A Satellite Account for Research and Development for Denmark

1. A Satellite Account for Research and Development for Denmark By Christian Gysting, Statistics Denmark

2. Structure of this presentation • About the project • Compilation of the R&D satellite account for Denmark, 1990-2003. • Sources • The method • Results

3. The original plan: A joint project • The original plan: A joint project between Statistics Denmark and The Ministry of Economic and Business Affairs • Statistics Denmark: R&D Satellite Account for Denmark, 1990-2003. • Report in Danish and in English • The Ministry of Economic and Business Affairs: Micro and Macro productivity analysis.

4. Resources and time consume • Ressources: 1 economist and 1 student assistent • Time: The project was launch in january 2005 and completed in august 2006. • Gathering of data: Purchase from The Danish Centre for Studies in Research and Research Policy

5. The R&D satellite account • What is The Satellite Account for Research and Development? • A national account system where R&D is treated as gross fixed capital formation. • Adjusted GDP • R&D investment with a break down on industries. • All R&D expenditure is treated as GFCF.

6. The scope of the R&D satellite account • Period: 1990 – 2002 (beginning of 2003). • R&D GFCF estimated back to 1966 (PIM) • Variables: • adjusted national account system • GDP • Value Added, break down on industries. • R&D Gross stock, break down on industries. • R&D Net stock, break down on industries. • R&D Consumption of fixed capital, break down on industries. • R&D Gross fixed capital formation, break down on industries. • Prices: • All figures in current prices and constant 2000-prices.

7. Sources • Primary R&D statistics according to the Frascati Manuals definitions: • Data collected by The Danish Centre for Studies in Research and Research Policy • Additional breakdown on industries: • Statistics Denmarks statistics on empleyment by occupation (ISCO-88, International Standard Classification on Occupations)

8. Sources: R&D statistics • Frascati Manual: International Manual on Measurement of Research and Development. • OECD • GERD – Gross domestic Expenditure on Research and Development • Main aggregate in the Frascati Manual • Estimated as the sum of wages, intermediate consumption and gross fixed capital formation • Cost-based estimation of R&D-output

9. Alternative sources • Alternative information about R&D in current NA: • Purchased R&D: Sale of a service • Import and export is part of the foreign trade statistics. • Own account production: Unknown. • The satellite account is mostly based on figures from The Danish Centre for Studies in Research and Research Policy

10. The Method (1) Compiling the R&D satellite account is a 3 step process: • Estimation of R&D production and R&D gross fixed capital formation according to national account definitions (bridge table) • Estimation of R&D capital stocks • Adjustment of the present national account figures

11. The Method (2): Output estimated as the sum of costs • Output estimated as the sum of costs • No market prices of own account production of R&D • Purchased R&D is included in total R&D-output

12. The Method (3): Simplification • Freely available R&D is included in R&D investments • No VAT, other taxes on products and trade margins on R&D-services • Values at basic price equal to values at purchasers price for R&D services • No lag between time of expenditure and time of investments • No R&D is treated as intermediate consumption but as capital formation

13. Commodity flow table for R&D

14. The bridge table • The bridge table: A link between primary R&D statistics and R&D output and R&D GFCF according to national account definitions.

15. [A]: GERD

16. [B]: GFCF included in GERD • The sum of cost approach: We use consumption of fixed capital instead of gross fixed capital formation • Identification of acquisition of buildings and equipment: • Can be found in the R&D statistics.

17. [B]: Consumption of fixed capital • Consumption of fixed capital is estimated as a mark-up on the sum of wage and salary costs and intermediate consumption at the level of industries. • The mark-up rate is obtained from the general national accounts at industry level, where the consumption of fixed capital’s share of [compensation of employees and intermediate consumption] can be simply estimated.

18. [C]: Software (1) • R&D-expenditure (GERD) include some elements of R&D on software. • Double counting

19. [C]: Software (2) • Information from primary R&D statistics on purpose of R&D expenditure. • Question in R&R survey on type of product the R&D is related towards (2001). • On of this products is hardware and software combined • Special survey on ICT (2003). Break down on type of ICT. • Software is identified • Approximate 14-15 per cent of the expenditure is target at software development (in 2002)

20. [C]: Software (3)

21. [C]: Software (4)

22. [D]: Other taxes less subsidies on production • Needed in a cost based estimation of output • Information is available within the national account division

23. [E]: Return to capital (net operation surplus) • ”Compensation” for the capital services provided by the capital stock • estimated as a mark-up on wage and salary costs and current expenditure on the basis of the general ratio between net operating surplus and [compensation of employees as well as intermediate consumption] at industry level.

24. [G]: Trade of R&D-service • Not all R&D output is own account production. • Information (from primary statistics) on the amount spend on buying R&D-services is used to determine 2 factores: • The amount spend on purchase of R&D services • The buying industries • Information (from primary statistics) on the purpose of the R&D-out is used to determine the selling industry • For instance: R&D expenditure in the research and development industry (NACE 73) target on agriculture is assumed to be purchased by the agriculture industry (NACE 1)

25. Constant prices • R&D-output in current prices is transformed into constant prices by deflating each input component. • Compensation of employees: Weighting of 2 indices of earnings: 1) Trends in the compensation of employees per man-year for persons engaged in research and development activities, according to the R&D statistics from CFA (broken down by persons employed in the public and private sector and 2) Statistics Denmark’s general indices of earnings for the manufacturing industry and the government sector, respectively. • Intermediate consumption: Implicit price indices from the national accounts for intermediate consumption at the level of industries. • Consumption of fixed capital: Implicit price indices from the national accounts for consumption of fixed capital at the level of industries. • Subsidies: The base year’s percentage rate for subsidies. • Net operating surplus: The base year’s percentage rate for net operating surplus.

26. The brigde table

27. Step 2: R&D Capital stock • PIM • Service lives • basic research: 13 years • applied research: 11 years • experimental development: 9 years • Depreciation pattern: Straight-line • Survival functional form: Winfrey S3

28. Results (1): Gross fixed capital formation, 2000.

29. Results (2): Net capital stock, 2003

30. Step 3: Adjustments to the current national account compilation • The output and gross fixed capital formation in the private sector is increased by own account production of R&D in the private sector. • The purchase of R&D by private sector companies is reclassified from intermediate consumption to gross fixed capital formation. • The own account production of R&D by general government is reclassified from government consumption expenditure to gross fixed capital formation. • The purchase of R&D by the general government sector is reclassified from government consumption expenditure to gross fixed capital formation. • The output in the general government sector is increased by the new R&D consumption of fixed capital in the general government sector.

31. Step 3: Adjustments to the current national account compilation, impact on GDP

32. Results (1): Adjustments

33. Results (2): Size of adjustments on selected aggregates

34. Results (3): Saving ratio

35. Possible improvements • Information on sale and purchase of R&D • Break down of purchased R&D into intermediate consumption and GFCF • Identification of freely available R&D • Mark-up for capital services (CFC and return to capital)