 2,900 responses. We used this data for two major studies - the first on the extent to which service outputs are standardised or particularised, the second on the nature and extent of innovation in services

The Standardisation or Particularisation of Service Outputs

This study analysed the pattern of service activities using evidence on the structure of the income to service firms from 'standardised', 'partial customised' and 'specialised' services. We have also examined the patterns of 'standardisation-specialisation' with respect to the size of the firms, and their broad sector of activity.

Services are often thought to provide customised services, yet our analysis lends support to those, such as Pavitt, Soete-Miozzo, Silvestrou et al. and de Jong who have sought to provide "combined" taxonomies of service activities, based partially on the nature of their technological underpinnings, and partially on the nature of the markets they serve. For example, we found the generally 'scale-intensive' sectors of trade, transport and communications and banking and insurance to be largely oriented towards the provision of standardised services - that is services which are not adapted to individual consumers. These sectors also tended to have relatively low proportions of highly qualified employees. By contrast, in the 'specialist supplier' sectors of technical services and other financial services, university graduates constituted a much larger proportion of total employment, and firms in these sectors tended to earn a larger than average proportion of their income from specialised and partially customised services.

Yet, overall, the most striking finding from our analysis was the tremendous diversity that is repeatedly found within the population of service firms. Whilst there are broad trends which reflect the sectoral categorisations discussed above, there is also immense variation in behaviour within each broad sector. Whilst useful as starting points, simple taxonomies may mislead us into expecting much more homogeneity within sectors than is actually the case, and the diversity amongst service firms needs to be more fully understood.

Innovation Activity within German Service Firms

This study reports directly on the innovative activities of the surveyed firms. The pattern of innovation was related to the size of the innovating firms, the broad sector of their activities, and to the extent to which their sales were due to 'standardised', 'partially-customised' or 'bespoke' services (see above). The effects of innovations, first in terms of the relationship between innovation and the (sales) growth, and then in terms of the wider, subjectively identified, effects of the innovations, were also considered.

The first important conclusion is that services are innovative. There is clear evidence that service firms undertake service, process and organisational change, although there is a considerable degree of confusion in terms of separating process from organisational change in services. This study also examined the firms' claims with respect to the impacts of their innovations on their own activities, on the services they provided, and on the service users. From that analysis, three principle conclusions can be drawn:

1. The effects of innovation in services do not separate neatly into service type effects and process (and/or organisational change) type effects. Service innovations frequently have effects on the service provider's productivity or flexibility; effects which might normally be associated with process innovation. Similarly, process or organisational innovations frequently have effects on the quality and availability of services provided; effects that are normally associated with 'product' innovation. Virtually all of the innovations, whether service, process or organisational, had an important effect on the service provider and on the service provided.
2. However, service firms seem less assertive or knowledgeable about the effects of their innovations on their customers' performance and/or productivity than the literature tends to suggest. This is puzzling, because most of the service innovators adapted at least some of their outputs to suit specific customer needs - only a minority only provided standardised services. The service innovators do appear to recognise important improvements to the services they provide, which must relate in some way to (perceived) user needs. But they appear less confident about the consequences of their innovations on the service users. Perhaps this apparent modesty reflects an accurate perception that their inputs only constitute a small part of the inputs and internal efforts that their users require in order to achieve major gains in performance and/or productivity.
3. Firms which introduced more than one type of innovation, and particularly those that introduced both service innovations and non-service innovations, were the most likely to identify each of the different sets of effects as important. This pattern suggests innovation in services tends to be more effective when a combination of service and non-service innovations are introduced, rather than when only one type of innovation is introduced. Furthermore, the firms that introduced multiple (types of) innovations tended to be the most aggressive (or, reversing the causation, the most aggressive firms tended to introduce multiple types of innovation). The firms which claimed to have introduced all three types of innovation were both the most likely to have grown (in terms of sales) and were the most likely to expect to grow in the future, suggesting a link between growth and the introduction of multiple types of innovation which (are intended to) have multiple effects.

3. The UK response to the Second European Community Innovation Survey

The second European Community Innovation Survey was carried out in 1997 and included both manufacturing and service firms. Of the 2,342 firms which responded to the UK CIS II survey, roughly one third (744) were active in the service sectors. The survey therefore provides a valuable insight into the innovative activities of service firms in the UK, as well as those of manufacturers. Here we highlight some of the main findings from our analyses of this data.

1. Service firms are innovative. Size and technological intensity is, however, more important in determining innovativeness than whether the firm is a manufacturer or service provider.
2. Factor analysis revealed two sets of innovation aims - the first associated with winning new markets, the second with efficiency savings.
3. Larger firms were more likely to be 'market driven' innovators than smaller firms, although in most individual sectors the relationship with firm size was weak. Some service sectors (Financial Services, Information Technology Services and Technical Services) have a disproportionately large share of market driven innovators.
4. 'Efficiency saving' innovative activity is not associated with the size of the firms, but there was greater variation between sectors. Manufacturing firms - especially the lower technology sectors within manufacturing - were more likely to innovate for 'efficiency savings', whilst this approach was less common amongst service firms.
5. Innovation expenditures were divided into two types - the first associated with a process oriented innovation activities (e.g., the acquisition of equipment and external technology, and training); the second with R&D and the market introduction of innovations.
6. In manufacturing, the proportion of firms which spend on R&D increases steadily with firm size. Services, however, present a different pattern. In high technology services firm size does not influence the likelihood of conducting R&D, whilst amongst the low technology service sectors the propensity to undertake R&D does increase, but from a low base; only about a third of very large low technology service firms undertake R&D.
7. The proportion of firms with 'process oriented innovation expenditures increased with firm size, but varied less between sectors. Small low technology manufacturers were slightly less likely to have spent on these activities, but high technology services were amongst the most likely firms to incur these non-R&D innovation expenditures.
8. Two types of linkages between innovative firms and other organisations were found. The first associated with commercial activities (such as collaborating with customers, suppliers, or competitors); the second with pre-competitive activities (such as collaborations with universities and government research institutes).
9. Both types of collaboration were strongly related to firm size - the larger the firm the more likely it was to collaborate. Collaboration was also greatest amongst the higher technology sectors, and highest of all in high technology services. These patterns were similar for both 'near market' collaborations and 'pre-competitive/development' collaborations, although the differences between sectors were more marked in the latter.
10. Further analysis showed that the relationship between innovation and co-operation (with customers and suppliers) is more complicated. From a subjective perspective, it is clear that most firms, and especially low technology service firms, still 'go it alone' for innovation; that is, they develop their innovations without (formal) co-operative arrangements with other firms. However, firms that are attempting to introduce higher level innovations, that is, innovations that are 'new to the market' and not just 'new to the firm', are much more likely to have co-operative arrangements for innovation. Consequently, if an objective perspective is taken, particularly one that weights innovations by their significance, then a large proportion of innovations are developed through co-operative arrangements. In summary, therefore, the extent and importance of co-operative activity for the development of innovations depends on both the type of firms being considered and what is meant by innovation.
11. Finally, in relation to comparing innovation amongst domestic and foreign owned firms, we found that although foreign owned and domestic firms generally shared the same innovation aims, the foreign owned firms were more likely to have innovated than domestic firms, and they were also more likely to have collaborative agreements than domestic firms. However, they were not more likely to have incurred expenditures on R&D. This is explained by the fact that the foreign firms import a significant part of their R&D activities from R&D laboratories abroad.

Significance of Results and Outcomes

Our analyses of large data-sets focused on innovative activity, and particularly innovative outputs, have shown that service firms exhibit broadly similar innovation postures to manufacturing firms. This was not necessarily what might have been predicted in advance, particularly in the light of the established literature on innovation in services. There are of course difficulties. The surveys we used essentially adapted a methodological approach designed for manufacturers to services. For instance, the format of the CBI survey presents service industry respondents with questions couched in terms of products rather than services. Whilst some service firms may routinely use the terminology of products to describe their market offerings, others may not. It is important, therefore, that in the future surveys are refined to ask questions which make them more likely to elicit any detailed variations between the innovative styles of service firms and manufacturing firms, should these exist. A second aspect of this is that future surveys should be designed to ask manufacturing firms about their service innovations, rather than focusing wholly on their product innovations, which implies a focus on their tangible outputs. Our experience in analysing these data-sets means we are well placed to contribute to the redesign of survey instruments, such as the Community Innovation Survey, the third version of which will shortly be designed, for implementation in 2002 or 2003.

Our work on the measurement of innovation through analyses of large data-sets also relates to the role of distributed innovation processes or systems in the future agenda of CRIC's work. We have shown that most firms do not collaborate (formally) in undertaking their innovative activities, but collaboration is much more common when firms are developing high level, or more radical, innovations. Clearly, radical innovations are highly significant, and the nature of the distributed innovation process in the development of radical innovations is therefore of considerable importance. We should note, however, that distributed processes can also arise with lower levels of innovative activity. Finally, innovation is often closely related to competition, and our analysis helps to reveal the role of innovation (and different kinds of innovation) in the competitive process between firms.

Key Publications

Coombs, R. and M. Tomlinson (1998), 'Patterns of UK Company Innovation Styles: New Evidence from the CBI Innovation Trends Survey', Technology Analysis and Strategic Management, Vol. 10, No.3.

Hipp, C. Tether, B. S. and Miles, I. (forthcoming), 'The Incidence and Effects of Innovation in Services; Evidence from Germany' - the International Journal of Innovation Management (2000).

Tether, B. S., Tomlinson, M. and Coombs, R. (1999), 'An Analysis of the UK Response to the Second Community Innovation Survey', for the Technology and Standards Directorate of the Department of Trade and Industry (DTI) of the UK Government.

Tether, B. S. Hipp, C. and Miles, I. (forthcoming), 'Standardization and Particularization in Services; Evidence from Germany' - forthcoming in Research Policy (previous version available as CRIC Discussion Paper No. 30)

Tether, B. S. (2000) 'Who Co-operates for Innovation within the Supply Chain, and Why? An Analysis of the United Kingdom's Innovation Survey', CRIC Discussion Paper No. 35, University of Manchester and UMIST.

Tomlinson, M. and Coombs, R. (1998), 'Comparing the Innovative Behaviour of 'British' and 'Foreign' Firms Operating in the UK', CRIC Discussion paper No.23, University of Manchester and UMIST.

Tomlinson M (2000) Innovation surveys: A researcher's perspective. DRUID Working Paper series. University of Aalborg.

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