Innovation - the commercial application of new knowledge - has been recognised both in the UK and internationally as one of the key drivers of growth and productivity. Reflecting on-going structural change, however, it is innovation in the service industries which is attracting increasing attention. Based on a bespoke survey of around 1100 UK service businesses our study is the first attempt to model the innovation value chain for knowledge-based services, highlighting the causal links between service firms' knowledge investments, their innovation outputs and business growth. We combine the activity based approach of the innovation value chain with firms' external links at each stage of the innovation process, introducing the notion of encoding relationships. Our econometric results emphasise the importance of openness in the exploratory phase of the innovation process and the significance of team-working in later stages of the process. Business growth is related directly to the extent of firms' service innovation but is less strongly linked to marketing, strategic and business process innovation.