1. 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.

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 2014e-Frame Final Conference2

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 2014e-Frame Final Conference 3

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 4

5. 1. Who Wants to Measure Intangible Capital? Statistical Agencies/Public Institutions Academic ResearchersFirms 10 February 2014e-Frame Final Conference5 Policy Intangibles Tangibles Labour Perfor- mance Perfor- mance Media, society Financial markets

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 2014e-Frame Final Conference6

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.netwww.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 2014e-Frame Final Conference7

8. 2. CHS: Country-level Results from INTAN-Invest 10 February 2014e-Frame Final Conference8 GDP shares of tangible vs. intangible investment, 1995–2009 (average values) Source: Corrado et al. (2013), Oxford Review of Economic Policy

9. 3. Integration into National Accounts? 1.Computer software and databases 2.Innovative property i.R&D (incl. in financial industry)new SNA 2008-ESA 2010 ii.Mineral explorations and evaluationFixed asset boundary iii.Entertainment, literary and artistic originals iv.Design 3.Economic competencies i.Brand equity (advertising and market research)SNA 2008-ESA 2010 ii.Organisational capitalNon-produced assets iii.Firm-specific human capital (training) (counted if transaction) Based on Iommi (2013), presentation at e-Frame workshop in intangibles 10 February 2014e-Frame Final Conference9

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 2014e-Frame Final Conference10

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 2014e-Frame Final Conference11

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 2014e-Frame Final Conference12

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 2014e-Frame Final Conference13

14. 5. Policy-Relevant Use: Intangibles as Part of GDP 10 February 2014e-Frame Final Conference14 “In the short term America’s new GDP measure makes international comparisons more difficult.” (Economist, 3.8.2013) “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) “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) “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)

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 2014e-Frame Final Conference15

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 2014e-Frame Final Conference16

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 2014e-Frame Final Conference17

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 2014e-Frame Final Conference18

19. Back Up II: Asset List of INTAN-Invest 10 February 2014e-Frame Final Conference19 Asset typeKey SourceDepreciation Rate Computerized information 1. SoftwareEU KLEMS (investment)31.5 2. DatabasesEU KLEMS (investment)31.5 Innovative property 3. Mineral explorationNA/SUT (investment)7.5 4. R&D (scientific)BERD (expenditures)15 5. Entertainment and artistic originalsNA/SUT (investment)20 6. New product/systems in financial servicesEU KLEMS, WIOD, STAN (labour compensation)20 7. Design and other new product/systemsSBS (turnover)20 Economic competencies 8. Brand equity a. AdvertisingZenith Optimedia (turnover)55 b. Market researchSBS (turnover)/ ESOMAR (add. source for consistency)55 9. Firm-specific resources a. Employer-provided trainingCVTS (costs of CVT)/LCS(apprentice costs)40 b. Organizational structureSBS (turnover), LFS (# employees)/SES (earnings)40

20. Back Up III: Growth Accounting 10 February 2014e-Frame Final Conference20 Total capital deepening Tangibles Intangibles Labour composition MFP (1)(2)(3)(4)(5)(6) Austria2.40.80.30.50.21.4 Belgium1.80.70.20.50.11.0 Denmark1.41.20.70.50.2–0.1 Finland3.80.90.20.70.22.7 France1.91.00.40.60.40.5 Germany1.71.00.70.30.00.8 Ireland3.81.40.80.60.12.2 Italy0.60.70.50.2 –0.4 Netherlan ds 2.30.90.40.50.41.0 Spain0.81.00.70.30.5–0.6 Sweden3.71.91.10.80.31.5 UK2.91.50.80.70.41.1 US2.81.50.70.80.21.1 Contributions to the growth of output per hour, 1995–2007 Source: Corrado et al. (2013)

21. Back Up IV: Industry-level Results from INDICSER Share of F&E, design and economic competencies in adjusted VA average 1995-2007, source data used: EU KLEMS 2009, INTAN-Invest 10 February 2014e-Frame Final Conference21 Source: Niebel, O‘Mahony and Saam (2013)

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 2014e-Frame Final Conference22