Services have been regarded as something intangible, perishable, and heterogeneous so that it is difficult to measure the quality and productivity of them. Services also have long been considered non-productive economic activities. However, considering the recent growth of service industry across the world, it is imperative to study the very nature of service and its systems in the knowledge-based economy from an integrated perspective to improve the quality of life and effective economic development. For this, we in this study will develop a systematic way of understanding the nature service in the knowledge-based economy from a systems’ perspective and build an integrated theory of service systems which facilitates service innovation and improves service productivity. The proposed theory will provide the foundation for designing, producing, delivering, operating, maintaining, monitoring, and improving service systems, which in turn leads to service innovation and thus a sustainable economic growth with providing greater employment opportunities. This study will also provide researchers and companies with the basis for future study and guidelines to further service innovation.