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Intangible Capital

Intangible Capital. Marianne Saam Centre 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.

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Intangible Capital

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  1. Intangible Capital Marianne Saam Centrefor European Economic Research (ZEW) e-Frame Final Conference 10 February 2014 The e-Frame projectisfundedbythe 7th EU Framework Programme, Theme 8 Socio-EconomicSciencesandHumanities, Grant Agreement No. 290 520.

  2. GDP andBeyond: Measurement, PolicyUseandMoving Forward • GDP iscurrentlyaugmentedby R&D investment • Beyondareotherintangibleassets not yetcapitalised in national accounts • Measurement remainschallenging, forexampleforserviceslives • PolicyUseismuchwanted (``smart growth‘‘) but forexampleindustry-level datais still experimental • Moving Forward? Yes, a lotisbeingdone out of FP7 projects, atthe OECD, at NSIs, in national and transnational initiatives…. e-Frame Final Conference

  3. Agenda • MeasuringIntangible Assets: Whatisitandwhomeasuresit? • The Corrado-Hulten-Sichel Framework • Integration into National Accounts • Firm-level Measurement • Policy-Relevant Use • Outlook e-Frame Final Conference

  4. 1. WhatisIntangible Capital? • „Knowledge-basedassets (…) createfuturebenefitsforfirms, but, unlikemachines (…) theyare not physical.“ (OECD, 2013) • „Intangibleassetsare non-physicalsourcesofvalue (claimstofuturebenefits) generatedbyinnovation (discovery), uniqueorganizationaldesigns, or human resourcepractices“ (Lev, 2001) e-Frame Final Conference

  5. 1. Who WantstoMeasureIntangible Capital? Statistical Agencies/Public Institutions Academic Researchers Firms Policy Financial markets Perfor- mance Intangibles Media, society Tangibles Labour e-Frame Final Conference

  6. 2. The Framework by Corrado, Hultenand Sichel • Corrado, Hultenand Sichel (2005, 2009 – CHS) • Framework tomeasureintangibleinvestment in a waycompatiblewith national accounts • ….andconsistentwiththeeconomictheoryofinvestment • Measurement offraction of an identifiable data series on intangible spending that is investment • Expenditure on own-accountorpurchasedknowledgeassets • Wagespaidforworking time spent on creationofknowledgeassets e-Frame Final Conference

  7. 2. Data Using Framework by Corrado, Hultenand 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 • Freelyavailableatwww.intan-invest.net • Joint initiative ofthe FP7 SSH Projects COINVEST and INNODRIVE and The Conference Board, supportedbythe EC (2013) • First industry breakdown of INTAN-Investdata (NACE rev. 1.1) toindustry-level in FP7 SSH project INDICSER • INTAN-Investmeanwhileavailable in NACE rev.2 e-Frame Final Conference

  8. 2. CHS: Country-levelResultsfrom INTAN-Invest GDP shares of tangible vs. intangible investment, 1995–2009 (average values) Source: Corrado et al. (2013), Oxford Review ofEconomicPolicy e-Frame Final Conference

  9. 3. Integration into National Accounts? • Computer softwareanddatabases • Innovative property • R&D (incl. in financialindustry) new SNA 2008-ESA 2010 • Mineral explorationsandevaluation Fixed assetboundary • Entertainment, literaryandartisticoriginals • Design • Economiccompetencies • Brand equity (advertisingandmarketresearch) SNA 2008-ESA 2010 • Organisational capital Non-producedassets • Firm-specific human capital (training) (countediftransaction) Based on Iommi (2013), presentationat e-Frame workshop in intangibles e-Frame Final Conference

  10. 3. Integration into National Accounts? • Trade-off betweencompletenessandaccuracyofcoverageofintangibleassets • GDP hastobemeasurethatistrusted,comparableacross countries and time • Fromthisperspective, conservatismwithregardtochanging GDP seems an almostnecessaryvirtue • On theotherhand, in thelongterm GDP hastokeepupwithnewinsights in thequantificationofassets • „Knowledge economy“ evermoreimportant in policydebate • Intangibleassetscoretarget in EU 2020: 3% of GDP in R&D • The debateaboutexpandingtheassetboundaryshouldcontinue e-Frame Final Conference

  11. 3. Integration into National Accounts? Comments from e-Frame Workshop • Tooearlytoextendassetboundaryof NAs beyond R&D • Conditionsforpossibleextension in thefuture • Framework by CHS adaptedforpracticalimplementation at NSIs • Internationallycomparablesurveyspriorto potential implementation • More knowledgeaboutshort-run propertiesofintangibleinvestment • However, includingonly R&D maybiasmeasurementofintangiblestowardsmanufacturing • Mix ofsurveyingandmodellingmaybeneeded (burden on firms) • Treatment of human capital in national accounts also seenasneedingimprovement e-Frame Final Conference

  12. 4. Firm-level Measurement • ONS/NESTA surveycollectsinformationfrommorethan 1000 firms on expenditures on sixcategoriesofintangibleassetsand on servicelives (Field/Franklin 2012) • Goal: • Provideevidence on intangibleinvestmentbeyond R&D • Collectdata on own-account vs. purchasedintangibles • Complementothersurveys on intangibles • Find out whetherfirmscananswerquestionsaboutservicelivesofintangiblesandaboutownershipof R&D assets • Sample issmallcomparedtoother ONS surveys, R&D expenditurelookslowerthan in othersurveys e-Frame Final Conference

  13. 4. Firm-level Measurement • Firmsthemselvesmayhave an interestorobligationtomeasureintangiblecapital(see Guenther, 2013, presentation at OECD) • Toassestheircontributionto firm performance • Tocomplytoaccountingrules • Tocommunicatetheirinvestmentstocapitalmarketsandpolicy • Critical pointsofaccountingforintangibles • Level offinancialinformation on intangibles in financialreportingislow • Large roomformanagerialdiscretion in thereporting on intangibles • Low voluntarydisclosureofinvestment in intangibles • Intangiblesdataare not usedmuch in managementcontrol, littlevalidation Source: Guenther (2013), presentation at OECD e-Frame Final Conference

  14. 5. Policy-Relevant Use: Intangiblesas Part of GDP “In the short term America’s new GDP measure makes international comparisons more difficult.” (Economist, 3.8.2013) “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) “GDP – New Statistics Let Debt Ratio Decline” (FAZ, Germany, 21.1.14) e-Frame Final Conference

  15. 5. Policy-Relevant Use: Intangiblesas Driver of GDP Conclusionsfrom OECD project • Supply-sideprogramsshouldsupportintangibleinvestment in areasofhighestsocialreturn • Intellectualpropertyrightsneedfurtherdevelopment • Intangibleassetsare an importantfactor in global valuechain • Securitisationofdebtusingintangibleassetscouldbeimprovedtoaddressshortfallsofearly-stage riskcapital • Manyoftheworld‘smostsuccessfulcompanies‘ valueresidesalmostentirely in theirknowledge-basedassets, but corporatefinancialreportsprovide limited information • Policiesneedtoaddresstheeconomic potential of „bigdata“ e-Frame Final Conference

  16. 6. Outlook • Intangibleinvestment: bothtechnologicaland non-technologicalinnovation • Long-term:littlereason not toaccountforintangibleinvestment in GDP • Medium term:academicprojects, experimental surveysandsatelliteaccounts will moveagendaforward • Major measurementissues on servicelifes, ratesofreturnandsectoralheterogeneityare not solved • Common languagetobefoundbetweenacademics, publicinstitutions, statisticians at NSIs andfirms • Existingsurveys on innovationandtrainingwith a more „micro“ approachcontinuetobeimportantsourceofevidence • Data constructionforthepublicsectorhas just started (SPINTAN) e-Frame Final Conference

  17. Further Reading Corrado, C., J. Haskel, C. Jona-Lasinio, M. Iommi (2013), Innovation andintangibleinvestment in Europe, Japan andthe United States, Oxford Review ofEconomicPolicy, 29(2),261-268. OECD (2013), New Sourcesof Growth: Knowledge-Based Capital – Key AnalysesandPolicyConclusions – Synthesis Report. European Commission (2013), Joint database on intangiblesfor European policymaking - Data fromInnodrive, CoinvestandThe Conference Board – A policy-sciencedialogoe, DG for Research and Innovation – Socio-EconomicSciencesandHumanities. e-Frame Final Conference

  18. Back up I: Communicatingintangiblestothepublic Are wepersuadedthatintangibleassetsexist? • A machinemaybevaluable, obsolete orbroken, but I can in principledeterminebycommonlyagreedcriteriawhetheritexists • The existenceof a patent or a pieceofsoftwareis also quitestraightwardtocommunicate • Creatingassetsthroughtraining, consulting, marketingormanagerialeffortmaybemuchmorerisky • Society morescepticalaboutintangiblevaluecreation after financialcrisis • …maybe tooconventionalreasoning. Machines, softwareorpatentsmay also becountedwhile not contributingpositivelytoproductivity e-Frame Final Conference

  19. Back Up II: Asset List of INTAN-Invest e-Frame Final Conference

  20. Back Up III: Growth Accounting Contributions to the growth of output per hour, 1995–2007 Source: Corrado et al. (2013) e-Frame Final Conference

  21. Back Up IV: Industry-level Resultsfrom INDICSER Share of F&E, design andeconomiccompetencies in adjusted VA average 1995-2007, sourcedataused: EU KLEMS 2009, INTAN-Invest Source: Niebel, O‘MahonyandSaam (2013) e-Frame Final Conference

  22. Back Up V: Firm-level Measurement UK Source: Field and Franklin (2012), presentedby Daniel Ker (ONS) at the e-Frame workshop on intangibles e-Frame Final Conference

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