Towards a theory of innovation in services

Abstract

The paper sets out some foundations for a theory of innovation in service industries, and indicates the role that such innovation may play in the generation of growth cycles. The discussion starts with the origins of a major new technology in the capital goods sector, and its subsequent development according to the normal product cycle theory. This is followed by a consideration of the transmission process by which the new technology is taken up in user industries within the consumer goods and services sector. A "reverse product cycle" is then proposed to describe the innovation process which takes place in user industries such as services, once the new technology has been adopted. This cycle starts with process improvements to increase the efficiency of delivery of existing services, moves on to process innovations which improve service quality, and then leads to product innovations through the generation of new types of services. Finally, the existence of two out of phase innovation cycles in the capital and consumer sectors, deriving from a technology transmission process which causes disequilibrium in technical progress between the two, is put forward as a mechanisms helping to create the long wave fluctuations in economic development associated with Schumpeterian technological revolutions.