Developing a UK R&D Satellite Account

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

2. Presentation to Eurostat R&D Task Force 27 March 2008 • Background • Methods and conceptual issues • Practicalities & data • Experimental results for UK • Future developments • OECD Task Force involvement • Constraints & objectives

3. 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

4. 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

5. 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impact ambiguous • National income likely to be revised up • Secondary distribution of income • Transfers to do R&D no longer current (removed) • (?)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

6. 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.

7. 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

8. 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

9. 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

10. 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

12. 4. Experimental results Published in http://www.statistics.gov.uk/cci/article.asp?ID=1903

14. Comparison of alternative R&D output estimates by sector, 2004 (£ billion) Source: Galindo-Rueda (2007) Economic & Labour Market Review

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

16. Impact of R&D capitalisation on Goods and Services Account

17. Impact on GDP growth rates

18. 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.

19. 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)

20. 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.

21. 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