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Measuring Intangible Capital: Insights and Challenges from e-Frame Final Conference

The e-Frame Final Conference, held on February 10, 2014, at the Centre for European Economic Research (ZEW), explored the complexities of measuring intangible capital, a growing area of interest for policymakers, researchers, and firms. Discussions focused on the Corrado-Hulten-Sichel framework for integrating intangibles into national accounts, the significance of R&D investment, and the future direction of intangible asset measurement. Challenges include data reliability and the need for advanced methodologies. The conference highlighted the importance of these assets in fostering sustainable growth in the knowledge economy.

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Measuring Intangible Capital: Insights and Challenges from e-Frame Final Conference

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  1. Intangible Capital Marianne Saam Centrefor European Economic Research (ZEW) e-Frame Final Conference 10 February 2014 The e-Frame projectisfundedbythe 7th EU Framework Programme, Theme 8 Socio-EconomicSciencesandHumanities, Grant Agreement No. 290 520.

  2. GDP andBeyond: Measurement, PolicyUseandMoving Forward • GDP iscurrentlyaugmentedby R&D investment • Beyondareotherintangibleassets not yetcapitalised in national accounts • Measurement remainschallenging, forexampleforserviceslives • PolicyUseismuchwanted (``smart growth‘‘) but forexampleindustry-level datais still experimental • Moving Forward? Yes, a lotisbeingdone out of FP7 projects, atthe OECD, at NSIs, in national and transnational initiatives…. e-Frame Final Conference

  3. Agenda • MeasuringIntangible Assets: Whatisitandwhomeasuresit? • The Corrado-Hulten-Sichel Framework • Integration into National Accounts • Firm-level Measurement • Policy-Relevant Use • Outlook e-Frame Final Conference

  4. 1. WhatisIntangible Capital? • „Knowledge-basedassets (…) createfuturebenefitsforfirms, but, unlikemachines (…) theyare not physical.“ (OECD, 2013) • „Intangibleassetsare non-physicalsourcesofvalue (claimstofuturebenefits) generatedbyinnovation (discovery), uniqueorganizationaldesigns, or human resourcepractices“ (Lev, 2001) e-Frame Final Conference

  5. 1. Who WantstoMeasureIntangible Capital? Statistical Agencies/Public Institutions Academic Researchers Firms Policy Financial markets Perfor- mance Intangibles Media, society Tangibles Labour e-Frame Final Conference

  6. 2. The Framework by Corrado, Hultenand Sichel • Corrado, Hultenand Sichel (2005, 2009 – CHS) • Framework tomeasureintangibleinvestment in a waycompatiblewith national accounts • ….andconsistentwiththeeconomictheoryofinvestment • Measurement offraction of an identifiable data series on intangible spending that is investment • Expenditure on own-accountorpurchasedknowledgeassets • Wagespaidforworking time spent on creationofknowledgeassets e-Frame Final Conference

  7. 2. Data Using Framework by Corrado, Hultenand 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 • Freelyavailableatwww.intan-invest.net • Joint initiative ofthe FP7 SSH Projects COINVEST and INNODRIVE and The Conference Board, supportedbythe EC (2013) • First industry breakdown of INTAN-Investdata (NACE rev. 1.1) toindustry-level in FP7 SSH project INDICSER • INTAN-Investmeanwhileavailable in NACE rev.2 e-Frame Final Conference

  8. 2. CHS: Country-levelResultsfrom INTAN-Invest GDP shares of tangible vs. intangible investment, 1995–2009 (average values) Source: Corrado et al. (2013), Oxford Review ofEconomicPolicy e-Frame Final Conference

  9. 3. Integration into National Accounts? • Computer softwareanddatabases • Innovative property • R&D (incl. in financialindustry) new SNA 2008-ESA 2010 • Mineral explorationsandevaluation Fixed assetboundary • Entertainment, literaryandartisticoriginals • Design • Economiccompetencies • Brand equity (advertisingandmarketresearch) SNA 2008-ESA 2010 • Organisational capital Non-producedassets • Firm-specific human capital (training) (countediftransaction) Based on Iommi (2013), presentationat e-Frame workshop in intangibles e-Frame Final Conference

  10. 3. Integration into National Accounts? • Trade-off betweencompletenessandaccuracyofcoverageofintangibleassets • GDP hastobemeasurethatistrusted,comparableacross countries and time • Fromthisperspective, conservatismwithregardtochanging GDP seems an almostnecessaryvirtue • On theotherhand, in thelongterm GDP hastokeepupwithnewinsights in thequantificationofassets • „Knowledge economy“ evermoreimportant in policydebate • Intangibleassetscoretarget in EU 2020: 3% of GDP in R&D • The debateaboutexpandingtheassetboundaryshouldcontinue e-Frame Final Conference

  11. 3. Integration into National Accounts? Comments from e-Frame Workshop • Tooearlytoextendassetboundaryof NAs beyond R&D • Conditionsforpossibleextension in thefuture • Framework by CHS adaptedforpracticalimplementation at NSIs • Internationallycomparablesurveyspriorto potential implementation • More knowledgeaboutshort-run propertiesofintangibleinvestment • However, includingonly R&D maybiasmeasurementofintangiblestowardsmanufacturing • Mix ofsurveyingandmodellingmaybeneeded (burden on firms) • Treatment of human capital in national accounts also seenasneedingimprovement e-Frame Final Conference

  12. 4. Firm-level Measurement • ONS/NESTA surveycollectsinformationfrommorethan 1000 firms on expenditures on sixcategoriesofintangibleassetsand on servicelives (Field/Franklin 2012) • Goal: • Provideevidence on intangibleinvestmentbeyond R&D • Collectdata on own-account vs. purchasedintangibles • Complementothersurveys on intangibles • Find out whetherfirmscananswerquestionsaboutservicelivesofintangiblesandaboutownershipof R&D assets • Sample issmallcomparedtoother ONS surveys, R&D expenditurelookslowerthan in othersurveys e-Frame Final Conference

  13. 4. Firm-level Measurement • Firmsthemselvesmayhave an interestorobligationtomeasureintangiblecapital(see Guenther, 2013, presentation at OECD) • Toassestheircontributionto firm performance • Tocomplytoaccountingrules • Tocommunicatetheirinvestmentstocapitalmarketsandpolicy • Critical pointsofaccountingforintangibles • Level offinancialinformation on intangibles in financialreportingislow • Large roomformanagerialdiscretion in thereporting on intangibles • Low voluntarydisclosureofinvestment in intangibles • Intangiblesdataare not usedmuch in managementcontrol, littlevalidation Source: Guenther (2013), presentation at OECD e-Frame Final Conference

  14. 5. Policy-Relevant Use: Intangiblesas Part of GDP “In the short term America’s new GDP measure makes international comparisons more difficult.” (Economist, 3.8.2013) “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) “GDP – New Statistics Let Debt Ratio Decline” (FAZ, Germany, 21.1.14) e-Frame Final Conference

  15. 5. Policy-Relevant Use: Intangiblesas Driver of GDP Conclusionsfrom OECD project • Supply-sideprogramsshouldsupportintangibleinvestment in areasofhighestsocialreturn • Intellectualpropertyrightsneedfurtherdevelopment • Intangibleassetsare an importantfactor in global valuechain • Securitisationofdebtusingintangibleassetscouldbeimprovedtoaddressshortfallsofearly-stage riskcapital • Manyoftheworld‘smostsuccessfulcompanies‘ valueresidesalmostentirely in theirknowledge-basedassets, but corporatefinancialreportsprovide limited information • Policiesneedtoaddresstheeconomic potential of „bigdata“ e-Frame Final Conference

  16. 6. Outlook • Intangibleinvestment: bothtechnologicaland non-technologicalinnovation • Long-term:littlereason not toaccountforintangibleinvestment in GDP • Medium term:academicprojects, experimental surveysandsatelliteaccounts will moveagendaforward • Major measurementissues on servicelifes, ratesofreturnandsectoralheterogeneityare not solved • Common languagetobefoundbetweenacademics, publicinstitutions, statisticians at NSIs andfirms • Existingsurveys on innovationandtrainingwith a more „micro“ approachcontinuetobeimportantsourceofevidence • Data constructionforthepublicsectorhas just started (SPINTAN) e-Frame Final Conference

  17. Further Reading Corrado, C., J. Haskel, C. Jona-Lasinio, M. Iommi (2013), Innovation andintangibleinvestment in Europe, Japan andthe United States, Oxford Review ofEconomicPolicy, 29(2),261-268. OECD (2013), New Sourcesof Growth: Knowledge-Based Capital – Key AnalysesandPolicyConclusions – Synthesis Report. European Commission (2013), Joint database on intangiblesfor European policymaking - Data fromInnodrive, CoinvestandThe Conference Board – A policy-sciencedialogoe, DG for Research and Innovation – Socio-EconomicSciencesandHumanities. e-Frame Final Conference

  18. Back up I: Communicatingintangiblestothepublic Are wepersuadedthatintangibleassetsexist? • A machinemaybevaluable, obsolete orbroken, but I can in principledeterminebycommonlyagreedcriteriawhetheritexists • The existenceof a patent or a pieceofsoftwareis also quitestraightwardtocommunicate • Creatingassetsthroughtraining, consulting, marketingormanagerialeffortmaybemuchmorerisky • Society morescepticalaboutintangiblevaluecreation after financialcrisis • …maybe tooconventionalreasoning. Machines, softwareorpatentsmay also becountedwhile not contributingpositivelytoproductivity e-Frame Final Conference

  19. Back Up II: Asset List of INTAN-Invest e-Frame Final Conference

  20. Back Up III: Growth Accounting Contributions to the growth of output per hour, 1995–2007 Source: Corrado et al. (2013) e-Frame Final Conference

  21. Back Up IV: Industry-level Resultsfrom INDICSER Share of F&E, design andeconomiccompetencies in adjusted VA average 1995-2007, sourcedataused: EU KLEMS 2009, INTAN-Invest Source: Niebel, O‘MahonyandSaam (2013) e-Frame Final Conference

  22. Back Up V: Firm-level Measurement UK Source: Field and Franklin (2012), presentedby Daniel Ker (ONS) at the e-Frame workshop on intangibles e-Frame Final Conference

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