Oct 22, 2009 - Trusted Insights for Business Worldwide ... count what Apple spends on R&D and brand development, which ... in the Market Sector (% GDP).
Trusted Insights for Business Worldwide
Measuring Intangible Capital and Its Contribution to Economic Growth in Europe October 22, 2009
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Bart van Ark with Janet Hao and Charles Hulten
“While the knowledge economy is all around us, it is still hard to see it in the official statistics”* * Paraphrasing Robert Solow (1987)
Grab your iPod, flip it over, and read the script at the bottom. It says: "Designed by Apple in California. Assembled in China." Where the gizmo is made is immaterial to its popularity. It is great design, technical innovation, and savvy marketing that have helped Apple Computer sell more than 40 million iPods. Yet the folks at the BEA don't count what Apple spends on R&D and brand development, which totaled at least $800 million in 2005. Rather, they count each iPod twice: when it arrives from China, and when it sells. That, in effect, reduces Apple -- one of the world's greatest innovators -- to a reseller of imported goods 1
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Michael Mandel, Business Week (February 13, 2006)
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Why to capitalize intangibles? Corrado, Hulten and Sichel: “an input should be treated as an
investment as long as it reduces current consumption with the aim to generate revenues in the long term.” Extension of capital base according to broad definition: computerized information: software and databases innovative property: scientific and non-scientific R&D, copyrights, financial product development, architectural and engineering design economic competencies: advertising and market research, firm-specific human capital and organizational capital For business, broad definition accounts for important part of
differences between equity and market value Intangibles raise both the input/income side and the output/
production side of the accounting system Contribution of current paper is to provide international comparative
perspective by extending measures to 11 (16) countries 2
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The major challenges in capitalizing intangibles Intangibles are largely invisible and hard to count companies do often not have exact metrics to separate expenditure on intangibles assets from other expenses Intangible investments are often produced within the company and
therefore do not represent a market transaction an increasingly large share of intangibles are traded through markets to impute prices for within-company production and transactions. Intangibles are often not a direct or continuous input to current
production Greater emphasis on product innovations represents shift away from Solow to Schumpeterian approach to growth Intangibles are largely non-rival and their benefits often not
appropriable While violating marginalist principles at micro-level, the principles are close enough to the reality of market economy 3
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Intangibles exceed tangibles in advanced economies; tangibles still dominate elsewhere
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Intangible and Tangible Investment in the Market Sector (% GDP)
25 20 15 10 5 0
intangible investment
tangible investment
Sources: CHS (2005, 2009), MHW (2006, 2009), Hao et al. (2008), The Conference Board 4
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Large differences in intensity of innovative property and economic competencies
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Figure 2: Intangible Investment in the Market Sector (% of GDP)
10 8 6 4 2 0
economic competencies
innovative property
computerized information
Sources: CHS (2005, 2009), MHW (2006, 2009), Hao et al. (2008), The Conference Board 5
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Slowing in intangibles intensity since 2003, but catch-up in some follower countries Intangible Investment as a % of GDP
Sources: CHS (2005, 2009), MHW (2006, 2009), Hao et al. (2008), The Conference Board
6
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On the whole, countries with higher intangible investment shares show higher contributions to productivity growth Contribution of Inputs to Labor Productivity Growth (1995‐2006) 5.0 4.0 3.0 2.0 1.0 0.0 ‐1.0 ‐2.0 ICT
NonICT
Intangibles
Labor quality
MFP
* USA and UK for 1995-2003 Sources: CHS (2005, 2009), MHW (2006, 2009), Hao et al. (2008), The Conference Board 7
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Higher levels of intangibles in advanced economies strengthens case for Schumpeterian competition model
Intangible Investment (% GDP)
Intangible Investment and GDP per Capita (2001‐04) 14.00% Japan
12.00% 10.00% 8.00%
Czech
6.00% 4.00%
Slovakia
2.00%
Greece
0.00% 0
10000
R‐squared=0.43
20000
30000
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40000
GDP per capita (2009 EKS PPP $) GDP per capita (EKS PPP $)
Source: The Conference Board 8
US
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50000
Mature and sizeable capital markets are one source of support for investment in intangibles Intangible Investment and Market Capitalization (2001‐04)
Intangible Investment and Venture Capital (2001‐04)
Japan
12.00
Intangible investment (% GDP)
Intangible investment (% GDP)
14.00 US UK
10.00 8.00 6.00 4.00 Slovakia
2.00
Greece
0.00 0
R‐squared=0.39
20
40
60
80
100
120
Market Capitalization (% GDP)
140
160
14.00 12.00
US UK
10.00 8.00 6.00 4.00
Slovakia Greece
2.00 0.00 0
R‐squared==0.75
Source: The Conference Board
9
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0.05
0.1
0.15
0.2
0.25
Venture Capital (% GDP)
0.3
0.35
0.4
But the case for spillovers from intangibles remains unconvincing – at best Intangible Capital and Spillover Effect
MFP accounting for intangibles
3
Slovakia
Finland
2.5 2 1.5
US
1 0.5 0 ‐0.5 0
Italy
‐1
Spain
‐1.5
R‐squared=0.19
0.2
0.4
0.6
Intangible capital deepening contribution to LP growth
Source: The Conference Board 10
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0.8
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1
Intangibles are key to agenda for “investment in innovation” Four groups of countries: Leaders in intangibles (US and UK) which experienced high intangibles and labor productivity growth, but sensitive to market fluctuations Stabilizing countries (continental North-West-European) with high intangibles intensity but less direct relationship to productivity Catching-up countries (CEE and Greece) with (as yet) low intangibles but high productivity from other sources Laggard countries (Spain and Italy) with low intangibles and low productivity Current economic downturn turns attention away from long-term
value-building investments as backbone of knowledge economy Intangibles are also “foundation” on which short-term stimulation
measures need to be anchored to guarantee consistency with business models in private sector Innovation is about investment by firms, people and government 11
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