Capitalization of R&D in the national accounts of Israel

1. Capitalization of R&D in the national accounts of Israel

2. The exercise performed to test: • Feasibility of using existing R&D statistics as a basis for estimates of R&D assets in national accounts. • Implementation of recommendations developed in the framework of the work of the Canberra II group during the last 4 years. • Examination of the impact of R&D capitalization on the main national accounts aggregates.

3. Bridge tables between R&D statistics and national accounts Bridging values needed: • Acquisition of “extramural” R&D to be used as input in R&D production • Consumption of fixed capital owned by R&D producers and used in R&D production • Net operating surplus • Other taxes on production less other subsidies on production

4. Table 1. Summary of simplified bridge table results for Israel

5. Estimates of R&D capital formation • Supply and use of R&D output using the data from bridge tables. • Distinction between market and non-market R&D. • Separation of exports and imports of R&D proved to be important. • Constant price estimates prepared in satellite accounts since 1989.

6. Estimates of R&D capital formation(contd.) • Time lag between the start of R&D projects and the use of the finalized R&D - gestation lag and application lag – assumed to be 2 years, basing on venture capital funds sources. • Unfinished R&D defined as stocks of work in progress, considering the high share of R&D exports in Israel .

8. Uses of R&Dat 2000 prices

9. Estimates of service lives of R&D • Original intention to estimate service lives of R&D in Israel using existing panel data was abandoned due to lack of some important variables. • Instead, an average depreciation rate of 0.15, derived from the paper by Ballester, Garcia-Ayuso, Livnat (2000). • In future work it will be necessary to improve the service life estimates, i.a., by performing industry depreciation rates.

10. Estimates of R&D capital stocks

11. Net impact of capitalization of market R&D on GDP

12. Net impact of capitalization of market and non-market R&D on GDP

13. Capital formation compared to depreciation • Net GFCF obtained is continuously positive, since the depreciation is lower than the fixed capital formation in most years, due to relatively fast growth of the GFCF over the years. • However, the actual impact of R&D capitalization on NDP and NNI is different, since other changes to registration of output for final use have also been made.

14. Net fixed capital formation in R&Dcompared to NNI at market prices

15. Conclusions from the exercise • Feasible to integrate R&D statistics in national accounts, and obtain R&D capital formation and stocks. • The impact of capitalizing market R&D amounts to about 1.5% of GDP • The impact of non-market R&D is also significant - about 1.0% of GDP.

16. Conclusions from the exercise (contd.) • The treatment of non-market R&D in this way is consistent with the treatment of roads and other infrastructure in the current SNA. • However, it is important to show such R&D separately, since it is used by other sectors. • Although the individual use mostly can not be identified, the scope of non-market R&D used by the economy as a whole is of importance.  

17. Conclusions from the exercise (contd.) • The compilation of bridge tables and R&D capitalization process would very likely lead to an improvement of R&D estimates in the national accounts. • Improvement seems to be necessary, whether R&D is capitalized or not. There is a need for separate R&D accounts of a good quality in the SNA framework for economic analysis's and decisions.