The Role of Intangible Investments

The direct impact of technological progress on productivity and its indirect productivity effect through the adoption of those technologies across the economy should not be considered in isolation from a broader concept of investment beyond labour and capital. In recent years an important literature has emerged highlighting that organizational changes and other forms of intangible investment such as workforce training are necessary to gain significant productivity benefits from using ICT (Brynjolfsson, Hitt, and Yang, 2002; Black and Lynch, 2001).

Incorporating non-technological innovations (design, financial innovations), workforce training, improvements in organizational structures, marketing and branding, and—importantly—the creation of databases and other digital systems as part of an economy's creation of capital shows that digitalization does not happen on its own. Traditionally the expenses on such intangibles have not been capitalized in the national accounts (nor on company balance sheets, for that matter). However, following the pioneering work by Corrado, Hulten, and Sichel (2005, 2009), internationally comparable estimates have been put together by the Intan-Invest project and discussed in Corrado et al. (2013). This work divides intangibles into three broad categories: computerized information (software and databases), innovative property (scientific research and development (R&D), design, financial innovations), and economic competencies (workforce training, improvements in organizational structures, marketing and branding).

Table 1.3 shows that Europe (here the EU15 aggregate) has a much lower investment intensity in intangibles than the US. The share of all measured intangible investment in value added for the market sector in the EU15 has increased by one percentage point from 9.5 per cent of market sector value added in the 1995-2002 period to 10.5 percentfrom 2008 to 2010, by which time it was about two-thirds of the US intangibles share in market GDP at 15.3 per cent.[1] While the intangibles intensity was below that of the US in all categories, it was particularly weak in R&D and other innovative property, and market research and advertising. The former is in part related to the less intensive high-tech nature of Europe's manufacturing sector compared to the US, whereas the latter has to do with a smaller share of distributional and personal services in the European economies relative to the US. Within the EU15, the Scandinavian countries, France, and the UK have the highest intangibles intensity, but even here the gap with the US remains significant. Many EU15 countries currently invest less than half than in the US— these include Italy, Greece, and Portugal (Corrado etal., 2013).

Table 1.3. Investment intensity of intangible assets in the market sector as a percentage of market sector GDP for EU15 economies, 1995-2010

1995-2002

2003-7

2008-10

EU15

Computerized information

1.4%

1.6%

1.8%

Scientific R&D

1.6%

1.7%

1.8%

Other innovative property

1.5%

1.7%

1.8%

Market research & advertising

1.4%

1.3%

1.2%

Training

1.3%

1.3%

1.3%

Organizational capital

2.2%

2.5%

2.7%

Total Intangible capital

9.5%

10.0%

10.5%

United States

Computerized information

1.9%

2.1%

2.3%

Scientific R&D

2.7%

2.6%

3.0%

Other innovative property

2.0%

2.7%

2.9%

Market research & advertising

2.0%

2.1%

2.0%

Training

1.6%

1.8%

1.7%

Organizational capital

3.1%

3.5%

3.4%

Total Intangible capital

13.3%

14.7%

15.3%

Note: computerized information includes software and databases, innovative property includes scientific R&D, mineral exploration, entertainment and artistic originals, other new product developments (e.g. design and financial innovations), and economic competencies includes workforce training, improvements in organizational structures, and brands and reputation (including market research and advertising).

EU15 refers to pre-2004 membership of the EU.

Source: Corrado, Haskel, Jona-Lasinio, and Iommi (2013). Intan-Invest project

The US saw sharper increases than Europe in intangibles intensity, rising by 3.3 percentage points over the same period from 12.9 to 15.2 per cent of market sector value added. While the EU15 retained its intangibles during the recession, at least relative to value added, the US lost almost 0.6 of a percentage point in 2009.

The division between the three main categories is fairly similar between the two main regions, but the US showed stronger growth over the entire period in all three asset types, and saw sharper increases especially in computerized information and economic competencies (and more precisely organizational capital) during the late 1990s. The intensity of intangibles is in part related to the structure of the economy, which explains the relatively high intangible shares for the UK and the US, which have large shares of GDP in service sectors. These economies have relatively large shares of their intangibles concentrated in economic competencies, notably organizational investments, and in ICT. In Germany, which has an important share of GDP in manufacturing, the role of innovative property, including R&D, is relatively more important.

ICT and intangible assets are connected in many ways. Some ICT assets, such as software and databases, are themselves classified as an intangible asset. ICT can facilitate the deployment of other intangible assets and enable innovations across the economy, such as the reorganization of production emphasized by Bertschek and Kaiser (2004) and Bresnahan, Brynjolfsson, and Hitt (2002). It can also involve streamlining of existing business processes, for example order tracking, inventory control, accounting services, and the tracking of product delivery. At the same time, capital deepening in intangible assets also provides the foundation for ICT to impact on productivity. For example, the internal organization of a firm plays a role in its ability to use ICT more efficiently, in particular through managerial and other organizational changes.

Going beyond complementarities between ICT and intangibles, Figure 1.3 suggests that there is a strong relationship between intangible capital deepening (excluding ICT) and TFP growth, which is consistent with the possibility of TFP spillovers from intangible investments beyond GDP. More extensive regression estimates suggest this to be the case (Corrado etal., 2013). This result is in line with existing evidence on spillover effects from R&D, but the extension to other assets suggests than many intangible capital assets have public-good characteristics. In addition, recent work on the relationship between product innovation measures shows a strong relationship with TFP (Hall, 2011).

Relationship between intangible capital deepening and total factor productivity growth in EU economies, 1995-2007

Figure 1.3. Relationship between intangible capital deepening and total factor productivity growth in EU economies, 1995-2007

Note: Regression line is for the ten EU countries only. Intangible capital excludes software. Source: Corrado, Haskel, Jonas-Lasinio and Iommi (2013)

Clearly there is also much to argue against spillovers from intangibles. For example, spillovers might not occur if intangible capital is protected by intellectual property rules (copyright, trademarks, etc.) or tacit knowledge (e.g. internal knowledge of supply chain management).

Even beyond a broader investment concept, other business practices may also help companies become more productive than their competitors. One line of research focused on the impact of management practices on business performance, and suggests that about a quarter of cross-country and within-country TFP gaps can be accounted for by management practices. But even management competencies are at least in part the result of investment in human capital and improvement in organizational practices. Competition and governance also help account for the variation in management performance (Bloom etal., 2014).

  • [1] The estimates refer to the 'market' economy, excluding education, health, and publicadministration.
 
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