Intangible Capital

Marianne SaamCentre for European Economic Research (ZEW)

e-Frame Final Conference 10 February 2014

The e-Frame project is funded by the 7th EU Framework Programme, Theme 8 Socio-Economic Sciences and Humanities, Grant Agreement No.

290 520.

2

GDP and Beyond: Measurement, Policy Use and Moving Forward

GDP is currently augmented by R&D investment

Beyond are other intangible assets not yet capitalised in national accounts

Measurement remains challenging, for example for services lives

Policy Use is much wanted (``smart growth‘‘) but for example industry-level data is still experimental

Moving Forward? Yes, a lot is being done out of FP7 projects, at the OECD, at NSIs, in national and transnational initiatives….

10 February 2014 e-Frame Final Conference

3

Agenda

1. Measuring Intangible Assets: What is it and who measures it?

2. The Corrado-Hulten-Sichel Framework

3. Integration into National Accounts

4. Firm-level Measurement

5. Policy-Relevant Use

6. Outlook

10 February 2014 e-Frame Final Conference

4

1. What is Intangible Capital?

„Knowledge-based assets (…) create future benefits for firms, but, unlike machines (…) they are not physical.“ (OECD, 2013)

„Intangible assets are non-physical sources of value (claims to future benefits) generated by innovation (discovery), unique organizational designs, or human resource practices“

(Lev, 2001)

10 February 2014 e-Frame Final Conference

5

1. Who Wants to Measure Intangible Capital?

Statistical Agencies/Public Institutions

Academic ResearchersFirms10 February 2014 e-Frame Final Conference

Policy

Intangibles

Tangibles Labour

Perfor-mance

Media, society

Financial markets

e-Frame Final Conference 6

2. The Framework by Corrado, Hulten and Sichel

Corrado, Hulten and Sichel (2005, 2009 – CHS) • Framework to measure intangible investment in a way compatible with

national accounts

• ….and consistent with the economic theory of investment

Measurement of fraction of an identifiable data series on intangible spending that is investment• Expenditure on own-account or purchased knowledge assets• Wages paid for working time spent on creation of knowledge assets

10 February 2014

7

2. Data Using Framework by Corrado, Hulten and Sichel

INTAN-Invest database: Corrado, Haskel, Jona-Lasinio and Iommi (2012) published data on intangible investment of the market economy (plus sector O) for EU countries for the period 1995-2007

Freely available at www.intan-invest.net

Joint initiative of the FP7 SSH Projects COINVEST and INNODRIVE and The Conference Board, supported by the EC (2013)

First industry breakdown of INTAN-Invest data (NACE rev. 1.1) to industry-level in FP7 SSH project INDICSER

INTAN-Invest meanwhile available in NACE rev.2

10 February 2014 e-Frame Final Conference

8

2. CHS: Country-level Results from INTAN-Invest

10 February 2014 e-Frame Final Conference

GDP shares of tangible vs. intangible investment, 1995–2009 (average values)

Source: Corrado et al. (2013), Oxford Review of Economic Policy

e-Frame Final Conference 9

3. Integration into National Accounts?

1. Computer software and databases

2. Innovative propertyi. R&D (incl. in financial industry) new SNA 2008-

ESA 2010ii. Mineral explorations and evaluation Fixed asset

boundaryiii. Entertainment, literary and artistic originalsiv. Design

3. Economic competenciesi. Brand equity (advertising and market research) SNA 2008-ESA 2010ii. Organisational capital

Non-produced assetsiii. Firm-specific human capital (training) (counted if

transaction)

Based on Iommi (2013), presentation at e-Frame workshop in intangibles

10 February 2014

10

3. Integration into National Accounts?

Trade-off between completeness and accuracy of coverage of intangible assets

GDP has to be measure that is trusted , comparable across countries and time

From this perspective, conservatism with regard to changing GDP seems an almost necessary virtue

On the other hand, in the long term GDP has to keep up with new insights in the quantification of assets

„Knowledge economy“ ever more important in policy debate

Intangible assets core target in EU 2020: 3% of GDP in R&D

The debate about expanding the asset boundary should continue

10 February 2014 e-Frame Final Conference

11

3. Integration into National Accounts? Comments from e-Frame Workshop Too early to extend asset boundary of NAs beyond R&D Conditions for possible extension in the future

• Framework by CHS adapted for practical implementation at NSIs

• Internationally comparable surveys prior to potential implementation

• More knowledge about short-run properties of intangible investment

However, including only R&D may bias measurement of intangibles towards manufacturing

Mix of surveying and modelling may be needed (burden on firms) Treatment of human capital in national accounts also seen as needing

improvement

10 February 2014 e-Frame Final Conference

12

4. Firm-level Measurement

ONS/NESTA survey collects information from more than 1000 firms on expenditures on six categories of intangible assets and on service lives (Field/Franklin 2012)

Goal: • Provide evidence on intangible investment beyond R&D• Collect data on own-account vs. purchased intangibles• Complement other surveys on intangibles• Find out whether firms can answer questions about service lives of

intangibles and about ownership of R&D assets

Sample is small compared to other ONS surveys, R&D expenditure looks lower than in other surveys

10 February 2014 e-Frame Final Conference

e-Frame Final Conference 13

4. Firm-level Measurement

Firms themselves may have an interest or obligation to measure intangible capital (see Guenther, 2013, presentation at OECD)• To asses their contribution to firm performance• To comply to accounting rules• To communicate their investments to capital markets and policy

Critical points of accounting for intangibles• Level of financial information on intangibles in financial reporting is low• Large room for managerial discretion in the reporting on intangibles• Low voluntary disclosure of investment in intangibles• Intangibles data are not used much in management control, little

validation

Source: Guenther (2013), presentation at OECD•

10 February 2014

e-Frame Final Conference 14

5. Policy-Relevant Use: Intangibles as Part of GDP

10 February 2014

“In the short term America’s new GDP measure makes international comparisons

more difficult.”

(Economist, 3.8.2013)

“GDP – New Statistics Let Debt Ratio Decline”

(FAZ, Germany, 21.1.14)

“R&D expenditure is recorded as GFCF and no longer as current

expenditure. This will increase EU GDP by around 1.9%. (...) very important in the context of the

Europe 2020 strategy.”

(European Commission, 16.1.14)

e-Frame Final Conference 15

5. Policy-Relevant Use: Intangibles as Driver of GDP

Conclusions from OECD project Supply-side programs should support intangible investment in areas of highest

social return

Intellectual property rights need further development

Intangible assets are an important factor in global value chain

Securitisation of debt using intangible assets could be improved to address shortfalls of early-stage risk capital

Many of the world‘s most successful companies‘ value resides almost entirely in their knowledge-based assets, but corporate financial reports provide limited information

Policies need to address the economic potential of „big data“

•

10 February 2014

e-Frame Final Conference 16

6. Outlook

Intangible investment: both technological and non-technological innovation

Long-term: little reason not to account for intangible investment in GDP

Medium term: academic projects, experimental surveys and satellite accounts will move agenda forward

Major measurement issues on service lifes, rates of return and sectoral heterogeneity are not solved

Common language to be found between academics, public institutions, statisticians at NSIs and firms

Existing surveys on innovation and training with a more „micro“ approach continue to be important source of evidence

Data construction for the public sector has just started (SPINTAN)

•

10 February 2014

e-Frame Final Conference 17

Further Reading

Corrado, C., J. Haskel, C. Jona-Lasinio, M. Iommi (2013), Innovation and intangible investment in Europe, Japan and the United States, Oxford Review of Economic Policy, 29(2),261-268.

OECD (2013), New Sources of Growth: Knowledge-Based Capital – Key Analyses and Policy Conclusions – Synthesis Report.

European Commission (2013), Joint database on intangibles for European policymaking - Data from Innodrive, Coinvest and The Conference Board – A policy-science dialogoe, DG for Research and Innovation – Socio-Economic Sciences and Humanities.

•

10 February 2014

e-Frame Final Conference 18

Back up I: Communicating intangibles to the public

Are we persuaded that intangible assets exist?

• A machine may be valuable, obsolete or broken, but I can in principle determine by commonly agreed criteria whether it exists

• The existence of a patent or a piece of software is also quite straightward to communicate

• Creating assets through training, consulting, marketing or managerial effort may be much more risky

• Society more sceptical about intangible value creation after financial crisis

• …maybe too conventional reasoning. Machines, software or patents may also be counted while not contributing positively to productivity

•

10 February 2014

e-Frame Final Conference 19

Back Up II: Asset List of INTAN-Invest

•

10 February 2014

Asset type Key Source Depreciation Rate

Computerized information

1. Software EU KLEMS (investment) 31.52. Databases EU KLEMS (investment) 31.5

Innovative property

3. Mineral exploration NA/SUT (investment) 7.54. R&D (scientific) BERD (expenditures) 155. Entertainment and artistic originals NA/SUT (investment) 206. New product/systems in financial services EU KLEMS, WIOD, STAN (labour compensation) 20

7. Design and other new product/systems SBS (turnover) 20

Economic competencies

8. Brand equity a. Advertising Zenith Optimedia (turnover) 55b. Market research SBS (turnover)/ ESOMAR (add. source for consistency) 55

9. Firm-specific resources a. Employer-provided training CVTS (costs of CVT)/LCS(apprentice costs) 40b. Organizational structure SBS (turnover), LFS (# employees)/SES (earnings) 40

e-Frame Final Conference 20

Back Up III: Growth Accounting

•

10 February 2014

Total capital deepening

Tangibles

IntangiblesLabour

composition

MFP

(1) (2) (3) (4) (5) (6)

Austria 2.4 0.8 0.3 0.5 0.2 1.4

Belgium 1.8 0.7 0.2 0.5 0.1 1.0

Denmark 1.4 1.2 0.7 0.5 0.2 –0.1

Finland 3.8 0.9 0.2 0.7 0.2 2.7

France 1.9 1.0 0.4 0.6 0.4 0.5

Germany 1.7 1.0 0.7 0.3 0.0 0.8

Ireland 3.8 1.4 0.8 0.6 0.1 2.2

Italy 0.6 0.7 0.5 0.2 0.2 –0.4

Netherlands 2.3 0.9 0.4 0.5 0.4 1.0

Spain 0.8 1.0 0.7 0.3 0.5 –0.6

Sweden 3.7 1.9 1.1 0.8 0.3 1.5

UK 2.9 1.5 0.8 0.7 0.4 1.1

US 2.8 1.5 0.7 0.8 0.2 1.1

Contributions to the growth of output per hour, 1995–2007

Source: Corrado et al. (2013)

21

Back Up IV: Industry-level Results from INDICSERShare of F&E, design and economic competencies in adjusted VAaverage 1995-2007, source data used: EU KLEMS 2009, INTAN-Invest

10 February 2014 e-Frame Final Conference

Source: Niebel, O‘Mahony and Saam (2013)

e-Frame Final Conference 22

Back Up V: Firm-level Measurement UK

Source: Field and Franklin (2012), presented by Daniel Ker (ONS) at the e-Frame workshop on intangibles

10 February 2014