An Analysis of Business Model Innovation Competitiveness and its Implications for the Service Industry

Abstract

Recently, the industrial environment has changed as 4th industrial revolution technologies that influence production factors, such as artificial intelligence, big data, the Internet of Things (IoT) and 3D printers, have entered maturity. These changes have made creating added value by quickly responding to the needs of consumers more important than reducing costs through mass production. This means that developing and implementing new services that accompany technological competitiveness is crucial, and so the service industry too must invest in R&D, as the manufacturing sector has long done, to create new service business models and develop the technologies to implement them.

However, R&D investment in the Korean service industry is insufficient (Table 1). Even as the sector accounts for 73.4 percent of employment and 85.6 percent of businesses, its share of R&D expenditure (particularly compared to that of the manufacturing industry) is very low: R&D investments in the service sector represented just 8 percent of all R&D spending as of 2015, a serious imbalance in R&D investment.

Low R&D investment in the service sector has led to low labor productivity in Korea. The country ranked 27th out of 28 countries surveyed in 2015, and the productivity ratio of its manufacturing industry to its service industry was second highest among the countries surveyed. In addition, the value added portion of the service industry relative to gross domestic value added was 59.3 percent in 2013, ranking 33rd among the 34 OECD nations surveyed. Moreover that figure reflected a drop from 60.2 percent in 2006.

This paper explores policy avenues for improving labor productivity in Korea's service sector, focusing on incentives for service R&D.

Keywords: research and development, R&D, service R&D, service sector, productivity, labor productivity, service productivity, service innovation, R&D and innovation, productivity growth, R&D policy, innovation policy, productivity policy, service industry policy, Korea

JEL Classification: L80, O32, O38