Innovation policy in services: The development of knowledge-intensive business services (KIBS) in Finland.

SUMMARY

This paper starts from the observation that policy-oriented discussion and policy-oriented studies in the sector of knowledge-intensive business services (KIBS) have been rare despite the central role that this sector has been argued to play in innovation. Finland is one country where activities for the development of KIBS have recently been initiated both at the national and the regional level. This paper describes and analyses these activities. National and regional KIBS studies form an important starting point in all of them. In the practical conclusions, a common feature is the emphasis on the simultaneous development of both the demand and supply sides. The need to link KIBS to innovation systems has been identified particularly at the regional level.

KEY WORDS

knowledge-intensive business services (KIBS); innovative services; services development; innovation policy; technology programmes; regional innovation systems

INTRODUCTION

Knowledge-intensive business service firms (KIBS) are expert firms that provide services to other firms and public organisations. IT services, R&D services, technical consultancy, legal, financial and management consultancy, and marketing communications are typical KIBS industries (Hermelin 1997; Miles et al. 1995; Strambach 2001). Since the mid 1990s, KIBS have aroused broad interest as a part of the knowledge and innovation infrastructure of national and regional economies. Several researchers have argued that KIBS are important carriers, sources and facilitators of innovations (Gallouj 2002; den Hertog and Bilderbeek 2000; Miles 1999).

These arguments are plausible due to the nature of KIBS' business and they have also been confirmed by empirical studies. The role of KIBS as sources of innovation is visible in the Community Innovation Survey (CIS) studies of the EU, where technology-based KIBS (IT and technical consultancy) are included. According to the CIS III study, 64% of technology-based KIBS had carried out some sort of innovation activity, the share being clearly higher than the average in services (40%) or in manufacturing (47%) (Eurostat 2004a). The facilitating function of KIBS has been confirmed, among others, by a recent Finnish study, where companies in the client sectors of KIBS were interviewed. Every other interviewed company had purchased services from external experts when conducting important changes, and in every third company KIBS had been involved in innovation activities (Lith et al. 2005).

At the same time as the importance of KIBS has been recognised, many challenges have been identified in their development. The first issue is the quantitative insufficiency of KIBS in more remote areas. Even before the term 'KIBS' was used, the concentration of business services in advanced economies, and within these in a few metropolitan regions, was perceived (Howells and Green 1986; Illeris 1989). Equalisation in this respect between regions has not taken place until now (Strambach 2001). Secondly, there may be services available, but clients do not use them due to the lack of awareness or lack of resources. There are still companies which do not perceive the benefit of the business-supporting role of expert services, but regard these services as 'a necessary evil' or purchase only 'compulsory' services, like auditing. The lack of resources concerns mostly small and medium-sized enterprises, which often aim to maintain a minimum level of supporting services using their own personnel (Lith et al. 2005).

There are also qualitative problems both among clients and among KIBS. Outsourcing or purchasing services from outside the firm requires know-how from the client. Clients do not always take into account that a skilful recipient party is needed. Further, it is not self-evident that clients possess the process management and interaction skills required by the deep relationship of co-production, typical of KIBS transactions (Bragg 1998; Miles 1999). As regards KIBS themselves, there are many challenges concerning the quality of the service. One important challenge is the growing emphasis on client-orientation. The core expertise of professionals (e.g. legal expertise) which earlier was sufficient is nowadays often taken for granted. The real issue is that KIBS have to thoroughly understand the value creation process of their clients, and the function of their service in this process (Cooper et al. 1996; Hirvonen & Helander 2001).

The role of KIBS in innovation means that the above-described challenges are not only the concern of KIBS and their clients, but are also highly relevant from the viewpoint of the economy in general. Yet, policy-oriented discussion and policy-oriented studies of the provision and use of KIBS services have been rare until now or have been restricted to some specific sub-sectors, like IT services. The most important exception is the OECD's KISA (knowledge-intensive service activities) project which was carried out 2003-2006 OECD 2006). As its name suggests, the study examined knowledge-intensive services as activities irrespective of the type of the producing organisation: it covered KIBS, but also the corresponding in-house and publicly provided services. Eleven countries participated in the KISA project, Australia and Finland being the coordinators. Finland's active participation in the project reflected the emergence of interest in the systematic development of KIBS policies both at the national and the regional levels. Even though practical efforts are still at an early stage, the Finnish experience can be used to illustrate some possible approaches.

PURPOSE OF THIS PAPER

This paper aims to study the possibilities of enhancing the positive impact of KIBS with supporting policies. The main part of the paper consists of the presentation and analysis of developmental activities in the Finnish KIBS sector. A special feature in these activities has been the systematic utilisation of the findings of KIBS studies. The findings of the quantitative and qualitative challenges mentioned in the introduction have formed the starting point. Special attention has been paid to the main trends in the current development of KIBS. Before presenting the policy efforts, we summarise these trends. The author's own study, where 87 KIBS companies and 10 professional associations in the Finnish KIBS sector were interviewed, forms one source here (Toivonen 2004). At the end of the paper we draw some conclusions based on the Finnish experience and compare them with conclusions drawn from the OECD's KISA study.

There are both regional and national policies affecting the Finnish KIBS sector. We examine these on the basis of documents and interviews of 12 relevant stakeholders. At the national level, the objectives of the 'Serve' programme are analysed. This programme was launched by Tekes, the Finnish Funding Agency for Technology and Innovation, at the beginning of March 2006. KIBS form one of the four target areas in the programme, which concentrates on the development of service sectors.

At the regional level, activities in four Finnish regions are summarised and evaluated. Two regions are located around big cities (Helsinki and Tampere); two are more remote (Southern Ostrobothnia and Northern Savo). The author has been a member of the steering groups of KIBS projects in the Helsinki and Ostrobothnia regions and she has also been involved in the preparatory work of the 'Serve' programme. (1)

MAIN TRENDS IN THE CURRENT DEVELOPMENT OF KIBS

The KIBS sector is growing rapidly in modern economies. The progress of the division of labour increases the need for expert services, and external providers have certain competitive advantages compared to the in-house production of these services. KIBS firms that are in contact with many clients receive multiple influences from society and are capable of forming an overall view of the latest developments. This is difficult to achieve and maintain on an in-house basis (Kox 2002; Strambach 2001). However, the balance between external and internal services varies by company, the size of the company being one influencing factor. Several researchers have found that outsourcing is most common among medium-sized establishments (Illeris 1989). The decision also depends on the nature of the service: external services may be purchased in order to ensure the compliance with regulatory regimes, for instance (Thorburn 2005). Further, earlier success in buying expert services and in integrating them into the company's own activities impacts on the extent to which external services are used. The growing demand for planning services for outsourcing indicates that clients want to develop their purchasing know-how and use external services in a skilful way (Toivonen 2004).

As clients learn to utilise external services more efficiently, their expectations grow. KIBS have to provide demonstrable value for the client right from the start. Besides individual solutions to specific problems, they have to support the client's entire business and help it to create new business activities (Cooper et al. 1996; Hirvonen & Helander 2001). While this development increases the requirements imposed on KIBS, it also offers them a new way to acquire a strong position in the service relationship. Earlier the position of KIBS was usually based on knowledge asymmetry favouring the expert over the client (Lowendahl 1997). Nowadays the service relationship often shows the feature of strategic partnership, where KIBS' ability to show initiative and link their service to the strategy of the client are important quality criteria (Bessant & Rush 1995; Toivonen 2004).