Robert Huggins Centre for International Competitiveness Cardiff School of Management,

1. The Growth of Knowledge-Intensive Business Services: Innovation, Markets and Networks Robert Huggins Centre for International Competitiveness Cardiff School of Management, University of Wales Institute, Cardiff Presentation at the RSA Research Network Seminar on ‘Knowledge Intensive Business Services (KIBS) and Regional Innovation Policy in a Globalised Environment’, NESTA, London, 28th March, 2011.

2. Background • The increasing focus of leading and high growth firms on their core competences has fuelled growth in the outsourcing of the types of services provided by KIBS. • In Europe the growth of KIBS has outstripped the average for all sectors with much of this growth a result of development in computer and related activities. • KIBS firms rely heavily on professional knowledge to supply intermediate products and services that are knowledge based, fusing general codified (recorded) information with experience and tacit knowledge. • Although KIBS firms are highly diverse, there are a number of underlying commonalities. • KIBS firms are professional entities with a focus on the creation, accumulation or dissemination of knowledge (Miles et al., 1995). This

3. Objectives • The key objective of this paper is to further understand the evolution and growth of KIBS and the nature of the networks and markets for knowledge that KIBS firms operate within. • This study draws on a regional case study approach utilising qualitative data gathered from interviews with KIBS firm in London and Helsinki. • The choice of firms in these two regions facilitates an understanding of KIBS development in both a mature (London) and emerging (Helsinki) market environment for knowledge-intensive business services. • In both regions, KIBs are considered to be key strategic sectors for securing future regional growth; yet they also provide coverage across the different development trajectories of KIBS at the regional level. • The aim is not to undertake a direct regional comparison but to gain a more generalised perspective on KIBS development across differing regional contexts.

4. Research Questions • The main research questions the paper addresses are: • (1) how is the KIBS sector evolving in light of its recent growth pattern – in particular, the extent to which global competitiveness challenges are directly increasing market size through increased patterns of outsourcing, but also through complementary and heightened levels of innovation in the sector? • (2) how are the markets for KIBS developing in terms of the internationalisation of services – in particular, the extent to which internationalisation is occurring through opportunity and/or necessity? • (3) the role networks and systems of innovation are playing within the developmental pattern of KIBS – in particular, the extent to which these networks and systems are retaining a requirement for spatial proximity? • These questions are aimed at further our understanding of the growth of KIBs principally in relation to discourses relating to apparent changes in the spatial dimensions of the markets and networks through which knowledge flows.

5. Findings • The paper suggests that changing competitiveness conditions are leading to an increased emphasis on the capacity of firms to innovate and take advantage of the core competences and knowledge, resulting in a growing trend by firms to outsource KIBS. • This emphasis is propelling the growth of KIBS firms and the forms of traded and untraded knowledge exchange with which they are engaged. • At a spatial level, these developments are apparent through both localised effects, in the form of the regional concentration of KIBS, and globalised effects, in the form of the internationalisation of markets. • The paper uncovers a range of associated and regionally-specific drivers, as we as regional challenges such as skill shortages, ‘talent battles’, and more recently the potential fragility of the sector in weathering economic shocks.

6. What are Knowledge Intensive Business Services? • ‘Organisations who rely heavily on professional knowledge … to supply intermediate products and services that are knowledge based’ (den Hertog, 2000)

7. KIBS NACE Classifications

8. The Evolution of KIBS (1) • The KIBS sector consists of firms that have emerged precisely to help other organisations deal with problems for which external sources of knowledge are required (Miles, 2005). • Some studies suggest that the increasing role of KIBS can only partly be explained by outsourcing (Strambach 1997, Böhn and Thomi, 2003). • Although many services deliver a sometimes substantial contribution to innovation processes, they are not merely passive recipients of others’ innovations (den Hertog, 2000).

9. The Evolution of KIBS (2) • The emphasis on technological innovation has been somewhat moderated by the recognition of the importance of non-technological elements of, and approaches to, service innovation (den Hertog, 2000). • KIBS are considered as the outcome of the institutional formation of a market for knowledge based upon a process of increasing appropriability of localised knowledge (Antonelli, 1999). • Internationalisation and globalisation are often mentioned as a closely related pair of factors driving clients to seek inputs from KIBS (clients need the support of KIBS to operate in more diverse environments) (Miles, 2005).

10. EU Regions with Most Dense KIBS Employment

12. Legal Services in London • The City of London, which is the centre of the UK’s legal market, is a small area is often referred to as ‘the City’ or as ‘the Square Mile’, as its surface area represents approximately one square mile (2.6 square kilometres). • The City of London is a global centre of financial activity characterised by a high concentration of banks and financial services providers, legal services, insurance companies and professional services companies. • Law firms are the largest single employer within the City of London, with approximately 39,000 employees (with a further 29,000 employees based in other parts of central London). • Across the London region as a whole there are a total of approximately 90,000 employees and more than 11,000 firms, accounting for almost one-third of the total number of employees and firms in the UK’s legal sectors.

13. KIBS in Helsinki • KIBS are generally less important in Finland than they are across Europe as a whole. In Finland, KIBS account for 7.9% of total employment and 6.4% of total value added, compared with an EU-27 average in of 9.8% and 8.6%, respectively. • The KIBS sector in the Helsinki region is dominant in terms of the national sector, accounting for 65% of turnover, 56% of employment, and 46% of firms (all of which are significantly higher than the all sector share), with the market for KIBS tending to be heavily regionalised with much of the demand emanating from the capital region. • Total KIBS employment in the region is approximately 80,000, accounting for 15% of all regional employment. Professional services account for approximately two-thirds of KIBS employment and ICT and R&D activities the remaining third, although much of the growth of the KIBS sector has occurred within the ICT-related sub-sector. • In general, KIBS firms in the region are small and less competitive than their foreign counterparts.

14. Evolution and Change in Helsinki • The utilisation of KIBS by SMEs has been stimulated through government intervention. In particular, TEKES, the Finnish Funding Agency for Technology and Innovation. • TEKES has played a key role in developing and supporting new KIBS firms in the professional services sector, which the government considers are underdeveloped in comparison with ICT-related KIBS. • The public policy rationale underlying these strategies to nurture firms capable of providing high-quality and sophisticated services to a swathe of SMEs that are currently reluctant to engage with KIBS. • The majority of KIBS users in Helsinki tend to be larger firms – especially Nokia and its affiliates, with the exception of traditional KIBS activities such as accounting, financial and legal services.

15. Evolution and Change in London • In London’s legal services sector the middle market has been squeezed as the larger firms continue to grow and take advantage of economies of scale. Smaller firms are created to take advantage of ‘niche and boutique’ new market opportunities. • The largest firms in the sector are clearly global concerns, most of which are either of domestic or US origin. • Such has been the vast development and economic expansion of the Middle East some firms have recently opened new offices in Dubai and Qatar in order to seek to exploit emerging opportunities. • Firms have adopted a more cautious approached to Eastern Europe, where a number of international law firms opening offices in the region subsequently retrenched as a result of the unforeseen high cost of operations. • As law firms have sought to operate at the global level, there has been a degree consolidation within London through merger and acquisition.

16. Market Liberalisation • Convergence of international legislation and increasing liberalisation, such as the global movement towards a homogenised international financial reporting standard via the International Accounting Standards Board, is considered a double-edged sword for many KIBS. • In London, they are considered to generate new opportunities but also increase market competition. • As many of the KIBS firms in Helsinki are relatively small in size, international expansion opportunities for many firms is not considered feasible, with a number of firms expressing a fear that incoming international KIBS will force domestic concerns out of the market.

17. New Technology • New technology is also a major driver of change in the KIBS sector. • In Helsinki, the digitisation and commoditisation of KIBS has been a lever of new forms of collaboration such as between accounting and software service firms. • In London larger legal firms are investing in sophisticated customer relationship management (CRM) systems and business management systems. • Despite digital delivery, interviewees stressed that the creative processes underlying innovation within knowledge-intensive activities cannot be automated.

18. Human Capital • A number of firms noted difficulties in recruiting and retaining skilled workers with both specialist and generic business skills due to the high level of competitiveness within the regional labour market. • KIBS are using more flexible staffing models culminating in a leaner workforce, with the recruitment of fewer MBA graduates and a preference instead for graduates with more ‘real world’. • In London, firms have often put in place an open recruitment process allowing talent to emerge from around the globe.

19. Clustering, Networks, and Innovation Systems in Helsinki • As KIBS develop they are increasingly likely to form part of the knowledge infrastructure of regional, national and international innovation systems, complementing the role traditionally played by university and government research institutions. • The existence and utilisation of knowledge networks within Helsinki are an important element of the functioning of the regional KIBS sector, with a wide variety of formal and informal networks. • Most of Finland’s largest firms are headquartered within the region, and it is therefore crucial for many KIBS that they have communication with these firms. • Many of the networks involving KIBS in Helsinki are built informally across common locations. • For example, the Innopolis incubator in the Espoo area, near to Nokia’s headquarters, houses a range of technology and KIBS-based firms that have developed informal links that have resulted in new business development as well as other positive spillovers.

20. Clustering, Networks, and Innovation Systems in Helsinki (2) • These networks form part of a regional innovation system and a ‘high-tech’ cluster that has rapidly gained a world-class reputation. • This reputation has largely been formed as a result of the more ‘traditional’ technology sector, especially activities related to mobile telecommunications and Nokia, with KIBS benefiting from the growth and reputation of these activities. • According to regional policymakers, the future growth of KIBS will be reliant on them becoming evermore integrated into the regional innovation system through greater cross-disciplinary collaboration and cooperation.

21. Clustering, Networks, and Innovation Systems in London • In London, relationship building and personal contact with clients plays a role of crucial importance in the legal services sector. • Information asymmetry makes it difficult for clients to assess and value the work of their law firm, and a high degree of relationship building, physical proximity and reputation helps to successfully tackle these issues. • Access to knowledge is gained through close proximity to suppliers, client companies and competitors. • Physical proximity is considered to promote innovation through knowledge exchange at a formal and informal level. • Geographic proximity provides the grounds for this innovation and although technology may render remote communication viable, the majority of legal firms do not foresee that this will lead to any decline in face-to-face contact.

22. Clustering, Networks, and Innovation Systems in London (2) • As with Helsinki, the cluster has a strong global reputation, with the City of London being one of the most well-known financial centres in the world, with representation by major international banks, law firms and insurance companies. • The City of London provides law firms within the vicinity with a higher reputation than if they were located elsewhere, i.e. a City location turns a law firm into a City law firm. • In recent years, the spatial dimensions of the legal and financial services sector in London has undergone transformation with the redevelopment of the London’s Docklands and Canary Wharf. • Whilst the financial services sector has led the way, the reliance of London’s legal firms on this sector as key clients has meant a number of firms have migrated in the same direction

24. Concluding Remarks (1) • KIBS are taking a paramount role in shaping an increasingly dynamic global economy through the networks and markets they are forming • Globalisation is having a large impact on KIBS in terms of markets as well production. • For some KIBS, globalisation has enabled them to offshore production, while for others it represents new markets and opportunities for expansion and acquisition. • Technological progress has also impacted significantly on the development of KIBS, with improvements in ICT facilitating new modes of knowledge exchange and again heightening the propensity to penetrate international markets. • However, much like the knowledge-based manufacturing sector of the recent past, the limits of globalisation among KIBS are apparent; although these limits are being stretched by new spaces of knowledge flow.

25. Concluding Remarks (2) • New patterns of knowledge sourcing serve to illustrate the notion of an economic geography that is as spiky as it is flat. • This spikiness is typified by the existence of key and leading concentrations of knowledge-based economic activity around the world. • Concentrations of knowledge remain limited to a number of key regional locations, which are the primary spatial architecture underlying systems of innovation. • These regions, however, are increasingly connected through the knowledge networks resulting from the internationalisation of markets and the broadened scope of knowledge sourcing activities.