Services, The Knowledge Economy, and Information Technologies – Emerging Themes and Research Agendas

Draft of article forthcoming in “Services and the Knowlege Economy – Issues and Perspectives”, ICFAI University Press, Hyderabad 2006.

In this brief sketch, I argue that emerging discussions in the “services sector”, “knowledge economy” and the emerging role of Information and Communication Technologies (ICTs) contain important, under-explored links. These relationships can help develop new models to better understand the emerging economic environment, and I hope researchers and policy-makers will be stimulated to look afresh at questions of technology, economic development and innovation.

Summaries of the service economy, knowledge economy, or role of ICTs in innovation routinely begin with a complaint around existing economic taxonomies and methodologies. Economic historians and certain fields of information economics have interrogated the erroneous assumptions about knowledge and information implicit in neo-classical economic theory (see Lamberton (2002, 1996) for an overview of this literature). For example, economists work from the assumption that knowledge generally transcends specific social contexts, while much of the empirical evidence suggests that firms are not given units of coordinating ability, but are instead limited in their decisions by their capabilities, knowledge, and learning (Mokyr, 2002). The findings have been significant enough that Nobel Prize-winning economist Joseph Stiglitz claimed that “standard economic theory has little to say about the efficiency of the knowledge-based economy.” (Stiglitz quoted in Lamberton, 2002).

While ICTs received an inordinate amount of attention during the 1990s, they were often considered in isolation to the rest of the economy. ICTs face similar accounting problems to services: ICTs are often seen as an industry “sector”, but this sector is difficult to define and their true value lies in the way they transform existing economic relationships. The real material of much intellectual property in ICTs lies in the contextual information embedded into the product and the way it improves productivity in non-ICT areas. For example practice management software for healthcare providers may use quite generic technology and programming techniques, but the value hinges on the authors’ understanding of the healthcare business

Services have been similarly undervalued. Both Karl Marx and Adam Smith considered services to be not directly productive, and this has constrained the way economists perceive the role of services in contemporary economies. For example, services are usually defined negatively: in macroeconomic discourse services are often still considered to be that which isn’t agriculture and manufacturing. Yet services (like ICTs) are major enablers for other productive sectors as well as discrete market sectors of their own. International trade is made feasible only through the services sector – for example, according to Adam Smith (1986 [1776]) it was growth in insurance services that allowed growth in international shipping to occur. Much value in the contemporary economy can be traced to services.

Why services are important

Despite the growing importance and complexity of services, their definition has remained the same in mainstream economics since proposed by Fisher and Clark back in the 1930s. A distinction is drawn between services which are “intangible, invisible and perishable”, and simultaneously produced and consumed, while goods or products are thought of as tangible and storable. However, the effects of services can be long-lasting, as in education or medical services, while goods are increasingly disposable in use as consumption increases (Economic Commission for Latin America and the Caribbean, 1998).

Metcalf and Miles (2000) define services as activities directed at creating changes or transformation in some entities. This transformation can be of, for example, people or objects; through time, space, or nature. This is a very general definition! However, this definition allows services some tangibility, and also clarifies the significant distinction between the production of services and their consumption. For example, the value of goods is much more stable than services, where the producer and consumer (or consumers themselves) may have vastly different ideas about the benefits or value of a particular service. The ability to evaluate a good deal in the services economy is highly dependent on information and cognitive skills.

These factors make it difficult to find appropriate methodologies to measure the quality, efficiency, and productivity of services. For example, how productive is a bank, and what does it actually produce? Is it more productive if it produces more loans? Or is a bank’s productivity better measured by the productivity of its customers?

It may be due to these issues that the “productivity paradox” applies to both ICT and service industries. We know an increased share for services in a country’s GDP is a marker of highly developed economies, yet service industries themselves have “low productivity” by traditional measures. According to Andersen and Corley (2002) services account for roughly 75% of highly industrialised economies and have grown their economic share markedly over the last few decades. Yet services are also often accounted for as a cost rather than investment, despite knowledge-intensive business services such as consulting and financial services having a major impact on growth and productivity in firms. Services probably play an even bigger role in economic growth than we currently believe. If services are as important to economies as the research indicates, the errors in measurement will be radically skewing GDP figures in national accounts. This has significant implications for government policy when attempting to measure performance in emerging information economies.

The Knowledge Economy

In referring to informational environments distinctions are usually drawn between three forms: data, information, and knowledge.
Beer (1985) provides a useful overview from systems theory, suggesting that:

• Data are symbols that have not yet been subject to interpretation, they are “statements of fact”.
• Information refers to data that has been assigned a meaning. Beer(1985); p. 283) describes information as “that which changes us” – data becomes information when it can be acted upon. Insofar as information can be considered in the abstract, it is always linked to a specific situation and has only limited validity (van der Spek & Spijkervet, 1997).
• Knowledge is what enables people to assign meaning to data and thereby generate information. It includes insights, experiences and procedures and guide people’s thoughts, behaviour and communication. Knowledge is usually applicable in a range of situations and is durable over a period of time (van der Spek & Spijkervet, 1997)

Saskia Sassen claims that consensus is emerging around distinguishing two types of information critical to a global economy:

“One is the datum, which may be complex yet is standard knowledge: the level at which a stock market closes, a privatisation of a public utility, the bankruptcy of a bank. But there is a far more difficult type of “information”, akin to an interpretation/evaluation/judgement [what Beer calls “knowledge” - DB]… Access to the first kind of information is now global and immediate from just about any place in the highly developed world … But the second type of information requires a mixture of elements, which we could think of as the social infrastructure for global connectivity….It is possible, in principle, to reproduce the technical infrastructure anywhere, but the same cannot be asserted for specialised kinds of social connectivity.” (Sassen, 2002 p.22)

For Sassen, it is access to this second kind of information that gives cities and urban environments a competitive advantage in the market. The city provides a high concentration of information workers supported by a feminised and low-paid informational labour force. This division of labour forms part of the “necessary social infrastructure” for firms which undertake internationally dispersed, information-intensive production under capitalism, which emphasises control. According to Sassen, the distinctive way information facilitates dispersal of routine information activities and centralisation of control activities explains the increasing dominance of cities over rural areas in global economic activity. (Sassen, 1991)

The Role of ICTs and Services in the Knowledge Economy

It is also notable that the highest level of service activity and ICT use takes place in urban centres where Sassen’s “knowledge infrastructure” is in place. Services are knowledge intensive, usually based on a range of “immaterial inputs” including cultural and aesthetic knowledge, know-how, social and organisational knowledge, information-based knowledge, and science and technology knowledge. However, services require more knowledge resources than just those of the producer. Generally, there is no service without the knowledge of the customer. This can be illustrated by the example of educational services: a teacher can be in a classroom teaching one student, which is an educational service. If that student leaves, no service is being provided, as the teaching experience cannot be stockpiled as inventory. The rise of services displaying this logic has contributed to the process by which economies are said to be “consumption-led”. Primarily tacit or uncodified knowledge (such as preferences) in markets and ‘quasi-generic’ knowledge in firms combine and are given economic value in new services.

Information and Communication Technologies are central to development of the new services economy. ICT innovations facilitate “appropriability” (tangibility) of specific problem-solving methodologies, through dissemination and the provision of standard interfaces to knowledge. In this way, ICTs enable inter-locality exchange of information and thus trade in services, which were previously thought of as immobile (Andersen & Corley, 2002).

From an innovation perspective, ICTs and services are redefining research and development (R&D) as we know it. Service industries have a collective learning model – innovation resides in the client-purchaser network rather than specific firms. Service production is reflexive, incorporating constant feedback from the network without a formal ‘R&D’ stage (Ragazzi & Rolfo, 2002) This matches a shifting emphasis in the ICT sector away from “pure engineering” to user-led product development. Effective feedback between the design of product and process is increasingly important in ICT innovation (note e.g. the increasing importance of HCI, human factors and interface design), making technology “products” increasingly more like services.

In advanced industrialised nations these processes are so pronounced that some commentators have suggested that we have entered a post-scarcity economy, where there is no longer a shortage of goods, but shortage of goods with right service inputs such as marketing, design, strategic management (see e.g. Romer, 1990). More critical voices, especially from outside the US/UK, note not only that there are many who still cannot afford basic food, water and shelter; but that the question of immaterial value in advanced societies always relies in some way on the material production of less-advanced societies. The focus on measuring nation-states in macroeconomics (rather than transnational processes) is central to to maintaining this illusion of the “weightless economy” (Leadbeater, 2000).

International trade in services

Services tend to be heterogeneous and customised. Scale does not equate with value as strongly as in agriculture or manufacturing – the size of financial investment in knowledge-intensive services may be poor predictor of likely profitability (Caves, 2000). Where economies of scale are possible is in distribution, which Multi National Enterprises (MNEs) dominate by organising individual units into chains and managing them through centralised or decentralised (or both) networks (Clairmonte & Cavanagh, 1984). This poses serious challenges for countries without large MNEs when attempting to gain a foothold in the emergent transnational markets for services.

An important issue in global capital flows around information and services relates to the differing legal capabilities of multinational corporations and individuals to exploit global networks. In the employment relationship, Christopher May notes that “there is an important distinction between property-owning classes and those who work for them… with considerable barriers to individuals profiting from the ideas and knowledge they generate” (May, 2002). Tactics include the capture of subcontractor’s creative ideas and labour, and defensive use of the copyright and patent system to ensure commercialisation costs remain high (or legal risks prohibitive). There is increasing legal activity centred around limiting the mobility of technical personnel to competitive firms (which remains defined very broadly to the benefit of employers over workers). Further, since the adoption of the Trade Related Intellectual Property Rights (TRIPS) agreement by the World Trade Organisation (WTO), the legal regime governing the protection of intellectual property has radically expanded. Once property rights in knowledge are globalised, in a similar way to material property rights, the possibilities for expanding the division of labour geographically have become considerable.

Much “knowledge economy” rhetoric often presents the threat of the manufacturing sector’s migration to developing economies of cheaper labour power. But May (2000) has found that informational marketplaces are highly competitive and possibly more subject to occupational “task migration” than non-informational work. In other words, lower-paid jobs in the informational market are much more likely to be relocated to different physical locations when this can reduce costs or improve products. Examples include call centres servicing US consumers based in India, or UK firms outsourcing of video game art production to studios in Vietnam. There is a high level of instability in country-specific investments in information products and services, providing challenges to policy-makers attempting to position their regions to contract for provision of these services to MNEs

At the level of production and consumption, differentials between the nation-specific legal rights of large producers and individual consumers are also evident. Content (films, audio, texts) are increasingly no longer bought as “products” which can be put to use by consumers, but are “licensed” (as services) with significant restrictions on international circulation, resale, hire, or even what devices can be used to access that content (e.g. the increasing use of copy protection on audio CDs which prohibits personal computers from playing them). These have the effect of preventing consumers from making use of innovations in international networks and user-communities. Finally, with the increased role for legal protection in informational industries, large companies remain much better placed to influence the laws which govern information distribution than consumers, who are often unaware of the legal issues that surround their use of intellectual property.

Fashionable economic sectors such as the Creative Industries encourage a focus on the exploitation of Intellectual Property (IP). While IP ownership is desirable for economic returns from knowledge products, strong IP arrangements create disincentives for user takeup of products and services. For smaller economies where access to markets is the key challenge, weaker IP arrangements with broad distribution may provide better strategic positioning than strong IP control. Case studies around the rise of Open Source software (see e.g. http://opensource.mit.edu) will have many lessons for the consideration of IP arrangements.

Culturally-specific creative and content services (e.g. those in local languages or using local knowledge) are interesting to consider, as while their export potential may be limited, their economic base intrinsically resists migration (as opposed to labour or more general services). The creative economy is also correlated with the human capital development essential to providing high-value services. Richard Florida(2002) finds economic growth strongly correlated with a “creativity index” of cultural production, perhaps through flow-on effects in regional marketing and the talent development. It is these arguments that have been used to justify the New Zealand Government’s subsidy for production of the Lord of the Rings films.

Services, Knowledge, ICTs – emerging questions

The relationships between services, knowledge, and ICTs provide a rich field for future research. As suggested above, some key questions require our immediate attention.

• The role of culture in services and ICTs requires elaboration. Most innovation measures are very science and technology based (such as patents and other R&D metrics), but this is inappropriate for services firms which require many other knowledge sources and which innovate in many non-science based fields (e.g. content formats).
• Our understanding of the role of information in value chains needs development. Macro- and micro-economic analysis of information economy issues generally remains unlinked. We need better theoretical models for the growth contribution of services, knowledge, and ICTs that aligns with contemporary case studies.
• The role of networks in innovation has concentrated on clustering, but ICTs are facilitating new forms of knowledge transfer. We know that densely connected systems exploit new ideas better than sparsely connected systems, but have yet to explore the new ways we can connect researchers, producers, and markets, nationally and internationally (Walker, Kogut, & Shan, 1997).

Economics or sociology alone no longer have the tools to adequately explain these emerging relationships. Increasingly, learning occurs in the conversations between different disciplines, locations, and knowledge systems. There is an urgent need to foster more cross-sector, cross-disciplinary research into these issues which will determine the future prosperity of the Asia Pacific region.

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