[Editorial] R&D in services

The government has announced a set of measures to stimulate R&D investment in services as part of its continuing drive to advance the underdeveloped service sector. The package proposed, among other things, to provide tax credits to service companies for their spending on R&D and draw up a mid- to long-term fiscal support plan for R&D activities in the service sector.

The move is welcome given that the most effective way to enhance the innovative capacity and productivity of the service sector is to spur investment in R&D. The nation’s service sector productivity is woefully low -- about half the OECD average and much lower than that of its manufacturing industry.

One main reason is the small amount of R&D investment in services. While the service sector accounts for more that 60 percent of GDP, its share of the nation’s total R&D investment is a mere 7.1 percent. In contrast, the manufacturing sector takes up about 90 percent of the total, although its contribution to GDP is less than 30 percent.

Among advanced countries, Israel stands out in terms of the share of R&D investment devoted to the service sector -- 62 percent. The ratio is 35.8 percent in Canada and 29.6 percent in the United States.

Another problem with Korea is that the small amount of R&D investment in services is concentrated in a few knowledge-intensive segments, including computer and related activities and telecommunications. In advanced countries, R&D investment covers a wider scope of areas, such as real estate and tourism.

The latest package unveiled Wednesday also limits tax credits to 11 knowledge-based businesses, including health care, education, retail trade, market research and management consulting. The range of areas eligible for the tax benefit needs to be expanded.

The package also fails to address the most serious problem in promoting service R&D -- the lack of awareness among service companies. A survey recently conducted by the Korea Small Business Institute found that 75 percent of the nation’s service companies had no idea what service R&D means or what kind of service R&D they need.

Therefore, the government needs to start with an awareness campaign to promote private investment in service R&D. For this, it needs to publicize success stories and collect and spread best practices. At the same time, it needs to take into account the fact that small and medium-sized enterprises account for more than 90 percent of the service companies in Korea. For them, merely providing tax credits is not enough. They need more comprehensive R&D support.