A Literature Review on Skills and Innovation How Does Successful Innovation Impact on the Demand for Skills and How Do Skills Drive Innovation? A CRIC Report for The Department of Trade and Industry Bruce Tether, Andrea Mina, Davide Consoli and Dimitri Gagliardi September 2005 ESRC Centre for Research on Innovation and Competition University of Manchester, Manchester, M13 9QH, UK A Literature Review on Skills and Innovation A CRIC Report for the DTI Table of Contents Executive Summary Chapter Introduction 11 Chapter Context: The UK Economy’s Skills & Innovation Performance Introduction Productivity and Value Added Structural Change Growing Inactivity amongst Working Age Men Skills and Educational Attainment The UK’s Innovation Performance Conclusions 13 13 13 16 18 19 23 25 Chapter Innovation and Its Implications for the Demand for Skills Introduction Innovation and Employment Innovation and Skill Biases How Technical Change Affects the Demand for Skills The Paradigm of the Automobile Industry The Rise of Information Technologies How Organisational Innovation Affects the Demand for Skills Soft Skills and ‘Emotional Labour’ Complementary Explanations of Skill Bias Innovation, Skills and Wage Inequality Conclusions 26 26 26 28 30 30 33 35 38 39 41 43 Chapter The Instituted Supply of Skills and Implications for Innovation Introduction Human Capital and Its Implications for Innovation Education Systems and Skill Formation – Implications for Innovation Skill Formation for Work – Internal vs Occupational Labour Markets Intermediate Vocational Skill in Britain and Germany – the NIESR Studies The Proliferation of Qualifications and Skill Mismatching Is the UK Trapped in a ‘Low Skills Equilibrium’? Skills, Innovation, Value Added and Product Strategies Services, Soft Skills and ‘Emotional Labour’ A Note on Consumption Skills Conclusions and Moving to a High Skills Route to Development 45 45 49 52 55 59 61 63 64 68 69 70 Chapter Innovation Cycles and Strategies, and the Role of Skills Introduction Changing Understandings of Innovation – from Linear to Systemic Models Innovation over the ‘Stages’ of the Industrial Life Cycle Technology Trajectories and Pavitt’s Taxonomy Services and Organisational Innovation Radical Creativity versus Incremental Accumulation Innovation and Dynamic Capabilities Distributed Innovation and Imbalances in the UK’s ‘System of Innovation’ Conclusions 73 73 74 78 82 86 87 91 94 95 A Literature Review on Skills and Innovation A CRIC Report for the DTI Chapter Conclusions Answering the DTI’s Questions Question - Innovation and the Demand for Skills Question – The Supply of Skills and their Implications for Innovation Question – The Interaction between Skills and Innovation Policy Considerations The Strengths and Weaknesses of the Evidence Base Suggested Future Research Requirements 96 96 96 99 102 104 108 111 References 115 Figures Figure 2.1 Figure 2.2 Figure 2.3 Figure 3.1 Figure 3.2 Figure 3.3 Figure 4.1 Figure 4.2 Figure 5.1 Figure 5.2 Figure 5.3 Figure 5.4 Figure 5.5 Figure 5.6 Figure 5.7 Figure 5.8 Tables Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 2.5 Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 5.1 Table 5.2 Table 6.1 Tertiary Education – International Comparisons of Attainment of Levels by 2002 Expenditure on Education as a Share of GDP, 2001 – International Comparisons Gross Expenditure on Research and Development as a Proportion of GDP, 2001 International Comparisons Share of New Products in Sales and Employment Change in Europe Skill-Biased Technical Change – An Analytical Framework ‘Good Jobs and Bad Jobs’ – Change in UK Employment by Job Quality International Comparisons on Illiteracy & Innumeracy amongst Young Adult Categories of National Systems of Vocational Training The Third Generation ‘Coupling Model of Innovation The Fourth Generation ‘Parallel Process’ Model of Innovation The Fifth Generation ‘Systemic Integration’ Model of Innovation A Simple Life Cycle Model of Industrial Evolution Innovation over the Industrial Life Cycle Pavitt’s and Miozzo and Soete’s Taxonomies Sources of Advanced Technology and Strengths at Innovation for Manufacturing and Service Innovators A Penrosian Model of Resources and the Growth of Knowledge in the Firm Employment in the UK by Industry, Spring 1984 and Spring 2004 Employment in the UK by Occupation, 1971 to Spring 2004 Employment, Unemployment and Inactivity in the UK, 1993 and 2003 Pupils in England Reaching or Exceeding Expected ‘Key Stage ‘3’ Standards in English Maths and Science Patenting in the United States, 1996 – 2000 – International Comparisons Factors Hampering Innovation in Europe between 1998 and 2000 ‘Crucial’ Impediments to Growth amongst UK SMEs Impediments to Innovation – European Innobarometer Survey of 2001 Educational and Skills Inadequacies for Innovation – European Innobarometer, 2001 The Employment of Graduates and the Conduct of Research and Development The Employment of Graduates and Engaging in Innovation Activities Characteristics of Innovation, Technology and Skills over the Industry Life Cycle Major Technological Trajectories, their Sources of Technology, Innovation Strategies And Key Skills Characteristics of Innovation and Skills over the Industry Life Cycle Page 22 22 24 28 29 43 53 57 75 75 77 78 78 84 87 92 Page 16 17 19 21 24 46 46 47 47 64 65 81 83 97 A Literature Review on Skills and Innovation A CRIC Report for the DTI Case Study Boxes Case Study Japanese Production Practices in the Car Industry – Implications for Skills Case Study Innovation and Co-operation in UK Transport Services Case Study Poaching of Key Staff and Innovation in the West Midlands Case Study Educational Reforms for Increased Adaptability: The Case of Singapore Case Study London’s Design Consultancy Cluster Page 31 37 50 54 89 Disclaimer The views expressed in this report are those of the authors and not necessarily reflect the views of the Department of Trade and Industry, or any other individual or body associated with this research Acknowledgements The authors would like to thank the members of the DTI’s project steering committee - David Campbell, Ben Chesson, Maria Cody, Samantha Hanna and especially Ben Marriott, the project manager, for their guidance, comments and suggestions, patience and understanding We would also like to thank Damian Grimshaw, Ian Jones, Geoff Mason and Mario Pianta for helpful comments and suggestions A Literature Review on Skills and Innovation A CRIC Report for the DTI Executive Summary The Government is concerned with productivity, which is essentially a measure of ability to create wealth The more productive people are, the more wealth they create for every hour they work It has been found that the UK has a productivity gap with some of its main competitors including France, Germany and the US - enabling those countries to create more wealth per hour worked Attention has therefore been focused on what the UK can to speed up its productivity growth and create more wealth from the effort its workers expend The Government has identified five key drivers of productivity, which are innovation, skills, investment, enterprise and competition The direct links between each of these drivers and productivity have been explored in detail, but thus far relatively little attention has been focused on how some of these drivers interrelate with each other to drive productivity This research is intended to start to explore the links and relationships between two of the productivity drivers: skills and innovation It does this through pulling together theoretical and empirical literature from across various academic disciplines, including labour economics, management studies and innovation studies A skill can be defined as an ability or proficiency at a task that is normally acquired through education, training and/or experience It can at times be synonymous with the related concepts of competence, expertise, knowledge and human capital There are many different kinds of skills In this report, distinctions will be made between different levels of skill, and different types of skill The types considered include pure science, engineering, problem-solving, language skills, team working and communication skills Innovation is defined as the successful exploitation of new ideas That is the development and commercial exploitation of a new idea for a product or process that contributes to wealth creation and profitability The large-scale benefits of innovation come from the eventual wider diffusion of these new products and processes across the economy Innovation has many forms It can be technological in nature (relating to new machinery or other forms of equipment), organisational (relating to changing management practices or general structures) or even new individual ways of working unrelated to colleagues or new equipment How innovation drives the demand for skills This report finds that the impact of innovation on demand for skills is very dependent on the type of innovation and the context Most of the literature examined focuses on technological innovation In the case of process innovation,1 the literature predicts that innovation reduces jobs, because it tends to be of the kind where capital (new machinery/equipment) replaces labour, particularly unskilled labour However, this is not always the case, as a process innovation could be of the kind where more labour is used relative to capital, or where the job losses are offset by the creation of jobs elsewhere in the company or the economy (such as in the upstream production of new machinery) The empirical literature suggests, however, that process innovation, in general, implies job losses The theoretical and empirical literature suggests that product innovation, on the other hand, is positive to employment levels as it will often result in an increase in demand for those products The development and commercial exploitation of a new way of producing the organisation’s product(s) A Literature Review on Skills and Innovation A CRIC Report for the DTI The report goes on to discuss what types of employment are created or destroyed by innovation, and hence the changing demand for different types of skills The labour economics empirical literature is in broad agreement that technological innovation in advanced western economies has been skill-biased That is it has increased the demand for higher skills and reduced the demand for lower skills This skill-biased technical change has particularly characterised the US in recent years, and to a lesser extent the UK Labour economists tend to agree that skill-biased technical change has contributed to altering the distribution of earnings, exacerbating wage inequalities and increasing sector-specific unemployment Organisational innovation has been less studied but what literature there is suggests that organisational product innovation is positive to employment and that organisational process innovation is negative to employment A recent study of French manufacturing firms, however, found that both product and process organisational innovation are negatively related to employment, except when they are both introduced in combination and aimed at increasing market size, in which case they are positively related to employment In assessing the effect of innovation on the demand for skills, it is worth remembering that innovation is only one of a series of factors affecting the demand for skills Other factors include labour market institutions, such as the minimum wage and trade unions, domestic changes in the conditions of competition, the composition of public spending and changes in workers and consumers’ preferences The complex interactions between these factors make estimations of their interdependent effects extremely difficult International trade is another important factor that drives the demand for skills It is often framed as an alternative explanation to innovation in changing the demand for skills, but, as researchers have realised increasingly, it can often be complementary (reinforcing) to the effects of innovation How the supply of skills drives innovation performance There is no one mix of skills that is conducive to good innovation performance in all circumstances Instead, the required skills vary across the type of innovation concerned, the industry and the strategic model the firm pursues In the older models of (technological) innovation, such as the ‘science push’ model of Vannevar Bush, the skills to ‘produce’ innovation are the degree and higher-level science and engineering skills of a small head or elite in the organisational hierarchy More recent models of innovation, such as the ‘systemic integration’ model, allow for more democratic, distributed sources of innovation, involving the skills of the whole workforce In particular, this model says all workers should have basic ‘platform’ skills that allow them to be adaptable to changing circumstances and more open to new ideas to be innovative This contrasts with the past, when many workers developed only job-specific, narrow skillsets This model emphasises the importance of interaction and cooperation between all the actors in the innovation process, including the innovating firms’ suppliers, commercial partners and customers These interactions require communicating and negotiating skills The report identifies management and leadership skills as being of particular importance for all types of innovation Without leadership, or ‘strategic intent’, firms not innovate in any fundamental ways, and have to rely on small incremental improvements to their ways of working from learning-by-doing In a competitive environment, managers have to choose between different innovation and growth strategies, even if they are just to keep ‘treading water’ Putting the chosen strategy into practice requires management and leadership skills at all levels of the organisation There is little empirical evidence about how management skills (which may be A Literature Review on Skills and Innovation A CRIC Report for the DTI imperfectly measured in a variety of ways) relate to innovation, but theoretically they are thought to be very important Intermediate level technical skills are also thought to be very important for innovation, especially in manufacturing This is significant because the UK has a smaller proportion of people with these skills than countries like Germany and Japan Further, there is a concern that the quality of these skills is relatively low in the UK because of an over-reliance on narrow job related skills rather than underpinning knowledge (transferable skills) The German ‘dual’ apprenticeship system teaches apprentices academic (in the sense of conceptual or theoretical understanding) as well as vocational skills This is thought to enhance the capacity of German workers to adapt to, and enhance the new technologies they encounter over their working lives Evidence about the effect of these skill differences comes from the NIESR matched-plant studies, which show that British managers tend to defer the implementation of new equipment until it is ‘bug-free’, in part because of acknowledged skills weaknesses on the shop floor These delays imply British manufacturing firms cannot build up the valuable relationships with leading-edge suppliers, unlike German firms They therefore end up competing on price, and not on quality, and are considerably less productive Other (mixed) evidence of the importance of the supply of skills for innovation performance comes from surveys asking about the effects of skills shortages The UK Innovation Survey (relating to 1998-2000), suggested that lack of qualified personnel was not a first-order barrier to innovation, coming fifth out of nine barriers However, in the European Innobarometer Survey (2001), finding and mobilising human resources was the most cited barrier to innovation in the UK More recent data from the National Employers Skills Survey 2003 found that over a fifth of the firms that reported skills gaps amongst their existing workforces had delayed implementing new products due to these deficiencies, whilst nearly a third had experienced difficulties introducing new working practices It is worth mentioning that skills is one of several factors affecting innovation performance Other important barriers include access to finance and lack of demand for innovative products Since the supply of skills is less than socially optimal, the report asks why firms and workers not invest more in education and training Becker’s theory of human capital suggests that there may be several reasons, including lack of information on the returns to education and training, lack of access to finance to fund it and, for firms, fear of not reaping the return on their investment in training, because their trained workers may leave for another company The latter problem, fear of so-called poaching,2 may be especially relevant to highly-innovative, hightechnology industries In this case, the training may be extremely expensive, risky, yet very valuable to the firm that reaps the return on the investment, especially if a new market is being opened up The dynamic relationship between skills and innovation The questions about how innovation drives demand for skills and which skills are required for innovation are to some extent two sides of the same coin It is difficult to disentangle the skills that drive innovation from those which are demanded as a result of change brought about by innovation In the long term, the relationship between skills and innovation must be circular The skills of the workforce and management will help determine the innovation that takes place, which will then help determine the changed demand for skills in the firm, which will influence the innovation that takes place and so on There is evidence that fear of poaching is more of a problem than actual poaching A Literature Review on Skills and Innovation A CRIC Report for the DTI The product life cycle theory provides some answers to how innovation changes the demand for skills through the stages of a new product innovation, or it could also be viewed as how the skills for successful innovation change over the cycle.3 In the early, fluid stages of the industry where the product is ill-defined, the key skills are those of entrepreneurs, and sometimes those of scientific or technical specialists, which together with marketing skills realise or create the market for the product As time goes on, the product tends to become more standardised, until a dominant design emerges In this transitional stage, there is a shift from product to process innovation Functional, scientific management skills and specialist workforce skills are increasingly required Once the dominant design is established, the industry enters the specific stage, where innovation is more incremental and cumulative The skills required are managerial ‘command and control skills’ and low level or unspecific workforce skills Higher-level workforce skills may be increasingly required if the firm attempts to move into the higher quality end of the market in response to low-cost competition The product life cycle model had been principally applied to manufacturing firms There is limited evidence that some service sectors move in the opposite direction, from large-scale provision of standard services and process innovation to smaller-scale provision of customer-specific services, implying product innovation Low skill equilibrium is a relevant concept in the literature relating to the interaction of supply and demand for skills and innovation Essentially, this is a situation in which firms encounter a demand for low-specification, low-value added products, which only require low skills to produce They therefore tend to compete on price, utilising low-skill workers As low-skill jobs are available, but relatively few high-skill jobs exist, workers have little incentive to acquire higher-level skills, and so firms not have the supply of higher-level skills that they would require if they wanted to move to a high-specification product strategy This situation is thought to pertain in some parts of the UK economy This theory is supported by the empirical work of Geoff Mason who suggests that demand for skills in Britain is lower than that of several other economies because a large proportion of British enterprises have adopted low specification product strategies Further he argues that in the absence of strong incentives like foreign competition there is no reason for firms to change and adopt an innovation based strategy Also when firms wish to move up market they need different skills and so are likely to then experience skill shortages Another aspect that affects the relationship between innovation and skills is the industry in which the firms operate In the innovation studies literature, Pavitt argued there are four different types of (mainly manufacturing) industry that have their own patterns of innovation and requirements for skillsets First, science-based industries such as pharmaceuticals and electronics, require a core of degree-level science and engineering skills, and work a lot with universities and/or have their own R&D laboratories Second, scale-intensive industries rely on economies of scale, exploited by scientific managers, increasingly with cross-functional integration skills, specialist product design, engineering and development skills, and a workforce that is able to adapt to and make the best use of technologies Third, specialist suppliers, which engage in a lot of cooperation with lead users, tend to require the skills of interactive learning, the expertise to develop highly clientspecific solutions and vocational, practical development skills Fourth, supplier-dominated industries, where most (technological) innovation comes from outside the firm, require entrepreneurial skills for spotting market trends, and a workforce with the ability to implement and use new technologies In a later paper, Pavitt added a fifth category of information-intensive firms, largely in the service sector Their main source of new technology is in-house software or systems development, Not all industries will follow this pattern, as has been shown empirically A Literature Review on Skills and Innovation A CRIC Report for the DTI although some may come from outside Here the style of innovation requires technical skills to develop software and communication or cooperation skills to acquire technology from outside The empirical evidence suggests that service-sector firms are more organisationally innovative than manufacturing firms These organisationally-orientated service-sector firms are more likely to emphasise the importance of supply chain interaction and external intellectual property but less likely to emphasise in-house R&D and research based cooperation with other organisations such as universities as their key sources of technology Much of the literature emphasises the systemic nature of the relationships between innovation, skills and productivity Florida proposes the concept of the ‘creative class’ of people – scientists, engineers, designers and creative arts workers He finds their concentration level in local populations is positively related to economic performance and tolerance Meanwhile, in the innovation studies literature, Kodama suggests that with technological fusion and increasing cooperation, innovations are increasingly crossing industry and technological boundaries, which will tend to make the new innovations more widely applicable This in turn is changing the demand for skills by requiring that workers have broader, less specialised skills, involving multiple disciplines Policy implications With the growth of trade in goods and services, and the growing internationalisation of scientific and technological activities, it is increasingly important that innovation in the UK involves a large proportion of firms and their employees No longer can companies or the country as a whole rely heavily on small elites of highly trained or educated people Instead, innovation needs to be organisational as well as technological, and to involve those on the shop floor as well as those in R&D, marketing and management positions It follows, therefore, that one of the over-riding points is that if the UK is to continue to have a dynamic innovative economy then all its people need to have a good general education This needs to provide the person who receives it with a platform of generic skills that will prove useful in engaging with and adapting to the changing circumstances that will doubtless pertain within and across industries and firms That is they will be better able to innovate and adapt to the effects of innovation in their own company, and better able to re-enter the labour market, even moving into different fields, if they are made redundant The report suggests that a certain amount of academic education alongside vocational education raises the individual’s absorptive capacity to learn and adapt And, again, innovation is likely to require an increasingly adaptive workforce with a broad range of skills The supply of skills seems to be less than would be socially optimal, even with the current Government interventions in this area Therefore, perhaps some new form of cost and benefit sharing is required between the employer, employee and the Government, to encourage greater skill formation The authors explore the possibility of tax credits for training, as have been introduced in Canada An argument against such an approach is that it would be difficult to ensure that tax credits were not just being given for training that would have occurred anyway Another issue that needs to be addressed is the skills and commitment of managers to innovation and the R&D tax credit may prove to be a valuable step in this direction Changing routines and ingrained practices is, of course, difficult Encouraging more collaborative, trust-based arrangements between firms is necessary whereby firms may gain long-term advantages from interactive learning, even if there are additional short-run costs This is best achieved by confronting firms not with a single ‘best practice’ model, but rather by encouraging step-by-step A Literature Review on Skills and Innovation A CRIC Report for the DTI transformations through the adoption of practices appropriate to their stage or level of commitment to innovation There perhaps should also be more consideration of the trade-off between short-run productivity, or static efficiency, and capacity to innovate, or dynamic efficiency In many companies and organisations a battery of targets or financial measures encourage short-run efficiency but fail to recognise the importance of ‘organisational slack’ and local experimentation to achieve innovation and greater dynamic efficiency 3M allows its engineers to spend 15% of their time on any project that happens to interest them This approach, while clearly not applicable to all, has been shown to boost innovation, as well as increasing employee commitment and motivation 10 A Literature Review on Skills and Innovation A CRIC Report for the DTI based manufacturing but remains competitive in many high value added service activities such as management consulting 6.46 The empirical evidence on the extent to which the supply of skills is an important barrier to innovation is mixed (e.g Nickell and Nicolitsas, 1997; Green et al., 2003), although studies show that only a minority of firms claim to be hampered in their innovation efforts by a lack of skills, including technical skills, marketing and sales skills, and management skills (Lucking, 2004; FutureSkills Scotland, 2005) The extent to which these problems are overcome, or prevent innovation is generally unclear Also unclear from the existing work on large datasets is whether the characteristics of the firms which experience difficulties with innovation due to skill shortages or skill gaps were different (e.g., more innovative and growth oriented) than other firms, although the Cambridge Survey of SMEs suggests this is the case This may reflect the contention that a large number of firms in the UK are engaged in the production of low quality (or low specification) goods and services (Finegold and Soskice, 1998), and as such not seek to stretch themselves by requiring more highly skilled workers A number of detailed and insightful studies have been undertaken exploring this hypothesis, including work by Wilson and Hogart (2003) and Mason (2004 & 2005) Mason’s work in particular follows the tradition of case studies and matched plant studies by the National Institute for Economic and Social Research which have revealed important aspects of the relationship between skills and innovation Prais (1995), for example, highlights the importance of technical skills and supervisors in adaptable and efficient systems of production 6.47 Research from the innovation studies tradition provides convincing evidence, drawn largely from detailed case studies, that different types of innovation require different types of skills (Pavitt, 1984) Science-based industries are especially reliant on relatively small elites in research and development (and marketing), whilst scale intensive and specialist suppliers involve inter-active learning (von Hippel, 1988) and a much greater contribution from the workforce and hence a more democratic distribution of skills (Kodama, 1992) This also relates to the co-ordination processes for innovation Florida (2004, see also Hepworth et al., 2005) emphasises the importance of uncoordinated clusters of highly educated talented people as key to entrepreneurial forms of innovation, although these studies not explore how innovations are actually generated Kodama (1992), by contrast, highlights through case study work on large Japanese multinationals the management skills for the highly coordinated development of technologies within large enterprises 6.48 The evidence on skills and innovation in services, and how these compare with those in manufacturing, remains relatively weak, at least in part because of a lack of available data However, recent empirical analysis by Tether (2005) shows that services tend to be significantly more oriented to organisational (than product and process) innovation, and to place greater emphasis on the skills of their workforce and on co-operation practices, rather than focus on technologies and R&D activities This emphasis on organisational innovation in services is also highlighted by Miles (2005) 6.49 All told the existing evidence base points to the complexity of the relationships between skills and innovation, such that we cannot provide simple fix-all solutions, such as encouraging firms to hire graduates, or invest in more technology This is because the effectiveness of these resources will depend on the context in which they are deployed This said, we believe there are three major weaknesses in the existing evidence base 110 A Literature Review on Skills and Innovation A CRIC Report for the DTI 6.50 First, the evidence tends to be biased to manufacturing and ‘harder’ forms of technological innovation This reflects the greater availability of data for these activities, but as the UK is dominated by services, in which organisational innovation and ‘soft skills’ are thought to be particularly significant This is therefore a major weakness in the evidence base 6.51 Second, not enough is known about management skills and how these relate to innovation performance This is significant because management has the key role of coordinating processes of production and innovation 6.52 Third, and a perhaps more controversially, we consider that there is inadequate knowledge of the demand for new goods and services, and the role of demanding consumers in encouraging or discouraging the development of innovative goods and services As mentioned earlier, firms are unlikely to introduce new high specification products if they not expect these to sell, and thus without demand (or latent demand) firms are likely to remain in their existing markets 6.53 Suggested further research projects This review has highlighted a diversity of existing research strands on issues relating to ‘skills and innovation’, but it would appear that there is little overlap or communication between various groups of researchers active in each strand Although their detailed interests can differ, and although different and to some extent incompatible (even rival) theoretical perspectives are being developed, in our opinion there would be value in bringing together researchers from these different traditions in a workshop, or series of workshops, on the understanding that a spirit of openness would be mutually beneficial, both to the research community but also to policymaking in this area 6.54 We have outlined three broad areas that we consider require further attention – innovation and skills in services, management skills and innovation, and the role of demanding consumers in encouraging or discouraging innovation The last may be particularly difficult to study We consider that there is a need for several detailed research projects, and to this end we suggest – in no particular order of priority - five possible projects: 6.55 An investigation into the future of low-skilled routine service work During our review we became increasingly aware of the possible parallels between the severe contraction of manufacturing in the 1980s and a possible contraction of low skilled routine service work in the latter part of this decade or in the early 2010s The UK’s labour force includes a very large group of people, mostly women, working in relatively low skilled and routine occupations We are thinking, for example, about clerks in retail bank branches, checkout staff at supermarkets, and check-in staff at airports, and routine back-office work in insurance companies and banks 6.56 Much of this type of work is vulnerable to two forces: off-shoring and automation / selfservicing Although the current extent of off-shoring is relatively low, it is growing extremely rapidly, and whilst in the long run this may benefit the UK and the world economy, in the short run it may well lead to the severe contraction of some forms of employment in the UK Similarly, it is notable that Tesco has started to introduce selfservice check-outs, and the airlines are increasingly encouraging passengers to use selfservice check-ins at airports Meanwhile, the diffusion of broadband and the Internet has changed the way many people interact with insurance companies A decade ago insurance was sold through shops, then it moved to call centres, where a call-centre 111 A Literature Review on Skills and Innovation A CRIC Report for the DTI operative would take the customer through a set of questions to reach a quote Now people can shop for insurance on the Internet, inputting all the data themselves and allowing an agency (such as the AA) to seek out the best deal available to them Similarly banks are in the process of reducing their branch networks as more people use telephone and then Internet banking 6.57 We stress that we are not predicting a severe contraction in low skilled routine (largely female) work, as it is possible that new forms of work will replace the old (e.g the outsourcing of domestic cleaning is growing rapidly, and the supermarkets and airlines may redeploy check-in/check-out staff to other customer service functions), but we should at least be aware of the possibility of such a contraction, and policymakers may want to make contingency plans, especially as given the age and skill profile of many of these workers they will find it difficult to retrain in order to obtain ‘higher skilled’ work Meanwhile, if many of these workers are currently the sole-earner in a household, there is a danger that this development will impact particularly severely on much the same communities that where hit by the severe contraction of manufacturing in the 1980s which resulted in many men leaving the labour market for good 6.58 We suggest, therefore, that a study be done using both quantitative and qualitative methods into the future of low skilled routine service work This would begin with studies of the Labour Force Survey and other quantitative data on the extent of this form of work, and the skills of those employed in these tasks Qualitative approaches, such as interviews with ‘key players’, such as supermarkets, banks, airlines, and the appropriate trades unions could then be used to explore the likely future of this type of work, and the development of possible substitutes This would then lead into the development of future scenarios, with the aim that policymakers develop an understanding of the possible problem and what might be required to alleviate it.105 6.59 ‘Soft skills’ and Organisational Innovation Most of the evidence on skills and innovation relates to harder technical skills and harder forms of technological innovation, particularly in the context of manufacturing This is understandable, because better data tends to be available for manufacturing, for harder skills and for technological innovation, but the UK’s economy is dominated by services – manufacturing contributes less than 20% of GDP Services tend to engage in ‘softer’ forms of innovation, involving organisational and procedural change Services innovation also tends to be much less reliant on R&D and therefore the skills of R&D scientists and technicians There is a need, therefore, to explore the relationship between ‘soft skills’ and organisational innovation, especially but not only in the context of services This could be addressed through both quantitative and qualitative research 6.60 With regard to quantitative work, it is notable that the Scottish Skills Survey of 2004 found skill shortage vacancies and skill gaps to be most prominent in tasks requiring ‘soft skills’ It was also found that firms that reported skills shortages and skill gaps were often hindered in their innovation activities Although implied, the aggregate analysis does not reveal the extent to which the shortages and gaps in soft skills were a significant barrier to innovation As the Scottish Skills Survey gathered 7,500 responses, there would appear to 105 In making this proposal, we have in mind a model based on work CRIC coordinated in 2000 for Dr John Taylor, the then Director General of Research Councils at the Office for Science and Technology, which asked the question ‘What would success look like for the UK in information communication technologies and biotechnology by 2005?’ This work involved both a (largely) quantitative review of the UK’s state of affairs in ICTs and biotechnology, interviews with ‘key players’, and workshops where ‘scenarios’ were developed 112 A Literature Review on Skills and Innovation A CRIC Report for the DTI be ample scope for the investigation of these issues should the micro data be available Similar analyses could also be undertaken using the National Employers Skill Survey, which in 2003 involved 72,100 interviews with a representative sample of employers in England 6.61 Qualitative work involving case studies would provide a useful counterpart to this quantitative work As well as examining particular cases of organisational innovation and the role of soft skills in implementing these innovations, this research could explore in more detail reasons why employers feel soft skills are often a problem, and the extent to which this may be because they undervalue such skills in terms pay and other benefits, which influences the quality of the applicants for jobs involving soft skills 6.62 An investigation into ‘job polarisation’ Our third suggestion is for a smaller and more focused study on the development of ‘job polarisation’, as identified by Goos and Manning According to our understanding of this work, Goos and Manning have explored changes to cross-sectional categories of workers over time, rather than follow the careers of individual workers We suspect that some of the ‘hollowing out’ of intermediate positions that they identify may be due to the ‘re-labelling’ of some jobs, where this re-labelling may or may not be associated with changes to skills and responsibilities For example, it has been noted by Michael Porter amongst others that the UK has a relatively high proportion of ‘managers’ We suspect that this may well reflect considerable re-labelling of non-managerial jobs into managerial-jobs which occurred in the 1980s and early 1990s For example, what was ‘the guard’ on a train is now often referred to as ‘the train manager’, and consequently when asked to self-record occupational status, these people will tend to ‘upgrade’ their status Such a change may be entirely justified, if the re-labelling is associated with a significant change in the required skills and/or responsibilities, but it may also be ‘pure’ re-labelling We would suggest an exploration of longitudinal work-history data could shed light on these issues If, for example, an apparently significant change in status occurs without a significant change in pay or any new training this suggests re-labelling rather than a ‘real’ change in occupation 6.63 An investigation into how firms and their managers learn to manage innovation Surprisingly little appears to be known about how UK firms manage innovation processes and moreover whether a ‘formal training’ in innovation management improves performance There are several issues underlying this First, the relatively small proportion of UK managers who hold formal qualifications in management How, then, these manager without qualification manage (and learn to manage) innovation, and how their approaches vary from those who have qualifications in management Second, many if not most of those who hold qualifications in management will hold a qualification in a specialist area – such as finance, operations, marketing, etc., none of which relates directly to innovation, and few of whom may have received any training in innovation management It is reasonable to ask how these people also learn to manage innovation, especially as innovation increasingly involves cross functional teams, rather than coming from narrow specialisations A third group is the small group who have received training specifically oriented to innovation (and technology) management Do the practices of these tend to be more or less effective than those of the other two groups? 6.64 Another dimension to this is how firms (and their managers) learn to change their behaviours with respect to innovation In other words, according to the UK Innovation Survey and other sources, many if not most firms are non-innovators, some are 113 A Literature Review on Skills and Innovation A CRIC Report for the DTI occasional innovators, a few are frequent innovators, and a small minority are continuous innovators These firms tend to have very different practices and approaches to (or routines for) innovation, and an interesting question is how firms (and their managers) learn different (i.e appropriate) approaches to innovation which are required if they decide to change their status – say from a non-innovator to a frequent innovator, or from an occasional innovator to a continuous innovator We suggest that this type of upwards migration may be very difficult, and that firms may be largely ‘locked-in’ to their existing approaches to innovation, although the chances of successfully ‘upgrading’ may be enhanced by the involvement of those with a formal training in management, and enhanced further by the involvement of those with a formal training in innovation (and technology) management Perhaps the best way to explore these questions is through case study and survey work within firms 6.65 An investigation into skill compositions and innovation performance Our final suggestion is for quantitative studies exploring the relationship between skill compositions and innovation performance at the level of the firm At present, the UK Innovation Survey only asks firms whether or not they employ science and engineering graduates and ‘other graduates’, and the share of each of these in the total workforce This is useful information, and it has been shown that firms that employ graduates, and science and engineering graduates in particular are more likely to innovate (according to the 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Chapter Innovation and Its Implications for the Demand for Skills Introduction Innovation and Employment Innovation and Skill Biases How Technical Change Affects the Demand for Skills The Paradigm... Innovation and the Demand for Skills Question – The Supply of Skills and their Implications for Innovation Question – The Interaction between Skills and Innovation Policy Considerations The Strengths... International trade is another important factor that drives the demand for skills It is often framed as an alternative explanation to innovation in changing the demand for skills, but, as researchers