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Intangible Investment, the Digital Economy and the Productivity Puzzle
Based on joint work with Stian Westlake, Carol Corrado, Cecilia Jona-Lasinio,
Massimiliano Iommi
Presentation at Villa Mondragone International Economic Seminar, Rome, June 2018
1 / 31
The ever-changing digital economy
• Free goods - Skype, Google, Facebook
• The Cloud
• Big Data
• Arti�cial Intelligence
• But a puzzle: if we have all this technicalchange, why is productivity slowing down?
How well do our usual measures pick up these types of changes?
3 / 31
The ever-changing digital economy
• Free goods - Skype, Google, Facebook
• The Cloud
• Big Data
• Arti�cial Intelligence
• But a puzzle: if we have all this technicalchange, why is productivity slowing down?
How well do our usual measures pick up these types of changes?
3 / 31
The ever-changing digital economy
• Free goods - Skype, Google, Facebook
• The Cloud
• Big Data
• Arti�cial Intelligence
• But a puzzle: if we have all this technicalchange, why is productivity slowing down?
How well do our usual measures pick up these types of changes?3 / 31
Britain's most famous innovation
4 / 31
Britain's most famous innovation
4 / 31
More British innovation
• Many connected with the Digital Economy
• How well are these innovations re�ected in usual measures?
5 / 31
More British innovation
• Many connected with the Digital Economy
• How well are these innovations re�ected in usual measures?
5 / 31
Case study: the World's Top Companies (by market capitalisation, 2017)
Source: PWC
Some questions
• Do the published balance sheet assets of buildings, equipment, vehicles help understandthese companies? No e.g. Microsoft tangible capital $5bn
• For the new companies we can work out asset value of reported R&D since birth.
• Alphabet: R&D capital = $53bn• Microsoft: R&D capital = $85bn• Facebook: R&D capital = $14bn• Amazon: don't report R&D
6 / 31
What do company accounts tell us about these companies?
Source: Baruch Lev, Feng Gu, The End of Accounting, 2016
7 / 31
Let's count a broader range of investments
Treated as
Investment in
GDP?
Treated as
Investment in
GDP?
Tangible Investment Intangible Investment
Buildings and Structures Yes Computerised information
IT equipment (hardware, communication) Yes Software Yes (1993 SNA)
Non-computer equipment Yes Databases Uneven
Vehicles Yes Innovative Property
R&D and mineral exploration Yes (2008 SNA)
Artistic originals Yes (1993 SNA)
Design No
Economic Competencies
Training No
Market Research and Branding No
Business process re-engineering No
• Does considering these investments help understand• EasyJet, Grand Theft Auto, Finance, Tesco, Big Data, Monty Python?• The digital economy• Big Data• Arti�cal intelligence?
• What does the world look like when we count this broader range of investments?
8 / 31
Let's count a broader range of investments
Treated as
Investment in
GDP?
Treated as
Investment in
GDP?
Tangible Investment Intangible Investment
Buildings and Structures Yes Computerised information
IT equipment (hardware, communication) Yes Software Yes (1993 SNA)
Non-computer equipment Yes Databases Uneven
Vehicles Yes Innovative Property
R&D and mineral exploration Yes (2008 SNA)
Artistic originals Yes (1993 SNA)
Design No
Economic Competencies
Training No
Market Research and Branding No
Business process re-engineering No
• Does considering these investments help understand• EasyJet, Grand Theft Auto, Finance, Tesco, Big Data, Monty Python?• The digital economy• Big Data• Arti�cal intelligence?
• What does the world look like when we count this broader range of investments?
8 / 31
Let's count a broader range of investments
Treated as
Investment in
GDP?
Treated as
Investment in
GDP?
Tangible Investment Intangible Investment
Buildings and Structures Yes Computerised information
IT equipment (hardware, communication) Yes Software Yes (1993 SNA)
Non-computer equipment Yes Databases Uneven
Vehicles Yes Innovative Property
R&D and mineral exploration Yes (2008 SNA)
Artistic originals Yes (1993 SNA)
Design No
Economic Competencies
Training No
Market Research and Branding No
Business process re-engineering No
• Does considering these investments help understand• EasyJet, Grand Theft Auto, Finance, Tesco, Big Data, Monty Python?• The digital economy• Big Data• Arti�cal intelligence?
• What does the world look like when we count this broader range of investments?8 / 31
Trends over time EU and US
.05
.1.1
5
1995 2000 2005 2010 20151995 2000 2005 2010 2015Note: non-farm business. Industry-specific value added PPPs for EUNote: non-farm business. Industry-specific value added PPPs for EU
EU11 US
Intangible share Tangible share
Shar
e of
inta
ngib
le-a
djus
ted
GD
P
Year
Graphs by group_Country
(Share of intangible-adjusted GDP, US+EU11)Tangible and intangible investment
Note: EU aggregregation uses Eurostat's industry-speci�c production side PPPs.Source: INTAN-Invest c© 2018, available at www.intaninvest.net
9 / 31
Di�erences across countries: Intangible investment, 1999 to 2015
0.0
5.1
.15
.2Sh
are
of G
DP
ES IT DE AT NL UK DK FI FR US SE
Note: Ranked by intangible share. GDP adjusted to include intangibles.
(NonFarm Business, averages, 1999-2015)Tangible and intangible shares of GDP
Tangible Intangible
Note: Nonfarm business excludes real estate.Source: Authors' calculations based on INTAN-Invest c© 2018, available at www.intaninvest.net
10 / 31
Digression: Cross-country di�erences are correlated with interesting policyvariables: public R&D spend
ATATATATATATATATATATATATATATATATATATATDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDE
DKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDK
ESESESESESESESESESESESESESESESESESESES
FIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFR
ITITITITITITITITITITITITITITITITITITIT
NLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNL
SESESESESESESESESESESESESESESESESESESE
UKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUK
USUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUS
.06
.08
.1.1
2.1
4.1
6In
tang
ible
inve
stm
ent s
hare
of m
kt s
ecto
r val
ue a
dded
.005 .006 .007 .008 .009 .01Government and HE spend on R&D as share of GDP
(Averages, 1999-2013)Market sector intangible investment and Goverment R&D
Source: Jonathan Haskel, Stian Westlake, Capitalism Without Capital, 2017
11 / 31
Regulation
ATATATATATATATATATATATATATATATATATATAT
DEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDE
DKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDKDK
ESESESESESESESESESESESESESESESESESESES
FIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFIFI FRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFR
ITITITITITITITITITITITITITITITITITITIT
NLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNL
SESESESESESESESESESESESESESESESESESESE
UKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUK
USUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUS
.1.1
2.1
4.1
6.1
8Sh
are
1 1.5 2 2.5 3OECD employment market strictness index
Tangible investment share
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DEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDEDE
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ESESESESESESESESESESESESESESESESESESES
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FRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFR
ITITITITITITITITITITITITITITITITITITIT
NLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNLNL
SESESESESESESESESESESESESESESESESESESE
UKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUK
USUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUSUS
.06
.08
.1.1
2.1
4
1 1.5 2 2.5 3OECD employment market strictness index
Intangible investment share
Shares of GDP, average 1999-2013Tangible and intangible investment and regulation
Source: Jonathan Haskel, Stian Westlake, Capitalism Without Capital, 2017
12 / 31
Openness
AT
DE
DK
ES
FIFR
IT
NL
SE
UK
US.0
6.0
8.1
.12
.14
Inta
ngib
le in
vest
men
t sha
re o
f GD
P
.1 .15 .2 .25 .3OECD index of non-transport service trade restrictiveness
Intangible investment and service trade restrictiveness, 2013
Source: Jonathan Haskel, Stian Westlake, Capitalism Without Capital, 2017
13 / 31
GDP and growth when intangibles are capital
Upstream intangibles-producing N-sector using conventional inputs X = L,K :
PNN = PXXN ; dn = σNX dxN + daN (9)
Upstream tangibles-producing I-sector using conventional inputs X = L,K :
P I I = PXX I ; di = σIXdx
i + daN (10)
Downstream tangible and intangibles-using C-sector, also using intangible capital R:
PCV C ≡ PCC ; dc = σCX dx
C + σCR dr
C + daC (11)
Economy-wide value added = sum of industry value-added
PQQ ≡ PCV C + P I I + PNN (12)
=⇒
PQQ︸ ︷︷ ︸GDP
= PCC︸ ︷︷ ︸consump
+ P I I︸︷︷︸tan invest
+ PNN︸ ︷︷ ︸intan invest
; dq ≡ ωQC dc + ωQ
I di + ωQN dn = σQ
X dx + σQR dr + daQ︸ ︷︷ ︸
output =share* input X +share* input R+ TFP
• What are the new data on GDP, factor shares, inputs, TFP?
21 / 31
Growth accounting, per hour, with intangibles
0.0
1.0
2.0
30
.01
.02
.03
QH LH KH_tan KH_int TFP QH LH KH_tan KH_int TFP
QH LH KH_tan KH_int TFP QH LH KH_tan KH_int TFP
1999-07, EU 1999-07, US
2012-15, EU 2012-15, US
Graphs by xperiod and group_Country
(EU&US, Non-farm Business, per hour)Growth accounting
Source:Authors' calculations based on INTAN-Invest
• Intangibles are important: around 30% of lab prod growth in US, 20% in EU
• 88% of EU slowdown is TFP: 38% of US.
22 / 31
TFP slowdowns
When intangibles are intermediates:
PVV︸ ︷︷ ︸GDP
= PCC︸ ︷︷ ︸consump
+ P I I︸︷︷︸invest
; dv = σVX dx + daV︸ ︷︷ ︸
output =share*input + TFP
When intangibles are capital:
PQQ︸ ︷︷ ︸GDP
= PCC︸ ︷︷ ︸consump
+ P I I︸︷︷︸tan invest
+ PNN︸ ︷︷ ︸intan invest
; dq = σQX dx + σQ
R dr + daQ︸ ︷︷ ︸output =share* input X +share* input R+ TFP
• Assume partial output quality-adjustment
dcm = dc + νdθC
• Assume measured TFP ignores intangibles
dtNoIntanm = dv − σVX dx(V+N)
=⇒dtNoIntanm = daQ︸︷︷︸
tech,spillovers
− ωQV (dn − dv)︸ ︷︷ ︸
missing intan invest
+ σQR drV︸ ︷︷ ︸
intang rental
+ (σQX − σ
VX )dx(V+N)︸ ︷︷ ︸
K, L share mismeas
+ νωQC dθC︸ ︷︷ ︸
quality adj
• Quality adjustment? Spillovers? TFP slowdowns during early period of Big Datainvestment?
24 / 31
Quality adjustment is not just in high-technology goods...
Source Johnson (2015)
Observed price rises by 50%. Price index falls by 20%.27 / 31
Spillovers?
ATDE
DK
ES
FI
FR
IT
NL
SEUK
US
AT
DE
DK
ES
FIFR
ITNL
SE
UK
US
-.01
0.0
1.0
2.0
3M
ultif
acto
r pro
duct
ivity
gro
wth
0 .01 .02 .03 .04 .05Intangible capital services growth
Note: non-farm business.
(1999-2007 open diamonds; 2012-2015 closed circles)MFP and intangible capital services growth
Notes to �gure: �gure show time averages of MFP and capital services growth for the two time periods and 9 countriesindicated. Data are for NFBiz, MFP growth weighted by sectoral value added and capital services growth by sectoral capitalpayments.
• MFP growth slowdown =1% =( 1.1%-0.1%)
• Intang growth slowdown = 1.7%= (3.4%-1.7%)
• slope of relation = 0.17 =⇒ 0.3% slowdown = 33% of slowdown
28 / 31
Bias in TFP growth B due to unmeasured investment is given by
B = − ωQV (dn − dv)︸ ︷︷ ︸
missing intan invest
+ σQV dr
V︸ ︷︷ ︸intangibles
+ (σQX − σV
X )dx︸ ︷︷ ︸K, L share mismeas
.
Assume AI investment a multiple of nonNA intangible investment ...-.0
010
.001
.002
.003
2000 2005 2010 2015 2000 2005 2010 2015
EU US
Bias
to m
easu
red
TFP
grow
th
YearNote: Positive bias indicates measured TFP is too big
(Non-farm business sector, US and EU. Smoothed by 3yr ma.)Total bias
30 / 31
Summary
• Growing importance of the digital economy
• Intangibles approach is one way to organise our thoughts on this and guide
statistical agencies• What might we be looking for to better understand productivity in the digitaleconomy?• Unmeasured investment• Price quality-adjustment• Spillovers
31 / 31
Summary
• Growing importance of the digital economy
• Intangibles approach is one way to organise our thoughts on this and guide
statistical agencies• What might we be looking for to better understand productivity in the digitaleconomy?• Unmeasured investment• Price quality-adjustment• Spillovers
31 / 31