Service-dominant logic (SDL) has replaced the traditional product-dominant logic (PDL) in explaining today``s economy as service industry rapidly grows worldwide. Value inherently is not created by simply transferring products to customers, as PDL explains. Instead, value is always uniquely determined by the beneficiary, who co-creates value with the provider of the product. In other words, value is co-created as product is being consumed by the beneficiary. SDL as such integrates service and product together. However, there have been few empirical studies holding that theoretical position. Previous studies were more or less limited to the development of fundamental concepts, case studies, and future study direction indicating service system approach. Furthermore, there has been none of studies directly relating to service innovation, which is what the SDL ultimately intends to. This study is to conduct an empirical study with goals as follows: (1) to lay theoretical foundation regarding service system from the SDL perspective, (2) to explain empirically how service system entities, customer and supplier, influence service innovation and quality, (3) to explore how absorptive capacity of an organization influences the value-creation entities, service innovation and quality. It is thus to further our knowledge of operations of service systems. For this study, 700 sample enterprises were selected, out of which 368 samples (53%) were collected. Through the statistical analyses including PASW v. 18 and Amos V. 18, it was concluded as follows: (1) Customer engagement as in the interaction network has a significant relationship with service innovation, quality and absorptive capacity. (2) Supplier engagement between various levels of supplier chain has a significant relationship with service innovation and absorptive capacity, but is insignificantly related to service quality. (3) Absorptive capacity, it was shown, has a significant relationship with service innovation and service quality, both of which are significantly related to business performance. (4) In the analysis of indirect effect of absorptive capacity, customer engagement has greater effect on the service quality and service innovation, while supplier engagement has greater direct effect on service innovation, and greater indirect effect on service quality. This finding suggests that absorptive capacity of organizational members should be treated as an important factor for the improvement of service quality. This empirical study on the relationships between the value-creation entities has been able to propose available research direction in the area of service system. Furthermore, it has identified significant relationships among service innovation, service quality, and absorptive capacity. However, it has such limitations as ignoring other working variables in the operation of service systems, including value co-creation, product-service integration, and information technology. It is suggested that more variables be included in the future studies, including, especially, such resources proven to be important as T-shape, IT and network capacity. It is believed that such research efforts will contribute to the advancement of service-dominant economy, and knowledge of what constitutes competitive advantages in today``s new service paradigm.