Developing a UK R&D Satellite Account Progress made and developments Fernando Galindo-Rueda Economic Analysis Division Office for National Statistics

Presentation to Eurostat R&D Task Force 27 March Background 2. Methods and conceptual issues 3. Practicalities & data 4. Experimental results for UK 5. Future developments OECD Task Force involvement Constraints & objectives

1.Background SNA 1993 Revision 1 –R&D should be treated as gross fixed capital formation in the SNA, defined as in the Frascati Manual. –Valued at cost to reflect most activity on own account. –R&D Spillovers to be excluded –Patents subsumed into R&D assets Previous ONS analysis for Eurostat Revised in recent published analysis OECD Task Force

2. Methods and conceptual issues Production account –Traded R&D services: Simple reclassification of use from IC to capital formation –Own account R&D: De facto treated as ancillary output. Estimate own account output / use as above –Licences for use (rental) of IP: No changes –Non market R&D: Services from Government R&D stock –External G&S account: Outright sale/purchase patents ROW becomes trade in services Generation of income –Subsidies on production (R&D tax credits) already in –Operational Surplus revised up

2. Methods and conceptual issues (cont.) Allocation of income –GOS (resource) revised up –Property income R&D performed by UK MNEs overseas generates notional GOS Reinvested earnings on outward FDI Same applies to foreign MNEs in UK Net property income impact ambiguous –National income likely to be revised up Secondary distribution of income –Transfers to do R&D no longer current (removed) –(?) “Free” provision of knowledge within MNEs –(?) Other transfers “in kind” –Disposable income likely to be revised up Use of income account –Consumption by non profits revised down (treated as FCF), up (services of R&D capital to non-market owners) –Saving likely to be revised up

2. Methods and conceptual issues (cont.) Capital account –GFCF: Acquisitions less disposals of intangible produced assets revised up New assets – reflect R&D services Existing assets – reflect outright sale/purchase of existing R&D knowledge (i.e. patents) –Ownership transfer costs for patented entities (removed), into GFCF –Consumption of fixed capital (Revised up to reflect depreciation of new asset) –Changes in inventories (already some R&D work in progress) (?) –Acquisition less disposal of non produced non financial intangible assets (remove those related to patented entities linked to R&D) –Capital transfers: Revised to acknowledge R&D transfers previously treated as current –Net lending. Ambiguous impact.

2. Methods and conceptual issues (cont.) Financial account –Direct foreign investment arising from reinvested earnings Other changes in volume of assets & revaluation –Accounts not produced: would have recorded appearance of patents and obsolescence –Expected obsolescence of R&D asset in CFC –Revaluations to reflect success / failure of R&D? vs cost approach –Revaluations to financial assets & liabilities to reflect obsolescence of knowledge (e.g. other changes to international investment position) Balance sheet (etc…) –Estimate stocks of R&D knowledge

3. Practicalities and data Need to work with Frascati sources –Cheap, easy, only way to capture own-account Need to “build a bridge” from Frascati to SNA –Current sources (assumptions needed) –Improve / further develop Frascati sources (work with NESTI) Short term “solutions” vs long term questions –Changes to SBS / purchase inquiries –SERVCOM –Government & non-profit data –FDI sources –Overlaps BERD / SBS

Experimental analysis (sketch) Frascati intramural costs  R&D output basic prices –Compensation of employees –Intermediate consumption Treatment of extramural R&D as an input in R&D production –Operating surplus: Capital services of fixed stock –Taxes less subsidies on production : R&D tax credits –Scope: Business / Other / Social sciences / Software DC R&D output  R&D resources R&D resources  R&D uses –(adjusted perfomer-funder approach) –Problem with non-performers of R&D  New R&D supply/demand flows Adjust supply / use table –New R&D “row” replaces old –Adjustments to other goods and services  Can work out GDP(O) & GDP(E) revisions

Experimental analysis (sketch) R&D deflator –Costs of inputs –Quality adjustments (?) Depreciation rates –Different rates for owner & industry (?) R&D stocks (PIM) for R&D capital consumption R&D capital services –Additional output of non-market producers –Useful for productivity analysis

FM R&D expenditureNA economic cost of R&D production Source Wages and salaries current expenditure Compensation of employees Data from BERD, MA14 Other current expenditurePurchases of goods and services other than R&D Data from BERD, MA14 -Intermediate consumption of R&D services Estimated, various sources Capital expenditure- Data from BERD, MA14 - Consumption of fixed capital used in R&D production Estimated, various sources -Net operating surplus (net return on capital used) Estimated, various sources -Taxes less subsidies on R&D production ONS from R&D tax credits data Sum: Intramural R&D expenditure Sum: Gross R&D output at basic prices

4. Experimental results Published in

Bridge from Intramural R&D to R&D supplyCorpsGovNPISH Starting point: Frascati Manual intramural R&D expenditure12,8162,1705,411 less software adjustment equals: within scope R&D expenditure12,2672,1705,411 plus adjustment for tangible fixed assets1, equals: cost of R&D production excluding R&D IC13,5822,1345,322 plus intermediate consumption (IC) of R&D in production of R&D72392 equals: R&D output at producers' prices13,6552,1735,325 less subsidies on production equals: R&D gross output at basic prices12,9382,1735,325 plus taxes less subsidies on R&D services32400 equals: R&D gross output at purchasers’ prices13,2622,1735,325 plus imports of R&D1, plus intermediation margins000 equals: total R&D supply14,6832,7565,325 Source: Author's calculations on a number of ONS sources

Comparison of alternative R&D output estimates by sector, 2004 “Firms”GovtNon- profits All Economy R&D intramural expenditure (R&D stats) R&D output (National Accounts) R&D output (experimental) Source: Galindo-Rueda (2007) Economic & Labour Market Review (£ billion)

Deflators for R&D Source: Galindo-Rueda (2007) Economic & Labour Market Review

Resources Uses R&D output12,403R&D intermediate consumption-5,274 Output of other goods and services (OGS) (double counting)-9,089 Intermediate consumption OGS (double counting)-1,363 Output of OGS from non-market consumption of R&D capital services4,216R&D gross fixed capital formation19,407 R&D imports (adjustment from BoP to FM sources)197 Changes in inventories (elimination of work in progress)12 Final consumption of R&D by NPISH (elimination)-325 Final consumption of OGS by NPISH (double counting)-5,084 Final consumption of services from R&D capital by NPISH1,776 Government final consumption of OGS (double counting)-2,641 Final consumption of services from R&D capital by government2,440 R&D exports (adjustment from BoP to FM sources)-1,219 Total supply of R&D12,600Total demand of R&D12,600 Total supply of OGS-4,873Total demand of OGS-4,873 Total supply7,727 Total demand7,727 Impact of R&D capitalisation on Goods and Services Account

Impact on GDP growth rates Percentages Real GDP annual growth rate Nominal GDP annual growth rate Blue Book2006 Satellite estimate Blue Book2006 Satellite estimate

Estimates of impact of changes on key economic ratios R&D intensity (GERD/GDP) –Stays almost unchanged, below 2% R&D investment rate similar, but slightly lower Overall investment rate up from 16% to 18% Profit share (GOS/GDP) – Up by 1 pp. Saving rate up by 1 to 1.5 pp –Still to figure out precise divergence GDP – National Income.  Balance of new surplus from R&D by UK MNEs abroad and R&D by foreign MNEs in UK.

5. Future developments Objectives and constraints –Meet user needs – considerable policy interest in intangibles as a whole –Ensure conceptually sound yet practical recommendations –Minimise admin burdens on survey respondents –Contribute to key ONS commitments (re-engineered systems and efficiency savings)

5. Future developments (continued) Contribute to drafting of OECD handbook on intellectual property assets through involvement in its task-force –Data-linking analysis to address trade and MNE issues –Identify additional sources on IP stocks and flows –Expert-group approach to estimating some key parameters, such as service lives –Align this with efforts to measure government output. Develop revised (experimental) estimates in line with OECD recommendations by end of 2008.

5. Future developments (continued) Work with NESTI & ONS R&D sources team to bridge R&D sources gaps ONS National Accounts position: –No decision reached –Will assess analysis provided by EAD and international guidance in relation to: Need to fit with re-engineered systems & re-structured National Accounts Division Links with identified weaknesses in systems Priority-driven, coherent development of R&D within the new systems