Service Innovation , Embeddedness and Business Performance : UK Regional Evidence

Working Papers are produced in order to bring the results of research in progress to a wider audience and to facilitate discussion. They will normally be published in a revised form subsequently and the agreement of the authors should be obtained before referring to its contents in other published works. Abstract In this paper we explore the factors which determine the profile of innovation by service firms, and in particular the contribution of intra-and extra-regional connectivity. Subsequently we examine how service firms' innovation activity relates to productivity and export behaviour. Our empirical analysis is based on matched data from the 2005 UK Innovation Survey – the UK component of the Fourth Community Innovation Survey – and the Annual Business Inquiry for Northern Ireland. In terms of the determinants of service innovation we find evidence of negative intra-regional embeddedness effects but evidence of the positive contribution to innovation of extra-regional connectivity, particularly to customers. This is consistent with the 'neoclassical' view of embeddedness. R&D, firm size, newness and innovation-related training and investment also increase innovation outputs. Relationships between innovation, exporting and productivity prove complex but suggest that innovation itself is not sufficient to generate productivity improvements. Only when innovation is combined with increased export activity are productivity gains evident. This suggests that regional innovation policy should be oriented towards helping firms to innovation only where it helps firms to enter export markets or to expand their existing export market presence.