161
Towards a theory of innovation
Richard BARRAS
Technical Change Centre, 114 Cromwell Road, London S W7 4ES. U.K.
Final version received April 1986
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 technol-
ogy in the capital goods sector, and its subsequent develop-
ment 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 pro-
cess improvements to increase the efficiency of delivery of
existing services, moves on to process innovations which im-
prove 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 be-
tween the two, is put forward as a mechanisms helping to
create the long wave fluctuations in economic development
associated with Schumpeterian technological revolutions.
1. Introduction
The current debate on long waves, or growth
cycles, has not so far paid enough attention to the
process of transmission by which major new tech-
nologies originating and developing in the capital
goods sector are taken up through applications in
the consumer goods and services sector. An under-
standing of this transmission process requires a
more complete view of technological innovation
and diffusion than is provided by the traditional
demand-pull model; as is recognised in the more
recent innovation literature, such a view must
encompass both the supply of a new technology
by its producers and the demand for that technol-
ogy by its users or adopters. It is argued here that
examination of the technology transmission pro-
Research Policy 15 (1986) 161-173
North-Holland
0048-7333/86/$3.50 0 1986, Elsevier Science Publishers B.V. (North-Holland)
in services
cess helps to explain the underlying dynamics of
the growth cycle, in terms of a disequilibrium in
the rates of innovation achieved in the capital
goods (producer) sectors and the consumer goods
(adopter) sectors.
This view of the innovation process, and the
role of technology transmission in the growth cycle,
can further offer insights into the likely course of
events during the new technological revolution
now beginning, sometimes labelled the “fifth
Kondratiev”. There is a widespread consensus that
this new revolution will be based on the emergent
information technologies; what has so far been
less recognised is that the key adopter sectors in
this revolution are likely to be the service in-
dustries, rather than the manufacturing sectors
which have dominated previous technological rev-
olutions. From this supposition it can be argued
that the application of information technology in
a wide variety of previously “pre-industrial”
service activities will provide the motor for the
next major wave of expansion of output and em-
ployment in advanced industrialised economies,
and that an understanding of this new source of
economic growth requires the development of a
theory of innovation in services.
There has been a growing awareness in recent
years of the importance of service industries within
advanced industrialised economies, though this re-
alisation has perhaps been rather belated given
that in such economies services already typically
account for at least 50 percent of total output and
employment [2]. With this growing awareness there
has begun to emerge a body of applied research
into services, such as the work of Gershuny [18]
and [19]. However, there has so far been virtually
no consideration of the particular nature of in-
novation in services within economic theory, which
incorporates innovation models drawn almost ex-
clusively from analysis of the manufacturing pro-
cess. The aim of this paper is to lay some founda-
162 R. Barras / Innovation in Services
tions for building such a theory of innovation in
services. In trying to lay these foundations, a
theoretical model of the innovation process in
services is proposed, based upon the idea of a
“reverse product cycle” operating in service in-
dustries. This model has been developed out of a
quite extensive programme of empirical research
into technical innovation in services; this research
has focused primarily on the adoption and impact
of information technology in service industries
and has involved a mixture of econometric and
case study analysis of current trends, as well as
some more speculative and less formal forecasting
of likely trends over the next ten years (Barras [3],
[4], [5] and [6]; and Barras and Swann [I, [8], [9]
and [lo]). Nevertheless, given the relative lack of
previous research in this area, and the still emer-
gent nature of many of the service innovations
which are described, a great deal more empirical
testing needs to be undertaken before any claim
can be made to have constructed a complete theo-
retical edifice on these foundations.
2. The origin and development of new technology
The origins of a major new technology such as
information technology can be located in the
capital goods sector, where fundamental product
innovations such as computers are produced, after
what may be a long period of research and de-
velopment in industries such as electronics, busi-
ness equipment and telecommunications, for ex-
ample (see, for example, Mansfield et al. [24], on
the industrial R&D process). If a cluster of re-
lated innovations emerge, and if their combined
influence on other branches of economic activity
is potentially very pervasive, then the foundations
of a major new technology are established, par-
ticularly if reinforced by the establishment of an
infrastructure such as a digital telecommunica-
tions network suitable for opening up a wide
range of markets to the influence of the technol-
ogy. The importance of such product innovations
in capital goods supply industries have been
touched upon by several authors (see, for example,
Abernathy and Townsend [l]; Rosenberg [27];
and Metcalfe [25]); while the long wave literature
stresses the central role of the new technologies
associated with these innovations in creating the
Schumpeterian “ technological revolutions” un-
derlying successive growth cycles (see Freeman et
al. [17]; van Duijn [15]; and Coombs [ll]).
Unce the new technology has been established
and embodied in a set of emergent products, the
development of the new capital goods industries
set up to manufacture these products can be de-
scribed according to the by now standard product
cycle theory first expounded by Kuznets [23] and
subsequently elaborated by authors such as Ut-
terback [28]. Three phases of development can be
identified. The first, take-off or introduction phase,
corresponding to the period of major product
innovation during the establishment of the new
industries, is characterised by rapid technical ad-
vances and a diversity of new products; labour
intensive, relatively high cost flexible production
methods are applied to low volumes of output;
and the competitive emphasis is laid on product
performance to capture new markets. In the sec-
ond, growth phase, the competitive emphasis shifts
to major process innovations designed to improve
the quality of a decreasing range of products;
production methods become more standardised
and automated with increasing capital intensity;
and production volumes increase as user markets
continue to expand. The third, maturity phase,
sees a further shift in competitive emphasis to-
wards more incremental process improvements de-
signed to reduce the unit costs of a relatively
narrow range of standard products in markets
nearing saturation; production methods reach their
highest stage of automation, with intensifying con-
centration in larger production units and high
rates of labour saving investment progressively
raising the costs of further innovation.
The progression through these phases of the
product cycle is ‘accompanied by a shift from the
early predominance of product innovations, which
on balance generate increased employment
through investment which is “capital widening”,
to later process innovations, which on balance
displace employment through investment which is
“capital deepening”. Furthermore, once the ma-
turity phase is reached, the by now established
technology, and the established capital goods in-
dustries which produce it, become increasingly
vulnerable to competition from new and more
advanced technologies, leading to a fourth, transi-
tional, phase in which the whole cycle begins
again as the old industries decline and new in-
dustries begin to emerge.
 R. Barras
While the main phases recognised by this the-
ory are plausible, it is essential to beware of too
simplistic an interpretation of the mechanisms
involved. Thus several authors stress that the cycle
does not involve a strictly linear, sequential pro-
cess, but rather there exists close interaction and
feedback between process and product irmova-
tions at each stage (see Abernathy and Townsend
[l]; Utterback [28]; and Kline [22]). This interac-
tion and feedback can be seen very clearly in the
development of the computer industry since the
1960s. Successive generations of the technology
(mainframes, minis; micros), each represent an
important product innovation which has then been
extensively improved by a sequence of subsequent
process innovations, during a period when the
industry as a whole has moved from the take-off
to the growth phase. It is also too simplistic to
assume that either “ ~~ology push” or “demand
pull” is the single dominant driving force for
innovation throughout the product cycle, since
both are operating and interacting at each stage.
Nevertheless it is not unreasonable to suggest that
in the early phase of major product innovations,
technology push pressure resulting from an earlier
phase of fundamental research and development is
the predominant driving force, whereas in the
later phases of more incremental innovations, the
demand pull pressures created by users of the
technology become increasingly dominant. Since
in the case of information technology, the major-
ity of these users consist of service industries, then
an understanding of their role in the innovation
process becomes essential.
3. The transmission of technology
The transmission of a major new technology
such as information technology, from the capital
goods sector in which it is produced to the user
sectors, and particuIarly the service sectors, in
which it is applied, occurs slowly over a consider-
able period of time. Two types of delays occur.
The first consists of the adoption delays which are
widely discussed in the ~ovation diffusion litera-
ture, corresponding to the lag between the availa-
bility of capital goods embodying the new tech-
nology, and their take-up by potential users. The
second, and less widely recognised, type of delay
consists of the lags between the installation of the
/ Jnnovation in Services 163
capital goods, such as computers, and the realisa-
tion of the potential benefits to be derived from
them in terms of new or improved applications
within the user industries, for example, office au-
tomation in services. This second type of delay is
closely related to the innovation process within
the new industries themselves.
Starting with the familiar “adoption delays”,
the literature recognises three main types of fac-
tors which regulate the rate of adoption or diffu-
sion of a technology: the first is the trade-off
between price and te&n.ical performance, which
influences both the investment cost and the profit-
ability of adopting the new technology; the second
is the risk or uncertainty attached to the invest-
ment; and the third is the market structure of the
adopter industry (see, for example, Mansfield et
al. (241). As far as the price-performance trade-off
is concerned, Rosenberg [27] points out that there
is often a considerable delay between the attain-
ment of technical feasibility for a fundamental
product innovation in the producer sector, and the
achievement of economic feasibility for potential
users through a whole series of subsequent incre-
mental improvements by the producers - particu-
larly if the older, competing technologies are also
subject to ~nt~~g improvement. In a similar
vein, Metcalfe [25] discusses the crucial role of the
price mechanism in creating a “balanced diffusion
path”, such that the declining price of the product
balances the growth in demand as adoption in-
creases in parallel with the growth in production
capacity in the supply industry. As Metcalfe points
out, this model can be extended to allow for the
decline in unit production costs as further techni-
cal improvements are introduced into the supply
industry. The effect of continuous product and
process ~provemen~ on the price-performance
trade-off is illustrated dramatically by the com-
puter industry, in which it is estimated there has
been an average 20-25% percent per annum de-
crease in the price of hardware of constant equiv-
alent performance over the past 25 years, leading
to an average growth of over 40 percent per an-
num in the installed value of computers of con-
stant performance in UK user industries over the
period [S].
The second factor identified as regulating the
rate of adoption of the technology, tbe expectation
of risk or ~~rt~ty which users attach to its
adoption, is one which Klein [21] has considered
164 R. Barras / Innovabon
in detail. He distinguishes two types of uncer-
tainty - that associated with the performance of
the technology itself, and that associated with the
likely actions of other competitor firms within the
user sector. This latter type of uncertainty links to
the third factor identified as regulating the rate of
adoption, which is the market structure of the user
industries. This is an issue to which Schumpeter
paid considerable attention, formulating his view
that an oligopolistic market structure produces the
optimal conditions for the adoption of a new
technology, whereby large user organisations with
secure market shares and considerable investment
resources are able to risk uncertainty and indulge
in “technological competition” rather than price
competition (see Heertje [20]). In contrast, Klein
considers that the optimal conditions for innova-
tion are offered by a market structure char-
acterised by “dynamic competition”, consisting of
competition between a large number of innova-
tive, risk-taking firms, and an absence of institu-
tional barriers or price controls. Such conditions
of dynamic competition have prevailed during the
very rapid development of microcomputer tech-
nology in the past 5-10 years, whereas Schum-
peter’s model of oligopolistic competition seems
more appropriate to explain the leading role taken
by financial institutions such as banks and in-
surance companies in the adoption of computer
technology over the past 20 years. It could, there-
fore, be argued that dynamic competition offers
the best conditions for innovation in the early
stages of the product cycle associated with the
development of a major new technology in the
capital goods sector, whereas oligopolistic compe-
tition provides the best conditions for its early
adopted by user industries.
Having examined the main factors which regu-
late the rate of adoption of a new technology
within a user industry, it is equally important to
recognise the factors which contribute to “realisa-
tion delays” in the rate at which innovative appli-
cations are generated through the use of the tech-
nology within that industry, once it is introduced.
Again, three main types of factors can be identi-
fied as affecting the rate of realisation of the
potential of the technology. The first factor is
“opportunity”, defined as the suitability of the
activities carried out within the user sector for
applications of the new technology. This of course
affects the rate at which the technology is initially
in Services
adopted within an industry, but more important
in the longer term, it affects the rate at which
process and product innovations can be generated
once the technology has been introduced. In the
case of computer technology, opportunity is
another factor contributing to the leading role of
financial institutions in the use of computers, since
financial transactions of all types are ideally suited
to computerisation. The second factor is the “usa-
bility” of the technology, which in recent years has
become a far more critical constraint on the rate
of innovation in the use of computers than the
technical performance of the hardware, Here usa-
bility is defined to cover both the availability and
quality of software, which provides the direct em-
bodiment of service sector applications of the
technology, and the “user friendliness” of the
system’s basic operating procedures. The final fac-
tor affecting the realisation of the potential of a
technology is the “adaptability” of the organisa-
tions installing the equipment; this includes
workforce or managerial resistance to the intro-
duction of new technology; the extent to which
working procedures can be adjusted; and the rate
at which the workforce can be trained in the
necessary skills to use the technology.
In combination, therefore, the influence of
price-performance, uncertainty and market struc-
ture, are all assumed to determine the rate of
adoption of a new technology in user industries,
while opportunity, usability and adaptability to-
gether determine the rate at which the innovative
potential of the technology can subsequently be
realised. The path taken by this adoption and
diffusion process can be described by the familiar
S-shaped, logistic diffusion curve (see Davies [12]
for a review of such models) or, perhaps more
usefully, by the concept of a “natural trajectory”
of innovation first put forward by Nelson and
Winter [26]. Different trajectories in different user
industries reflect a combination of the common
price-performance characteristics of the technol-
ogy, and the differing market structures and types
of applications to be found in each industry, all of
which define the selection environment for user
adoption and innovation. With the adoption and
innovation. With the adoption of computer tech-
noly, the most dynamic influence on the diffusion
process has been provided by the very rapid rate
of technical progress in the production of com-
puters, which as already indicated is creating a
 R. Barras / Innovation in Services
continuous expansion of the “technological fron-
tier” defined by the price-performance character-
istics of the equipment, and thus a parallel expan-
sion of the user markets being penetrated by the
technology.
Case studies of the application of computers in
three different sectors (insurance, accountancy and
local government) illustrate how innovation trajec-
tories develop in service industries ([7], [9] and
[lo]). Each of the sectors shows a broadly similar
pattern of progression through successive genera-
tions of the hardware, but significant divergences
can be identified in relation to differences in the
service functions to which the technology is ap-
plied, ranging from the computerisation of in-
surance policies and claims, through computer
audit in accountancy, to corporate financial sys-
tems in local government. These case studies also
illustrate how the market structure of both the
capital equipment supply industry and the service
user industries influence the adoption and innova-
tion process. Thus given the pervasive influence of
technical change in the production of computer
equipment, the suppliers are in a powerful posi-
tion to influence the rate of adoption and applica-
tion of the technology in user industries through
their development and marketing strategies, par-
ticularly when the supply industry is becoming
increasingly dominated by one multinational com-
pany. In contrast, no one adopter organisation can
dictate the trajectory of innovation within a par-
ticular user industry, and indeed it appears that
individual organisations move along the trajectory
in a rather irregular manner, at some stages imple-
menting “leading edge” applications which quite
often prove costly or inefficient, followed by peri-
ods when they fall behind the vanguard in order
to consolidate their position.
So far two sets of factors have been identified
as determinin g the rate of adoption of new tech-
nology in user industries, and the innovation
trajectories which develop in these industries. The
first set can loosely be character&d as “technol-
ogy push” factors associated with the capital goods
embodying the technology, i.e. their price-perfor-
mance characteristics, the uncertainty about their
performance, and their usability; the second set
can be character&d as “demand-pull” factors
stemming from the nature of the user industries
and their applications of the technology, i.e. the
market structure of each industry, the opportuni-
165
ties to apply the technology, and the adaptability
of the user organisations. However, these factors
tell only half the story, since they are concerned
with the transmission of the technology from the
capital goods producer industries to the consumer
goods user industries. The second half of the story
concerns the innovation process within the user
industries themselves, which determines how the
technology is applied in the production of con-
sumer goods and services as a result of both
“ technology push” pressures originating within
these industries, and “demand pull” pressures
originating within the consumer markets for their
products.
4. The reverse product cycle
The argument has now arrived at the central
question addressed in this paper - how does in-
novation occur in user industries such as services?
The answer which is proposed here relies upon a
model of innovation which mirrors the theory of
the product cycle, as it has been applied to the
production of goods embodying a new technology,
but which assumes that in the user industries
which adopt the technology, the cycle operates in
the opposite direction. This model, derived from
empirical study of the adoption of information
technology in service industries ([7], [9] and [IO]),
has been termed the “reverse product cycle”. In
summary, the three phases of the reverse product
cycle consist of a first stage in which the applica-
tions of the new technology are designed to in-
crease the efficiency of delivery of existing services;
a second stage in which the technology is applied
to improving the quality of services; and a third
stage in which the technology assists in generating
wholly transformed or new services. Furthermore,
this sequence of phases in the reverse product
cycle within user industries will tend to parallel
the succession of phases of the normal product
cycle within capital goods industries such as the
computer industry which are producing the tech-
nology. Both innovation processes will steer the
innovation trajectories within service industries,
and there will be considerable feedback and inter-
action between the two processes, as for example
when innovations in service delivery create new
demands upon the performance of computer
equipment, leading to secondary innovations in
their design.
Each phase of the proposed reverse product
166 R. Barras / Innovation in Services
Table 1
Illustrations of the stages of the reverse product cycle in computer applications
Cycle stage I. Improved
Period efficiency
Computer technology 1970s
Mainframes
Sector applications
a. Insurance Computerised
policy records
b. Accountancy Computer audit;
Internal time
recording
c. Local Corporate
goverment financial
systems
(e.g. payroll)
Sources: Barras [6] and Barras and Swarm [7], [9] and [lo].
cycle can now be considered in more detail, using
illustrations derived from the case study research
into the adoption and impact of information tech-
nology in three selected service sectors (table 1).
During the first phase of the cycle, adopter
organisations in the user sectors will tend to con-
centrate their early applications of the new tech-
nology on incremental process innovations desig-
ned cumulatively to transform the mode of de-
livery of established services, thereby achieving
significant cost savings and increased efficiency.
Almost inevitably, given the labour intensive na-
ture of typically “pre-industrial” service activities,
these early applications are of a labour saving,
capital deepening nature, such that the first phase
of technical progress in services tends to have a
strong labour saving bias [5]. While these labour
saving effects may be masked in industries experi-
encing a continued growth in demand for their
services, the competitive pressures to use new
technology to shed labour and restructure the
organisation of production are typically strongest
in established sectors suffering from saturated or
even shrinking markets.
The early 1970s applications of mainframe
computer technology in service organisations were
certainly directed towards improved efficiency, and
they usually led to the shedding of a considerable
amount of clerical labour. Examples from the case
study research (table 1) include the use of corpo-
rate financial systems to computerise internal ad-
ministration functions such as personnel records
2. Improved 3. New services
quality
1980s 1990s
On-line Systems; Networks;
Minis&Micros
On-line policy Complete on-line
quotations service
Computerised Fully automated
management audit&accounts
accounting
Departmental Public information
service delivery services (e.g. Viewdata)
(e.g. housing
allocation)
and payroll, in a wide variety of sectors such as
local government [lo], the development of com-
puter audit techniques in accountancy [9], and the
computerisation of policy records in insurance [7].
The rate at which such efficiency improvements
could be realised was considerably enhanced by
the extraordinary rate of cheapening of computer
equipment which was occurring due to technical
progress in the supply industry, which as already
noted led to very high rates of user investment in
such equipment [3]. Furthermore, the full cost-sav-
ing potential of these applications has in many
cases only become fully real&d with the onset of
recession after 1979, which has forced a major
restructuring and labour shakeout in service in-
dustries such as general insurance which have
been suffering from over-capacity [7].
As the first phase efficiency impacts of the new
technology are realised, the reverse product cycle
moves to the second phase in which the tech-
nology is directed towards more radical process
innovations which improve the effectiveness rather
than the efficiency of delivery of services, leading
to improvements in quality rather than reductions
in cost. Given the intangible nature of most service
products, increases in quality are at least as im-
portant as increases in quantity when it comes to
measuring the output of service industries [3].
Consequently, this second stage movement to-
wards a qualitative improvement in services can
be viewed as an interim “transition phase”, be-
tween the improved efficiency of delivery of exist-
 R. Barras / Innovation
ing services, and the generation of new types of
services. These quality improvements begin to en-
courage some expansion of markets for the im-
proved products, while the competitive emphasis
on quality may typically be accompanied by cor-
porate diversification or integration among the
service providers. Furthermore, while investment
in the capital equipment embodying the technol-
ogy continues at a high rate, there is a shift
towards a more neutral form of technical progress,
with the capital widening impact being at least as
strong as the capital deepening effects, and the net
impact on labour utilisation also being broadly
neutral.
These effects can clearly be seen in the more
recent applications of mini and micro computer
technology in service industries in the last few
years. The focus of applications has moved from
central corporate systems directed towards inter-
nal administration, towards departmental applica-
tions on machines dedicated to the provision of
improved services in sectors where there is grow-
ing consumer demand. For households, much of
the growth in demand in recent years has been for
improved public services, and in some sectors such
as local government, the providers of these services
are beginning to respond by using information
technology to improve the quality of services de-
livered, for example by computerising the
processing of housing waiting lists [lo]. In the
private sector, quality improvements have been
particularly prominent in expanding sectors of the
financial and business services industry such as
life insurance and accountancy, with the introduc-
tion of on-line policy quotations in insurance
branch offices [7], and computerised management
accounting and book-keeping services in accoun-
tancy [9] providing two obvious examples (table
1). These applications have not led to a significant
displacement of labour, and in some cases such as
accountancy they appear to have sustained con-
tinued employment growth through the expansion
of markets for the services provided by the in-
dustry. A clear connection can also be observed
between the latest applications of computer tech-
nology and the current “revolution” occurring in
the financial sector, with distributed processing
and local area networks offering the capability for
greatly enhanced information handling, which is
encouraging the emergence of financial and busi-
ness services conglomerates offering a much wider
in Services 167
range of different services than hitherto [8].
The third phase of the reverse product cycle
involves a shift from qualitative improvements in
services to the generation of wholly new service
products. At this stage, product rather than pro-
cess innovations become dominant, as the compe-
titive emphasis shifts to product differentiation
and product performance in order to open up and
capture new markets. New industries and organi-
sation emerge, in parallel with the further diversi-
fication of existing organisations, in order to
supply the growing range of new services. The
overall impact on output and employment is ex-
pansionary, investment in new technology be-
comes predominantly capital widening in effect,
and the bias in technical progress may even tend
towards capital saving, reinforcing the employ-
ment generating effects of this stage of the cycle.
Now some confusion surrounds the concept of
product innovation in services, and in particular
what constitutes a “new service”. Because of the
intangibility of services, economic literature often
assumes that they are by definition processes - yet
this confuses the “product” which is the service
consumed by a firm or household, and the “pro-
cess” which is the mode of delivery of the service.
Furthermore, it is often argued that radical appli-
cations of new technology do not generate new
service products, but rather they provide new ways
of delivering existing services. This is true in the
strict sense that such activities continue to fulfil
the same functions which are defined by basic
social needs such as health, education, travel, en-
tertainment and the exchange of goods. However,
using an analogy with the contrast between a
horse and a motor car as a means of transporta-
tion, these new service applications are so differ-
ent in nature and mode of delivery from more
traditional forms of services that they can
meaningfully be described as new service prod-
ucts.
A further problem that arises in trying to define
product innovation in services is that in terms of
the impact of information t&hnology on services,
this third stage of the reverse product cycle has
hardly begun. Consequently, both the precise form
of the new products and the extent of the markets
for them can only be a matter of speculation at
present [6]. What does seem clear, however, is that
a necessary, though not sufficient, condition for a
major wave of IT-based product innovation in
168 R. Borras / Innovation in Services
services is the installation of a suitable digital
telecommunications infrastructure, such as broad
band cable, linking all domestic and business users
via a network of computer terminals [19]. The
development of such an infrastructure seems likely
to proceed by stages, starting with the existing
telephone networks and proceeding by progressive
digitalisation to a broad band network capable of
transmitting text, data, voice and live pictures [6].
Such a network will provide the means of produc-
tion and delivery for a range of new interactive,
electronic services, opening up whole new markets
for such services in the same manner that the
construction of the railways opened up new
markets for manufactured goods in the mid-nine-
teenth century [4].
Once this IT infrastructure is installed, new
service products are feasible in most current fields
of service activity, for example home banking and
shopping, electronic corporate banking and other
financial services, network information services
for domestic and business users, computer aided
education and training, and expert systems for
medical diagnosis. More precisely, the potential
for such services can already be distinguished in
the case study sectors which have been examined
in detail (table 1). Thus in insurance, the provision
of a universal IT infrastructure would allow access
to a complete on-line insurance and investment
service by both domestic and business users [7]: in
accountancy such an infrastructure could be used
to link clients’ and accountants’ computers di-
rectly, so allowing for the provision of a fully
automated audit and accounts service [9]; while in
local government, experiments are already under-
way to use viewdata systems to offer public infor-
mation services to local residents [lo]. What ap-
pears to distinguish these new services is a combi-
nation of three types of changes compared with
existing services. The locus of delivery shifts from
the point of production (e.g. the insurance office)
to the point of consumption (the home or busi-
ness); the qualitative nature of the service changes,
with an emphasis on increased flexibility and im-
proved information for consumers; and the nature
of the producer-consumer relationship changes,
with the growing computerisation of knowledge
particularly affecting the role of service profes-
sionals such as teachers, accountants and in-
surance underwriters.
The rate at which new markets will develop for
such services will depend upon a variety of factors
influencing demand, such as the costs of the new
services compared with those of their established
equivalents, the ease with which these network-
based services can be accessed, and the elimina-
tion of various social and institutional barriers to
their adoption [6]. However, once the new services
become established, it seems reasonable to sup-
pose that their further development may follow a
path similar to that of the normal product cycle
outlined for the capital goods embodying the
original technology. In other words, the transition
phase which began in the previous phase of the
cycle will extend to cover the period between the
achievement of technical feasibility in the delivery
of the new services, for example with the installa-
tion of a telecommunications infrastructure suita-
ble for home banking and shopping, and the
achievement of economic feasibility in competi-
tion with older established service equivalents such
as existing banking and retailing services. There-
after, as the “new service” industries win an in-
creasingly dominant position within their respec-
tive consumer markets, their further development
will involve a shift from product innovations to
major process innovations during the growth stage,
and thereafter a further shift to incremental pro-
cess improvements as they reach maturity. At this
stage a new wave of technology may emerge within
the capital goods sector, suitable for transmission
to the service sector and thus triggering the start
of a new reverse product cycle among the by now
mature service industries which originated during
the previous cycle.
5. Innovation and the growth cycle
The theoretical model developed in previous
sections has articulated the innovation process in
the capital goods sector and the consumer goods
and services sector in terms of what van Duijn [15]
calls “innovation life cycles”, based on the theory
of the product life cycle. Furthermore, the model
has assumed the emergence of a cluster of related
innovations in the capital goods sector which are
so fundamental and so pervasive in their impacts
that their combined effect, particularly when rein-
forced by the development of an appropriate in-
frastructure, is to establish a major new technol-
ogy, or as Freeman et al. term it, a “new technol-
 R. Borrm / Innovation
ogy system” [1’7]. As’ already indicated, much of
the long wave literature affords a central role to
the emergence of these major new technologies as
the driving force underlying successive growth
cycles; this tradition started with Schumpeter’s
original formulation of a theory of “technological
revolutions”, and continues through to recent dis-
cussions of the discontinuities in growth and in-
novation trajectories caused by the emergence of
new “ technological paradigms” [14].
Thus the First Kondratiev cycle is associated
with the convergence of steam power and textile
manufacture in the early nineteenth century; the
Second Kondratiev with the industries associated
with iron and steel, engineering and railways in
the second half of the nineteenth century, the
Third Kondratiev with the emergence of electric
power, automobiles and chemicals manufacture in
the early part of this century; and the Fourth
Kondratiev with the post-war boom based on
industries such as consumer electronics, synthetic
materials and pharmaceuticals (Freeman et al.
[17]). The thrust of this paper has been that the
next and Fifth Kondratiev will be associated with
new service activities based on information tech-
nology, and it can be argued that these activities
qualify as a ‘*new technology system” for three
reasons - because of the interlinkages created by
the convergence of established technologies (com-
puting, electronics, and telecommunications), be-
cause of their pervasive impact on other estab-
lished industries due to the increase information
content of all branches of production, and because
of the reinforcing effect of a digital telecommuni-
cations infrastructure in ~ans~tt~g the new
services and opening up new markets for them.
Now while there is considerable consensus as to
the central role of major new technologies in
successive growth cycles, there is considerable dis-
pute about the mechanisms by which innovation
Table 2
The phases of the growth cycle.
Growth cycle Capital sector
phase
Stage in Producis
innovation cycle
Prosperity Transition Emergent
Recession Introduction New
Depression Growth Improved
Recovery Maturity Cheaper
in Services 169
causes regular cyclical fluctuations in the secular
trend of economic growth. Delbeke [13] provides a
review of the alternative theories, all of which he
character&s in terms of assumptions about alter-
nating scarcity and abundance of different factors
of production in the upswing and downswing
phases of the cycle, whether they be theories based
on variations in the rate of innovation, in the
intensity of capital goods production, or in the
availability of labour or raw materials. More
specifically related to the discussion in this paper,
Coombs [ll] reviews some of the conflicting theo-
ries in terms of what they have to say about the
relationship between innovation in the capital
goods and consumer goods sectors. What is pro-
posed here is a rather different perspective on the
growth cycle mechanism derived from the dy-
namics of the technology transmission process,
whereby a new technology is transferred from the
capital goods sector to the consumer goods and
services sector, creating a disequilibrium in techni-
cal progress due to the juxtaposition of two out-
of-phase innovation life cycles in the two sectors.
This mechanisms helps to explain the cyclical
fluctations in capital productivity and profitability
which occur during the long wave [17], and which
have themselves been employed as explanatory
factors in some long wave theories. The model can
be explained schematically in terms of the four
stages of the long wave identified by Schumpeter
- prosperity, recession, depression and recovery -
with conditions at each stage being determined
predominantly by conditions in the larger con-
sumer goods and services sector (table 2). In prac-
tice, the course of events is naturally far more
complex, with considerable variations between
technologies, sectors and national economies at
each stage of the long wave.
For convenience, consider first the conditions
prevailing during the prosperity phase of the long
Consumer sector
Stage in Prodscts
innwation q&e
Growth Improved
Maturity Cheaper
Transition Emergent
Introduction New
170 R. Borras / Innoootion in Services
wave. The industries in the consumer goods and
services sector are in their growth phase, with the
quality of existing products being improved
through process innovations in the use of estab-
lished technologies originating in the previous
growth cycle. Output and labour productivity are
growing strongly to satisfy demand in expanding
consumer markets, employment is stabilising at its
peak level, and there is a continued strong growth
in capital investment, which increases the capital
intensity of production while stabilising capital
productivity and the rate of profit. During this
phase, technical progress is concentrated princip-
ally within the consumer sector, and it is broadly
neutral in its impact. Within the capital goods
sector, on the other hand, a transition phase be-
tween successive “ technological paradigms” pre-
vails, with little further improvement possible in
the technologies establishes in the previous cycle,
while the next wave of technology is still in the
research and development phase, generating
“emergent products” which may have reached
technical feasibility but are as yet of limited eco-
nomic feasibility. Such was the stage reached in
the emergent computer industry during most of
the 196Os, at the peak prosperity phase of the post
war boom generated by the previous wave of
technologies established in the 1930s and 1940s.
Once the emergent technologies in the capital
goods sector have reached the stage at which it is
economically feasible for the consumer sector to
begin widespread adoption of the new capital
goods embodying these technologies, then the
growth cycle moves into its recession phase. Now
the focus of technical progress shifts to the capital
goods sector, where major product innovations are
being generated in the take-off or introduction
phase of the normal product cycle of innovation
which has already been described. These product
innovations create a rapid rate of cheapening of
the new capital goods, which encourages a simi-
larly rapid expansion of their markets among the
by now maturing consumer goods and services
industries. Within these industries the first appli-
cations of the new technology are directed to-
wards achieving cost-cutting efficiency improve-
ments through incremental process improvements
in the production of existing goods and services.
The first stage of the reverse product cycle in the
consumer sector is thus launched, in parallel with
the start of the normal product cycle in the capital
goods sector. Since the consumer sector has now
reached its maturity phase, overall output growth
is slowing down as markets near saturation; the
rapid rate of investment in the new technology is
thus predominantly labour saving and capital de-
epening in its effects, so that while labour produc-
tivity continues to increase, though perhaps at a
lower rate, employment, capital productivity and
profitability all enter a period of decline. Such
were the conditions of recession prevailing during
most of the 1970s when, despite the recession, the
computer industry experienced very high rates of
growth and of product innovation in its major
take-off phase, while the first wave of applications
of the technology among mature consumer in-
dustries, especially service industries, began on a
wide scale.
As the normal product cycle in the capital
goods sector, and the reverse product cycle in the
consumer sector, move into their second phases,
the economy moves from recession to depression.
Innovation in the capital goods sector moves from
the introduction to the growth phase, with the
emphasis shifting from rapid and diversifying
product innovations to process imrovation which
by improving the quality of product ranges sustain
continued market growth among the consumer
industries while consolidating the position of the
capital goods industries themselves. In the con-
sumer sector, the emphasis shifts from using the
technology to increase the efficiency of production
of existing products towards improving the quality
of goods and services. Now these improved prod-
ucts, especially in the service industries, represent
an intermediate stage between the old established
products which dominated the previous, recession,
phase and the new products which will be pro-
duced in the coming recovery phase. As already
indicated, this second phase of the reverse product
cycle in the consumer sector can therefore be
termed a “transition phase” during which new
products begin to emerge, at least in embryo form,
though they may not yet have reached the stage of
technical feasibility and they have certainly not
reached economic feasibility.
Consequently, the limited expansion of markets
created by product improvements in the consumer
sector, even when combined with the strong growth
in the capital goods sector producing the new
technology, is not sufficient to offset the decline in
already mature consumer goods and services sec-
 R. Barras / Innovation in Services
tors which are suffering from saturated markets
and a limited scope for further process improve-
ments using by now outmoded technologies. The
economy thus suffers a phase of depression, with
output levels static or only slowly rising, maintain-
ing high levels of unemployment and under-utilised
capacity, even though the decline in employment
levels does tail off. Capital investment is now
broadly neutral in its effects, halting the decline in
profitability and capital productivity; this new
investment is accompanied by extensive scrapping
in the mature consumer industries of underutilised
capacity embodying obsolete technologies, giving
an apparent boost to average labour productivity
across the sector as a whole. These are the condi-
tions which are prevailing in the 198Os, in some
sectors at least, with the computer and related
information technology industries having entered
their growth and consolidation phase; applications
of computer technology in the consumer sector,
and especially in services, having begun to shift
from efficiency improvements to transitional qual-
ity improvements; but with the major part of the
consumer sector suffering a prolonged period of
depression and restructuring.
To complete the stages of the long wave, atten-
tion now shifts to the consumer sector, where the
achievement of widespread economic feasibility
among the new products which began to emerge in
the transition phase leads to a major new phase of
product innovation. New products and new con-
sumer industries are established, serving new con-
sumer markets and creating the base for sustained
economic recovery. These new consumer in-
dustries make extensive use of the products of the
now mature capital goods industries which are
producing the dominant technology, particularly
once a suitable infrastructure is installed to accel-
erate its transmission and open up new markets.
This investment is predominantly capital widen-
ing, with a possibly capital saving tendency as the
relative price of the technology begins to increase,
so that as output levels expand, so does employ-
ment, capital productivity and profitability.
Hereafter, the now established technology installed
in the consumer sector provides the motor for
further product and process innovations within
the new industries, as the consumer sector moves
towards its growth phase, the capital goods sector
moves towards another transition phase, and the
cycle begins over again. These were the conditions
171
prevailing in the 1950s during the period of post-
war economic recovery, when the mature technol-
ogies established in the 1930s and 1940s helped to
launch a major new consumer boom. This is also
the current prospect offered by the maturing
information technology industries - the genera-
tion of a services-led boom in the 1990s once a
suitable, universal telecommunications infrastruc-
ture is installed at national and international level
to act as the catalyst for the establishment of the
new service industries.
6. Conclusions
The argument which has been developed in this
paper starts with an examination of the origins of
a major new technology in the capital goods sec-
tor, and its subsequent development according to
the product life cycle theory. Consideration is
given next to the transmission process by which
this new technology is taken up by user industries
in the consumer goods and services sector, identi-
fying the factors which contribute both to delays
in the adoption of the technology and to delays in
the realisation of its potential, and discussing how
these factors shape the innovation trajectories
which emerge in the user industries. The central
thrust of the argument is then directed towards
the nature of the innovation process in the user
industries, concentrating in particular upon the
innovations in services currently being generated
by the adoption of information technology. A
“reverse product cycle” is proposed to describe
the innovation process in these industries, running
in parallel to the normal product cycle in the
capital goods sector, but operating in the opposite
sequence of stages. 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 for-
ward as a dynamic mechanism helping to create
the long wave fluctuations in economic activity
which are symptomatic of successive Schum-
peterian “ technological revolutions”.
The theoretical model of innovation in services
which has been proposed in the paper, based upon
the idea of a “reverse product cycle”, does appear
to correspond to empirical observation of how the
innovation process has been operating in three
172 R. Barras / innovation
case study service sectors over the past twenty
years, as a result of the introduction of computer
technology. However, far more applied reseach is
needed to test the model fully across a wider range
of sectors, and such a programme of research
would have to stretch over several years to allow
for the gradual emergence of the electronically-
based “new services” which in most cases are still
no more than a product of speculation. This re-
search would need to address general questions as
to how precisely the innovation mechanism works
in service indust~es, examining the innovation
trajectories in different sectors in some detail.
There are also more specific questions to be
answered as to how the operation of the reverse
product cycle varies according to differences in
technology, in service applications and in national
economic conditions. Once the operation of the
proposed reverse product cycle is established and
fully understood, then its interaction with the
normal product cycle in capital goods industries
could be investigated empirically, to ascertain how
important is the ~s~~~b~urn between the
i~ovation life cycles in the two sectors as a
mechanism contributing to long waves of eco-
nomic growth.
Beyond these theoretical considerations, it
seems vital to pursue the line of investigation
indicated here, since the arguments which have
been advanced in the paper offer some optimistic
pointers to the possible emergence in the 1990s of
a services-led boom based upon the universal ap-
plication of information technology. A necessary
initial condition is the establishment of a digital
tele~~u~cations network which is capable both
of tr~s~tt~g the vast volumes of information
which will be generated and of opening up new
domestic and international markets among
household and business consumers. Once such an
infrastructure is installed, there is enormous
potential for the generation of new service prod-
ucts in a wide variety of fields such as financial
and business services, retail and wholesale distri-
bution, entertainment and leisure, education and
health, and public administration. The develop-
ment of such services is likely to be further as-
sisted by current software developments in “ex-
pert” or “knowledge based” systems. While the
precise form of these new network-based services
is difficult as yet to predict, the indications are
that they could generate a major wave of capital
in Services
saving, employment-generating output growth.
Furthermore, they could be produced by high
skill, relatively labour intensive and more de-
centralised organisations, using the IT infrastruc-
ture as their main means of production and so
perhaps generating more modest capital require-
ments, particularly for expensive buildings, than
those of today’s major service providers. Of course,
such predictions beg a whole series of questions
about the distributional impacts of a new growth
cycle based on information technology, but these
lie outside the scope of this paper. A separate
paper does, however, consider some of the broader
implications of a new services-led boom, which is
likened to a “Services Revolution” comparable in
scope and importance to the nineteenth century
Industrial Revolution in manufacturing, and draws
out some pointers for government policies which
can encourage this boom, with a view to promo-
ting the much sought-after recovery towards full
employment in the advanced industrialised econo-
mies [4].
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