Intangibles, Innovation & Growth; Theory and Evidence

Jonathan HaskelImperial College Business School, Imperial

College Londonj.haskel@ic.ac.uk

COINVEST Sofia seminar, July 2010 COINVEST is a European Commission Framework 7 project funded under the Socio-economic Sciences and Humanities theme: www.coinvest.org.uk

• Objective: better understanding of growth and innovation• What drives growth and innovation?

– Henry Ford economy: machines = “tangible capital”– iPhone economy: knowledge = “intangible capital”

• What “intangible capital” is behind the iPhone?– Some R&D– But also: design, software, marketing, business organisation etc.

• So what has COINVEST done?– Measured wider set of intangible assets across 7 countries for the

market sector– Integrated such measures with National Accounts– Calculated effects of intangible investment on productivity and

growth– Backed with micro studies

• To understand why this is new, some history behind intangible studies

Innovation for the iPhone era: summary of COINVEST project

The intangibles agenda

• What drives growth?– Using more of existing factors = factor accumulation– Using existing factors better or developing new ones

= new ideas = innovation

• Traditional approach– Account for output by

• Factor accumulation: in practice tangible factors• Labour quality• Innovation = the residual: that is, the increase in output that

cannot be explained by increases in tangible inputs

The intangibles agenda, 2

• Strength of growth accounting framework – Conditional on assumptions, consistent account of growth– Linked with core economic and national accounting measures,

e.g. GDP– Link with economic theory means provides framework for

evaluating where private and social returns differ = policy framework

– Very successful in understanding the ICT revolution• Weakness of framework

– Relies on strong (?) assumptions– Measurement issues formidable– Account of innovation in the traditional approach (output, tangible

capital, labour quality) not strong:• Has to be freely available knowledge• Policy makers and non-economists find residual approach

unsatisfactory

The intangibles agenda, 3• Dissatisfaction with the residual moved innovation focus to

– Patents– Innovation surveys and innovation indicators– Innovation scoreboards

• Growth accounting focus became– IT revolution– R&D

• Innovation literature became rather disparate…• Many IT papers very much in growth accounting framework

– Backed by theory, strong measurement focus: core questions (did IT earn normal market returns?)

• Much other innovation work– Patents work v detailed but

• Subset of innovation• Citations data noisy• Changes in registration methods affect time series

– Innovation survey work wider than just R&D, but • Disconnected with other measures e.g. problems with time series

• Hanging over this is feeling that innovation process has changed– Strongly related to IT, but broader e.g. organisational change– User innovation– Open innovation: companies innovating without patents– Innovative sectors are retailing, banking, airlines

The intangibles agenda, 4• The Corrado, Hulten, Sichel approach: extend the boundaries of

growth accounting to more intangible assets besides R&D– Software– Innovative property

• R&D• Design• Financial services product development

– Economic competencies• Marketing• Training• Firm organisational capital

• Timely because– Fits with idea that innovation is more than just a residual– Fits the ICT revolution intuition that implementing ICT needs co-

investment in branding, new organisations etc.– Keeps the discipline of outputs and inputs– Fits with the broader innovation idea…

Innovation in the modern era

• The iPhone:– R&D and patents. But:– Software, Design, Marketing and reputation,

• Low cost airlines– No R&D, no patents. But:– Software, branding, business process

• Financial services– No R&D, no patents. But: – Non R&D product development, software, branding,

business process, training

Intangibles: some strengths

• Intangibles framework passes tests of– these innovations in the framework, including

spillovers (important in banking and airlines)– Integrated with price and quantity systems– Can evaluate policies e.g. policy suggestion

tax credit for software?– Helps with Europe2020 measurement

ambitions

Intangibles: more data needed on:

• Intangibles framework needs assumptions on:– List of assets and how to measure their spending

• Most existing surveys not set up to measure• We think own-account very important so needs detailed

questionnaires e.g. time allocation in OECD software method

– Intangible asset and user cost deflators• Intangibles often not traded, no observable asset or user

cost prices

– Incorporation into growth accounting• Needs assumptions on depreciation and competition

Intangibles: the to do list

• Micro questionnaires– New ONS questionnaire, extends R&D survey (slides below)

• Intangible depreciation– Evidence from new ONS questionnaire (slides below)

• Intangible asset prices – New work on inferring intangible prices from downstream

industries (joint work in progress with Carol Corrado and Peter Goodridge)

• Policy analysis (slides below)– Do intangibles close the productivity gap?– The role of public sector R&D– Cross country studies of policy indicators and intangibles

Some results

• Some macro results– Investment in intangibles– Effects on growth– Cross-country comparisons

• Some micro results– New questionaires

Tangible and Intangible Investment, 2006(% market sector GDP, COINVEST + other countries)

Investment by intangible asset (share in GDP, 2005 selected countries)

2.23 0.83 1.98 1.41 0.73 1.43 1.42

6.07

3.27

5.483.18 3.58

4.732.90

2.81

3.48

4.44

3.30 2.84

5.86

5.36

0

2

4

6

8

10

12

14

Japa

n

Port

ugal

Swed

en

Fran

ce

Ger

man

y US

UK

%GDP

Software and databases R&D and other intellectual property products Brand equity, firm training, organisational capital

Growth accounting (selected countries, 1995-06)

0.30 0.22 0.18 0.40-0.15

1.40

0.910.64 0.83

0.430.68

0.90

1.231.33

0.950.69 0.88

1.30

0.690.82

0.330.48 0.37

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Swed

en UK US

Japa

n

Fran

ce

Ger

man

y

% Labour quality Physical capital deepening Multifactor productivity Intangible capital deepening

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

0 10000 20000 30000 40000 50000

Inta

ngib

le In

vest

men

t (%

GD

P)

GDP per capita (PPP $)

Intangible Investment and GDP per Capita (2001-04)

SK

CZ

EL

USJPUK

AUSE

FINL

DKFR

DEAU

IT

ES

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.

0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%

0 20 40 60 80 100 120

inta

n in

v (%

gdp)

days required to open a business

Intangibles and Barrier of Enterpreneurship

US

AUDK NL

UKSE JPFIFR

IT AT CZDE

ELSK

ES

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

0 0.5 1 1.5 2 2.5 3

inta

n in

v (%

gdp)

R&D as a % of gov budget

Intangibles and R&D in Gov Budget

USJPUK

FR

ES

SE

NLDE

DK

ITATCZSK

EL

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. R&D as a share of governmetn budget is from Eurostat.

Development of micro evidence

• Main micro data on intangible investment– Software (purchased) from purchase inquiries– R&D from R&D surveys

• We want to be broader than this– EU innovation surveys

• Some ask intangible spending questions• But mostly poorly drafted and answered

– UK effort: to extend the UK R&D survey

UK Intangible Investment Survey

• Survey– Conducted by ONS in October 2009– Voluntary postal survey of 2,004 UK companies with ten or more

employees across the production and service sectors. Response rate 42%

– Stratified by industry and employment– Linkable via business register

• Questions – Firms’ spending on main intangible assets: R&D, software,

training, branding, design, organisation or business process improvement

• Own account and • Bought in

– Life lengths • Priorities

– Ask for own account data– Linked to business register

Layout of questionnaire

Assets divided into sections

Each section has a filter question which defines the asset with examples

Then asks purchased and own-account

Finally life lengths

% of respondent firms conducting intangible investment by asset category

• Confirms: non-R&D intangible spending is much more widespread than R&D spend

35%

30%

22%

8%

10%

13%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Training Software Reputation & Branding R&D Design Business ProcessImprovement

Asset Category

Perc

en

t o

f fi

rms c

on

du

cti

ng

in

tan

gib

le a

sset

Total expenditure by category (£m), weighted to give estimates of UK totals

• Observe importance of in-house spending

2360

3616

6433

4366

309649

4700

77162732

4864

847728

0

2000

4000

6000

8000

10000

12000

Training Software Reputation & Branding R&D Design Business ProcessImprovement

asset Category

To

tal

ex

pe

nd

itu

re (

£m

)

In-house

Purchased

Average benefit lives by asset (years)

• Findings– All are > 1 year– If we include time to development and implement,

R&D is longer

2.7

3.2

2.8

4.6

4.0

4.2

0.0

1.0

2.0

3.0

4.0

5.0

Training Software Reputation & Branding R&D Design Business ProcessImprovement

Asset Category

Av

era

ge b

en

efi

t li

ve

s (

yea

rs)

Summary

• Intangible investments are structured way of thinking about growth and innovation

• Becoming part of measurement systems anyway– Software treated as investment– R&D to be so treated

• Need new questionnaires: some being developed

Spares

Wednesday, April 19, 2023 30

• Is knowledge becoming more “important” in the Economy?

• Computers, iPods, etc. it feels like it! Can we be more precise? How do we think about growth?

• Proximate causes and ultimate causes

• Proximate:

• Ryanair. Machines and workers.• How do you get more? Either:

• Duplicate: more planes, more crew. • Innovate: more ideas

• So proximate drivers of growth are:• More capital (planes)• More labour (crew, check in)• More ideas (fast boarding, arranging rostering)

• Ultimate drivers are determinants of these

• Corruption and appropriation• Schooling investment etc.

Accounting for knowledge in growth

Wednesday, April 19, 2023 31

• Measurement

• We need to measure the contribution of the quality adjusted stock of capital and labour

• Capital: computers, better planes• Labour: better educated

• Measuring ideas is very hard. So do this as a residual i.e.

• Ideas contribution = output growth minus labour and capital input growth

• OR: output growth

= contribution of labour and capital input growth + ideas contribution (total factor productivity)

• How much are these relative contributions?

• Start by looking at developing countries

So, what drives growth? Capital, labour, ideas?

Wednesday, April 19, 2023 32

How exactly do we do the calculation? Growth accounting

Start with a very stylised model of production

Features • breaks out contribution of ideas, labour, capital• diminishing marginal returns• constant returns to scale• Easy form for growth rates (changes in ln)

Output = TFP Capital Stocka Labor Hours(1-

a)

% ch in output = % change in TFP

+ a*(% change in Capital Stock) +(1-a)*(% change in Labor Hours)

Three sector model

, , , ,

, , , , , ,

, , ,

(a) Intangible sector : ( , , );

(b) Tangible sector : ( , , , );

(c) Consumption sector : ( , , ,

N N L Kt N t N t t t t N t t N t

I I L K Nt I t I t I t t t t I t t I t t I t

Ct C t C t C t

N F L K t P N P L P K

I F L K N t P I P L P K P N

C F L K N t

Intang as intermediates

, , ,

, ,

);

GDP:

C L K Nt t t C t t C t t C t

Q C I L Kt t t t t t t t t ta b c

P C P L P K P N

P Q VA P C P I P L P K

1(1 )t t K tK I K

, , , , , ,

, , , , , ,

,

(a) Intangible sector : ( , , , );

(b) Tangible sector : ( , , , );

(c) Consumption sector : ( ,

N N L K Rt N t N t N t t t t N t t N t t N t

I I L K Rt I t I t I t t t t I t t I t t I t

Ct C t

N F L K R t P N P L P K P R

I F L K R t P I P L P K P R

C F L K

Intang as investment

, , , , ,

, ,

, , );

GDP:

C L K RC t C t t t t C t t C t t C t

Q C I N L K Rt t t t t t t t t t t t t ta b c

R t P C P L P K P R

P Q VA P C P I P N P L P K P R

1(1 )t t K tK I K

1(1 )t t R tR N R

Lesson: a. GDP rises

b. international productivity comparisons change

Sources of growth with intangibles

/ : ln ln ln ln

: ln

TAN

TANL K

Growth a c V s L s K TFP

Innovation index II TFP

/ : ln ln ln ln ln

: ln ln

TAN INTAN

INTAN

INTAN TAN INTAN INTANL K K

INTAN INTAN

K

Growth a c V s L s K s K TFP

Innovation index II s K TFP

Excluding intang:

Including intang:

Lessons: a. productivity growth changes

b. TFPG changes

c. “innovation” changes