The Knowledge Economy, Intangible Investment and Growth Jonathan Haskel Imperial College Business School, Imperial College London j.haskel@ic.ac.uk British Embassy, Berlin 17th June 2011

Can Europe grow out of trouble? The enduring productivity deficit Revise this Source: EUKLEMS and The Conference Board

The R&D deficit… Source: OECD STI indicators

…and now with China Source: OECD STI indicators

Driving growth in knowledge economies GDP per worker driven by Physical capital deepening Within the firm: ICT Outside the firm: infrastructure Human capital deepening General education of labour force Immigration Ideas/innovation/intangible capital deepening Use of ideas Within the firm: investment in R&D and non-R&D (software, design, training, branding, organisation) From outside the firm: open innovation

So, why is Europe lagging? Composition Larger public sector in Europe brings average down? Too much financial services? Physical capital? Lower computer adoption? Human capital? Ideas/Innovation/Intangible capital? Low R&D. But is R&D the whole story? No, lower productivity in service sectors Maybe, but manufacturing and measurement isnt a big story Computer adoption is shares of computer capital in value added a bit lower than US Human, well US is terrible….

Measuring all intangible investment Knowledge investment is more than just R&D Software Innovative property Scientific R&D Design Financial services product development Artistic originals Economic competencies Marketing Training Firm organisational capital

Intangible/tangible investment varies significantly across countries Greece, v v low intang investment, much more tang. Compare with the US and Sweden Source: OECD/COINVEST project

How does composition of intangible investment vary How does composition of intangible investment vary? (Investment by intangible asset share in GDP, 2005 selected countries) Sweden and Ja, very R&D intensive US, who are big on R&D, much more on training etc. Source: OECD/COINVEST project

Manufacturing is not manufacturing any more… Note that manufacturing is not manufacturing any more But.. Ge intang is a lot in manufacturing Source: COINVEST

Knowledge is the key to growth (growth accounting, 1995-06) Source: OECD/COINVEST project

Policy?

Strict employment protection correlated with low intangible investment… Source: COINVEST

…as is many days to start a business. Source: COINVEST

Government R&D can help… Source: COINVEST

…and note that strictness positively correlated with tangibles. …. Source: COINVEST

Implications Key importance of knowledge Policy : what not to do Knowledge = Intangibles and TFP = major contributors to growth It’s not just R&D Manufacturing is not manufacturing any more Policy : what not to do Stop obsessing about manufacturing and just R&D Policy: what to do All investment needs long term tax and regime certainty. Bank regulation? Government Science Budgets and public R&D will help Employment regulation Part of overall social contract Helps tangibles, hurts intangibles So the choice: do we want growth from catch-up or innovation?

spares

Manufacturing: Ge leads, but mostly intermediates. Sw intangible based Retail: Sw leads. TFP important FinBizServices: UK lead, intangibles important

  Let us present the variation from the CHS baseline for each modified asset in the countries listed above. The different intangible asset estimates within countries could be ascribed to two major differences. First, different sources might have been used for same asset in the CHS and Coinvest data versions. Generally, when those differences are quite small we consider them negligible. Second, different assumptions apply in the estimates of the assets.

Richer country can afford intangible investment, or is at the higher end of the supply chain (higher-value-added activities). Source: Hao et al. (2009) for Germany, France, Italy and Spain; CHS (2009) for the US , Marrano et al. (2009) for the UK, Jalava et al. (2007) for Finland, Fukao et al. (2009) for Japan, Edquist (2009) for Sweden, Van Rooijen-Horsten et al. (2008) for the Netherlands and Barnes and McClure (2009) for Australia. GDP per capita is from the Total Economy Database of The Conference Board. 22

Sweden and UK are most intangible intensive….with Germany following….. Note: market sector value added is adjusted for intangible spending and excludes real estate NACE code 70 Source: Coinvest and Euklems 23 23

In which industries do countries invest of their intangible capital In which industries do countries invest of their intangible capital? Ge most intangible investment in manufacturing, UK in services Figure 13 reports intangible and tangible investment as a share of value added in three industries for UK, Germany and Sweden in year 2006. Value added has been adjusted to include intangible investment.

Intangible contributions Retail: similar; Mfr: Sweden high; Finance: UK high

An innovation gap?