Similarities and Differences Between Product and Service

Innovation
----Base on Empirical Analysis of Jiangsu Province’s Panel Data

Yancai Zhang
School of Economics and Management
Huaiyin normal university
Jiangsu huaian, China
zyancai@163.com
Abstract: This paper aims to provide an initial step towards a synthesis of service and product
research. Using a baseline model of innovation, applicable to innovation in general, we hypothesize
differential context effects between service and product in order to better understand their differences
and similarities. The results provide initial support for the integrating perspective.
Key words: Service Innovation; Product Innovation; Similarities and Differences

1. INTRODUCTION
In a macro aspect, the service industry has already become the major driver of world economic
growth. The proportion of service sector in employment and GDP has reached 2/3 in developed
countries. Some large and medium cities in China have developed a service-oriented industrial
economy. In Beijing, Shanghai, and Guangzhou, the service industry accounts for the proportion of
GDP at or above 50%. All this shows that the service industry or service activities have already become
the main factors determining economic growth rate and quality. At the time of industrial economy, we
focus on the innovation studies in manufacturing industry, knowing that manufacturing innovation is an
important way to improve the manufacturing performance. Then, in an era of service-oriented
economy, the service innovation is also bound to become a major factor determining the economic
performance. At the background of economic globalization and the time of service economy, how to
harness the innovation means to improve the core competitiveness of service industry and promote
social economic development is an important issue to be solved [1]. In China, the service industry
develops fast. However, the service industry mostly follows the traditional marketing mode and
marketing path to explore the market, which makes the development difficult. Among all these studies
of service innovation, many service innovation models merely focus on the amendments of product
innovation model. However, product innovation and service innovation is essentially different.
Therefore, domestic scholars should make a thorough and systematic research on specific service
innovation model, analyzing the similarities and differences between service innovation and
manufacturing innovation, so as to contribute to the design of service innovation mechanism
considering the unique characteristics of service industry.
The core of service innovation focuses on the new service innovation. And the core of
manufacturing innovation focuses on the product innovation. Therefore, to clarify the connections and
differences between new service innovation and new product innovation will help us to understand the
similarities and differences between service innovation and manufacturing innovation.
2. PREVIOUS RESEARCH ON NSD AND NPD
There has been a lively debate in the literature about the specific characteristics of services and
products (Lovelock & Gummesson, 2004; Vargo & Lusch, 2004a; Zeithaml, Parasuraman & Berry,
1985) and implications for the marketing discipline. Other authors (e.g. Griffin, 1997; Hughes & Wood,
2000; Johne & Storey, 1998; Sirilli & Evangelista, 1998) have studied how service and product
characteristics affect new service and new product development (see Drejer, 2004 for an overview).
Two views exist in the literature on NPD versus NSD. Proponents of an “assimilation approach” have
argued that the concepts developed in a product or manufacturing context are easily applied in a service
context because of their similarity.
Scholars taking a “demarcation approach” stress the unique characteristics of services and
subsequently the need for concepts and models specifically designed for services (Coombs & Miles,
2000). We will briefly synthesize and summarize the key findings building on both perspectives and
their research.
A review of the literature shows that many similarities between NPD and NSD exist (Griffin,
1997; Hughes & Wood, 2000; Sirilli & Evangelista, 1998). In general, successful NSD and NPD firms
share a strong commitment to innovation, have well structured innovation efforts, and allocate
substantial resources to their innovation efforts (e.g. Brown & Eisenhardt, 1995; Ernst, 2002; Griffin,
1997; Tidd & Bodley, 2002). First and foremost these firms display high top management involvement.
As a result their strategic objectives focus beyond short-term success and its employees clearly
understand the types of new products and services the organization is aiming for (Johne, 1993).
Second, they tend to align carefully their cultures and systems to their innovation processes, so as to
lend maximum support to the innovation efforts (De Brentani, 2001; Johne & Storey, 1998). Third,
their NPD and NSD programs tend to be more formalized, better structured, and proactive compared to
those of their less successful counterparts (Easingwood, 1986; Johne, 1993). Fourth, high quality
development staff and other resources complement these successful innovators' new product and
service organizations (Drew, 1995; Edgett, 1994; Johne, 1993; Johne & Storey, 1998).
However, the literature also shows that there are differences between innovation processes of new
product and new service firms (Djellal & Gallouj, 2001; Gallouj & Weinstein, 1997; Menor, Tatikonda
& Sampson, 2002). These differences pertain mainly to the specific characteristics of services i.e., their
intangibility, co-production with customers, simultaneity, heterogeneity and perishable (Fitzsimmons &
Fitzsimmons, 2000) that affect the development process of services and make them to a certain degree
unique. First, in service innovation, “it is not the service itself that is produced but the pre-requisites for
the service”(Edvardsson & Olsson, 1996, p. 1476). Due to services' real-time production new services
go hand in hand with modifications of the service delivery process and changes in frontline employees'
skills. The interaction between new service development and service delivery is therefore highly, and
stronger than the relationship between NPD/R&D and production in a product-manufacturing context
(Tatikonda & Zeithaml, 2001). Second, because “NSD requires integrating the needs of new service
operations and processes with those of existing business activities” (Johne & Storey, 1998, p. 207) the
fit between the new service and existing systems is also more important than in a product-
manufacturing context. The front- and back-office functions must operate in an integrated way trying to
overcome differences in objectives and time horizon between them. While a front-office is typically
designed to satisfy customer needs, a back-office's emphasis is on maximizing operational efficiency
and output (Menor et al., 2002). This tension extends to new service development and suggests that the
influence of organizational inertia is more important in the case of new service than product innovation.
It explains why “envisioning, energizing and enabling” capabilities, sound
communication/coordination, and reducing intra-organizational conflicts and struggle of power have
been identified as fundamental and very critical, particularly for NSD (Edvardsson, Haglund &
Mattsson, 1995; Johne, 1993; Johne & Storey, 1998; Lievens & Moenaert, 2000; Menor et al., 2002).A
final important difference between service and manufacturing firms involves R&D expenditures. Study
results suggest that R&D investments are more strongly associated with successful manufacturing than
service innovation (Barras, 1986; Brouwer & Kleinknecht, 1996).
Contrary to manufacturing firms, most service firms are not characterized by major R&D
departments (Djellal & Gallouj, 2001). Service innovation involves the development of new procedures
and concepts rather than new core technology (Preissl, 2000). Together with the organization of NSD
around customers' market pull, this suggests a smaller role and influence of the R&D department in
service development.
In summary, the literature shows that NPD and NSD have much in common but also that internal
organizational factors seem to be more important in NSD than NPD context. The R&D department and
R&D expenditures, on the other hand, seem to be more important in a new product than service
context. Before developing hypotheses we will introduce a baseline model of innovation.
3. INFLUENTIAL FACTORS OF INNOVATION OF SERVICE INDUSTRY
Innovation of service means that, in order to pursue maximization of profits, manufacturers realize
commercialized application of new thought, new method and mew technical means for the first time
with participation of consumers and through a discrete and repetitive innovation process, and spread the
innovation into other manufacturers with time going on. Innovation of service industry is a complicated
process, whose success is restrained by various factors. Cheng Shungen pointed out, the fundamental
factors which influence innovation of financial industry and service industry include subject and
mechanism of financial innovation, market environment of financial innovation, financial regulatory
system, means and idea,and so on[1]. In analysis of impetus for innovation of communications industry,
Zhang Jing et al pointed out that innovation of service industry in communications industry is the
outcome of combined action of internal driving force and external driving force. Meanwhile,
communications industry and activities of external participants of its innovation are influenced by
institutional, social, technical and management path [2]
. Lin Lei and Wu Guisheng classified factors of
innovation of service industry into the two categories of internal and external factor . Innovation of
[3]

service industry is mainly promoted by internal factors, including strategy formulation within an
enterprise, action of managerial personnel and employees and formal research and development
sections. What are mostly important in external factors of innovation of service industry are specified
path in service industry, technical path and institutional path, etc. Lv Fei and Xu Qingrui classified
resistance encountered in innovation of service industry into internal resistance and external resistance
according to sources of resistance, the former is usually considered to be more difficult to be overcome
than the latter [4]
. In most cases, resistance factors do not function alone, but function altogether with
several other factors. According to Wang, success of a service industry is determined by various factors
and success of a service company is mainly affected by internal conditions and external factors. Internal
conditions include personnel, organizational structure and network which affect the process of
innovation of service industry and corporate culture, leadership competence, strategy and corporate
feature which affect atmosphere of innovation. External factors include market profile, knowledge
structure and government policy which affect result of innovation . According to Li et al, driving
[5]

factors of innovation of service industry can be primarily classified into three categories: external
environment, external agent and internal motive . Peng et al conclude that decisive factors in
[6]

innovation activities of knowledge intensive service industry are external link, internal system and
human resource [7].
From the above research results, it can be seen that influential factors of innovation of service
industry can be classified into internal and external categories. Some domestic academics apply linear
regression method to demonstrate influences of external influential factors on innovation of service
industry and detect that external factors in different industries exert different influences upon them.
This article is going to use structural equation modeling technology to demonstrate influences of
external influential factors on innovation of service industry and attempt to find out new evidence of
dynamic mechanism in innovation of service industry.
4. THEORETICAL ASSUMPTIONS AND ANALYTICAL FRAMEWORK
Based on some empirical studies conducted by domestic and foreign scholars, we make the
following assumptions for the influencing factors of regional service innovation.
(1) R&D expenditure. The service industry not only emphasizes on the wide application of
modern technologies, but also focuses on innovations. Since the 80s of the 20th century, in most
developed countries the R&D activities and investment grows rapidly, accounting for an increasing
share. In this paper, we want to testify a positive correlation between service R&D investment and
service innovation capability.
(2) Entrepreneurial incentive mechanism and entrepreneurship. Entrepreneurship is one of key
drivers of service innovation. The entry and exit of enterprise is a re-distribution process of resources
from low-productivity unit to high-productivity unit. Therefore, it plays an important rule in
productivity growth. This creative destruction process promotes the use of innovations and new
technologies. In general, the reconstruction of service enterprise is more frequent than that of
manufacturing enterprise. Therefore, we hope to testify the positive correlation between service
organization innovation and service innovation capability.
(3) Human resources. Employees with abilities of innovation and spirits of innovation are the core
resources of enterprises. Service enterprises emphasize more on staff qualification and professional
level. Human resources are vital for services and service innovation. Therefore, in this paper, we expect
for a positive correlation between investments in human resources and innovation capability.
(4) Degree of market competition and market openness. Studies show that irregular changes
enhance competition. New services are developed and provided to customers. However, the rigidity of
industrial structure, the lack of competition, and the plethora of production capability lead to the lack of
drivers for service innovation, causing barriers for service innovation. International experiences also
show that the important reason for the strong growth of service industry in OECD (Organization for
Economic Cooperation and Development) countries is the increased competition and trans-national
trade over the past few decades. In addition, competition has also contributed to the entry and growth
of innovative enterprises that meet the particular customer needs. Therefore, in this paper we expect a
positive correlation between the degree of competition and openness and the service innovation
capability.
 (5) Intellectual property right. The service intellectual property right protection mechanism
include the standard intellectual property right protection mechanism, such as patent, copyright, and
trademark, and also other intellectual property protection activities. Although the effects of intellectual
property right on service innovation are limited, they tend to be more important. Therefore, in this
paper we expect a positive correlation between service intellectual property right and service
innovation capability.
(6) The level of information and ICT investment. ICT (Information and Communication
Technology) is an important sector in service industry. It is also the important resource for
technological innovation in service industry. The improvement of information level and the increasing
investment in ICT drive the service innovation to a great degree. Therefore, in this paper we expect a
positive correlation between the level of information and ICT investment in service industry and the
service innovation capability.
(7) System innovation. System economics agree that societal and system environment has an
important decisive effect on economic development. System constraint is one of important reasons for
the slow development of China’s service industry. In China, the marketization is not well- developed
and the competition is inadequate. Especially in the service industry, conditions are more serious. In
contrast to the manufacturing industry, the service industry relies more on system. A study shows that
there is a positive correlation between changes of systems and growth of service economy.
International experiences also show that in the expansion of service industry, the government
regulatory policies play an important role, which directly determines the market access opportunities,
and also the market structure and the competition condition.
(8) Market demand. According to Berry’s gap analysis model, customer expectant services are
affected by previous experiences, public opinions in communication, and personal needs. Customer
expectant services are different and unstable, what causes the diversity and variability of customer
needs. The development of modern service industry, first of all, depends on the market demand,
especially the middle demands from industrial sectors and government sectors. International
experiences also show that the modern service industry booms on the base of highly-developed
manufacturing industry. Therefore, in this paper we expect a positive correlation between market
demands for services and service industry innovation capability.
5. DATA DESCRIPTION AND MODEL DESIGN
5.1 Data Ddescription
Based on analysis above, in this paper we take the time series from 1985 to 2008 in Jiangsu
province as the sample, constructing a regression equation model based on these time series data. This
model means to identify the influencing factors that affect the service innovation level in Jiangsu
province from the quantitative point of view. In order to make a comparison with the innovation
driving model in manufacturing industry, we build another model, reflecting the influences of the eight
driving factors above on the innovation in manufacturing. By comparing the coefficients, we can reveal
the importance of these driving factors in manufacturing innovation and service innovation, and further
display the differences between new product innovation and new service innovation.
Take the service innovation composite index (SINN) in Jiangsu province as the dependent
variables, indicating the overall innovation level of service industry. Meanwhile, select the following
indexes as independent variables: the R&D index RD, reflecting the R&D ability and level of service
industry; the entrepreneur spirits index MAN, reflecting the innovation incentive mechanism and the
entrepreneur spirits in Jiangsu province; the human resource index HUM, reflecting the conditions of
human resources in Jiangsu province; the market structure index MAR, reflecting the competition
degree and openness degree in the service industry in Jiangsu province; the intellectual property right
index IP, reflecting the development of intellectual property right in Jiangsu province; the information
index ICT, reflecting the degree of information application and the use of information technologies in
service industry in Jiangsu province; the system innovation index SYS, reflecting the system reform of
service industry in Jiangsu province, and also indicating the system environment for service industry;
the market demand index DEM, reflecting the demand of service industry in Jiangsu province. Specific
details are displayed in Table 1.
Table1 Definition of Variables
variables 名称 composite
SINN service innovation composite labor productivity of Service industry (v1) 、 Investment effect of
index Service industry (v2)、capital productivity of Service industry (v3)
MAN entrepreneur spirits index jobholders proportion in Individual and private sector (v4)
HUM human resource index Graduate rate per 10000 persons (v5) 、 Professionals rate per
10000 persons(v6)
MAR market structure index FDI percentage in Investment in fixed assets of society(v7)
IP intellectual property right Intellectual property rights and patent number (v8)
index
ICT information index Books, newspapers, magazines holding number per 10000 persons
(v9),total Telephone and postal services quantity (v10)
SYS system innovation index Private business and township business loan proportion
(v11) 、 Investment in fixed assets of companies disowned by
state(v12)、Financial expenditure proportion of GDP (v13)
DEM market demand index Consumption rate (v15)、Industrial added value (v14)
RD R&D index R&D cost(v16)

5.2 The construction of variables

In the nine variables above, except that the four variables, namely the market structure index, the
entrepreneur incentive index, the intellectual property right index, the R&D index, can be assigned
directly, other five variables consist of many sub-questions and sub-factors. Therefore, we have a
problem of constructing variables. In perspective of theories of structural equation modeling, these five
variables can be taken as latent variables. Therefore, this paper adopts the exploratory factor analysis,
which is one of ways used in structural equation modeling, taking five latent variables from the sub-
factors according to the weights, and constructing the structural variables as follow:

p
p i = �vi j pi j (1)
j =1

Here,
p i is the variable and pi j is the measured variable of the factor i. vi j is the weight of the

measured variable j in the factor i. In constructing these variables, we use the statistical software Visual
PLS to make analysis.
5.3 Model design
We establish the regression equation as follow, which is used to testify the influencing factors of
service innovation.
SINN = a + b1MAN + b 2 HUM + b3 MAR+b 4 IP+b 5 ICT+b 6SYS+b 7 DEM+b8 RD
(2)
In order to guarantee the preciseness of results, we standardize the data of variables. In order to
reduce the hetero-scedasticity, we change the model into the form as follow.
LNSINN = a + b LNMAN + b LNHUM + b LNMAR
1 2 3
+ b 4 LNIP+b5LNICT+b6LNSYS+b7 LNDEM+b8LNRD (3)

6. THE RESULT OF EMPIRICAL TEST AND THE ECONOMIC EXPLANATION

6.1 The result of model regression
Based on the generalized least square method and stepwise regression, we can get the equation (4)
as follow.
LNSINN = -3.155 + 0.439LNSYS+0.336LNIP
(4)
T-value -6.216 6.223 4.410

In the regression results of equation (4), the decision coefficient R 2 is 0.938 after an adjustment
of the equation. It means the equation is capable of explanation, and the fitting degree is satisfying. As
the significance level is at 0.01, the test value of F reaches 173.53, which means the regression
equation is sound significantly in general. The two explanatory variables are under the 0.01
significance level, and the test value of regression coefficient t is significant. The coefficients of
equation’s two dependent variables are positive, which is in accordance with the economic theories and
the assumptions in this paper. The variable inflation factor VIF is less than ten, which means no serious
multi-collinearity in this model. The statistical value of D-W in the model is 0.882, and the Richard-
Watson table explains that there is no auto-correlation in the model.
In order to compare the effects of innovation factors on service innovation and product
innovation, we replace the dependent variables in equation (4) with the data reflecting the innovation
capability of the secondary industry (here we use the data representing the manufacturing industry).
Other factors do not change. Make the SPSS16.0 to operate the generalized least square method and the
stepwise regression method, and get the equation (5) as follow.

LNSINN 2 = 0.302 + 0.623LNSYS+0.157LNMAN

(5)
T-value 1.136 11.021 2.475

In the regression results from equation (5), the decision coefficient R 2 is 0.941 after an
adjustment of the equation. It means the equation is capable of explanation, and the fitting degree is
satisfying. As the significance level is at 0.01, the test value of F reaches 111.31, which means the
regression equation is sound significantly in general. The two explanatory variables are under the 0.01
significance level, and the test value of regression coefficient t is significant. The coefficients of
equation’s two dependent variables are positive, which is in accordance with the economic theories and
the assumptions in this paper. The variable inflation factor VIF is less than ten, which means no serious
multi-collinearity in this model. The statistical value of D-W in the model is 0.813, and the Richard-
Watson table explains that there is no auto-correlation in the model.
6.2 Explanations for the results
According to results from equation (4), among the eight factors proposed by this paper in a
theoretical assumption, the system innovation and the intellectual property right have significant
impacts on the service innovation level and capability. The R&D investment, the entrepreneurship
incentive mechanism and entrepreneur spirits, the human resource, the market demand, the market
structural level do not exert significant effects on the same subject. According to results from equation
(5), the system innovation and the human resource have significant impacts on the manufacturing
innovation. The R&D investment, the entrepreneurship incentive mechanism and entrepreneur spirits,
the market demand, the market structural level do not exert significant effects on the same subject.
These results show that there are overlap points and differences between manufacturing innovation’s
influencing factors and service innovation’s, which is in accordance with the disputes over this issue all
the time. Based on the results of equation (4) and (5), we should realize that one country or region
should create a mature innovation mechanism, which is meaningful for the manufacturing innovation
and service innovation (we can get this point from the values of regression coefficients of factors in the
two equations). In addition, patent technologies have more effects on service innovation than that on
manufacturing innovation. And human resource has more significant effects on manufacturing
innovation rather than service innovation.
7. COUNTERMEASURES AND DISCUSSIONsuggestions
In order to achieve the fast and healthy development of service industry in Jiangsu province and
optimize the industrial structure, it is necessary to enhance the technological progress in service
industry, and greatly improve the contribution ratio of technological progresses in the service industry.
First of all, the technological innovation capabilities affect the service industry to a great degree
(the number of patents has significant impacts on service innovation). Therefore, it is necessary to
increase the R&D investment in service industry, accelerate the rise of modern service industry, to
enhance the knowledge-intensity and the technology-intensity of service industry, to promote the
service industry into the innovation-driven stage as soon as possible, and to improve the service
innovation capability.
Secondly, the service system reform serves as an important influencing factor in service industry.
Therefore, it is necessary to further speed up the marketization and socialization process of service
industry in Jiangsu province. By means of easing market regulation, increasing government
investments, and accelerating the process of marketization, it can liberate the energy and creativity of
service industry, and improve the competition level of the industry.

REFERENCES
[1] YUAN X. N., 2009, An Analysis on Innovation in Manufacturing and Service , FINANCE AND TRADE
RESEARCH, No. 3, pp.14-19.
[2] Avlonitis G J, Papastathopoulou P G, Gounaris S P. ,2001,An empirically-based typology of product
innovativeness for new financial services: Success and failure scenarios, Journal of Product Innovation
Management, vol. 18, No.5, pp.324−342.
[3] Menor L J, Tatikonda M V,Sampson S E. ,2002,New service development: Areas for exploitation and
exploration [J].Journal of Operations Management , vol. 20,No. 2, pp.135−157.
[4] Hughes A, Wood E., 2000, Rethinking innovation comparisons between manufacturing and services: The
experience of CBR SME surveys in the UK, Boston: Metcalfe, Innovation systems in the service economy;
Measurement and case study analysis, pp.105−124.
[5] Tatikonda M V, Zeithaml V. A., 2001, Managing the new service development process: Multi-disciplinary
literature synthesis and directions for future research, New York: New directions in supply-chain management,
pp.200−233.
[6] Lin L., Wu G. S., “Service Innovation: Research Summarization, Concept and Characters”,Science Research
Management,Feb.,2005,pp.1-6.

[7] Xu Q. R., Lv F. , 2003 ,”On Service Innovation”, Science Of Science And Management Of S.& T., March,
,pp.34-37.

[8] H. J. Wang, “Research On Factors Related to the Service Innovation Process”, Technology and Innovation
Management, March,2007,pp.18-20.

[9] J. Y. Li, Q. Feng, “Service Innovation Motive of Commercial Banks——a Survey Based Empirical
Study”, Finance Forum, June,2007,pp.19-24.

[10] H. S. Peng,X. L.Ye , “Innovation Factor Model in Knowledge Intensive Business Services”, Modern
Information, Oct,2006,pp.8-11.