Intangibles and innovation

Jonathan Haskelj.haskel@ic.ac.uk

Middlesex, 2009

Broad questions

• Better understanding of the “new” or “knowledge” economy: work on intangibles– “Old economy” = tangibles

• traditional machines, production lines etc– “New Economy” = intangibles

• Software, design, brand reputation • Move to knowledge-intensive activities• Rise of the service sector

• Better understanding of innovation: relate intangibles to innovation– DIUS “Innovation Nation” White Paper: commission an “innovation

index”• Presentation

– Where do we see new/knowledge economy in the data?– How this relates to innovation– What research can do to shed more light on these questions– (Papers at www.coinvest.org.uk plus links)

How does the iPod show up in (US) National Accounts?

• iPod: designed in California, made in China• Apple

– nominal value added = Sales – value of imports – (design+marketing+R&D)

– Initially value added is negative, with spending on design etc. and no sales

– Then value added is positive when sales on stream– Sources of rise in value added is a residual so hard to

understand knowledge economy• Alternative model

– Apple invests in knowledge capital asset by investing in R&D, design, marketing

– Real GDP rises with more investment– Innovation measured by more knowledge investment

Intangibles research programme

• Settle on list of intangible assets• Measure investment in them• Calculate knowledge assets created• Incorporate into National Accounts

– Output side: additional value added– Input side: additional input i.e. knowledge stock

• Hopefully gives– Better GDP measure– Better account of drivers of GDP– Better account of knowledge economy

Relation of intangibles to innovation

• What is innovation? – NESTA (2007) “change associated with the creation and

adoption of ideas that are new-to-world, new-to-nation/region, new-to-industry or new-to-firm”

– Frascati “Technological innovation activities are all of the scientific, technological, organisational, financial and commercial steps, including investments in new knowledge, which actually, or are intended to, lead to the implementation of technologically new or improved products and processes”

– Oslo “A technological product innovation is the implementation/commercialisation of a product with improved performance characteristics such as to deliver objectively new or improved services to the consumer. A technological process innovation is the implementation/adoption of new or significantly improved production or delivery methods. It may involve changes in equipment, human resources, working methods or a combination of these”

Intangibles and innovation, our definition

• Innovation is about producing more output– Not ideas, happiness etc.

• But what part of this new output is due to innovation?

What part of extra output is due to innovation?

• Imagine an economy with no innovation• How could we get more output? Ryanair

– Lay on another plane and another crew– Deepening physical capital and labour = duplication

• How would we get more output from innovation?– Faster boarding, turnaround: better software– Deepening knowledge capital = innovation

• Summary: innovation is – extra output over and above that from use of additional

physical capital and labour– Or, the extra output from use of new knowledge capital

• So what do we measure? • Measure growth in output (GDP), and in inputs: physical

capital, knowledge capital, labour• Innovation accounts are data on knowledge investment• Innovation index is contribution of knowledge investment to

output growth

How would this affect the iPod?• Current method

– Inputs: Count scientific R&D only on separate survey– Output/value added:

• No effect by assumption: all R&D used up in a year, no enduring asset created or value added, so only an intermediate

• Intangibles approach– Count a wider range of inputs

• Upstream: more than just R&D– Upstream spending also on design, software

• Downstream: need associated coinvestment– Marketing, organisational change

– Output/value added• Rises: spending is an enduring knowledge asset so its

investment

• Shows up as innovation spending on intangible assets

Intangibles and innovation research programme

• “Innovation accounting”– Settle on list of intangible assets– Measure investment in them– Calculate knowledge assets so created

• Needs deprecation, price indices

• “Innovation index”– Incorporate into National Accounts

• Output side: additional value added• Input side: additional input i.e. knowledge stock

– Work out contribution of increased knowledge stock to growth

• Needs elasticity of output with respect to labour, tangible inputs, knowledge inputs

Algebra of including intangibles

:

:

/ : ln ln ln ln

: ln

TAN

TAN

TAN TANV K

TANL K

Expenditure V C I

Income p V wL p K

Growth a c V s L s K TFP

Innovation II TFP

:

:

/ : ln ln ln ln ln

: ln ln

TAN INTAN

INTAN

INTAN TAN INTAN

INTAN TAN TAN INTAN INTANV K K

INTAN TAN INTAN INTANL K K

INTAN INTAN

K

Expenditure V C I I

Income p V wL p K p K

Growth a c V s L s K s K TFP

Innovation II s K TFP

Excluding intang:

Including intang:

List of intangible assets(Corrado, Hulten, Sichel, 2005)

A. Computerized information• Computer software (bought in, own account)• Computer databases

B. Scientific and creative property• Science and Eng R&D spending, usually leading to a patent/licence• Mineral exploration (mostly R&D in oil and minerals)• Artistic originals (mostly R&D in creating artistic originals)• Other product development, design, research, usually not leading to a

patent/licence (I.e. non-scientific R&D spend)– product devel costs in fin svcs– architect and eng design– R&D in soc sci and humanities

C. Economic competencies• Brand equity (to develop reputation capital via branding or trademarks)• Firm-specific human capital• Organizational structure (organisational capital)

A. Computerized information

Method and data sources

Computerized information

Computer softwarePurchased: via surveys. Own account: labour force data on software professionals. Source: National Accounts

Computerized databases Included

B. Scientific and creative propertyInnovative property

Scientific R&DCurrent expenditure on R&D from BERD. R&D in computer industry subtracted

Mineral explorationMainly R&D in mining and spending on mineral exploration. National Accounts

Copyright and license costsSpending on creation of originals e.g. TV, movies, books. National Accounts

Other product development, design and research

New product development costs in the financial industry

20% of all intermediate purchase by Financial Services industry, ONS data. Intermediate purchases reduced by purchases of adv, software, consulting and design.

New architectural and engineering designs

Sales of architecture and design industry SIC 742, ABI data. Own account using labour costs data.

R&D in social science and humanitiesNo broad statistical information. Estimated as twice industry revenues of social science and humanities R&D industry

C. Economic competenciesBrand equity

Advertising expenditureTotal spending on advertising as reported by Advertising Association, less expenditure on classified ads

Market researchTwice revenues of the market and consumer research industry as reported in ABI.

Firm-specific human capital

NESS05, survey of employer provided training. Includes: A) Direct firm expenses (in-house trainers, outside trainers, tuition reimbursement, and outside training funds) B) Wage and salary costs of employee time in training.

Organizational structure

PurchasedData on revenues of managment consulting industry from Management Consulting Assocation.

Own accountNo broad statistical information. Estimated as 20% of value of executive time using ASHE data on wages in executive occupations, excluding software occupations.

Does it matter?

Industries

TABLE 1 Assignment of SIC codes and NACE1 sections to our 6 industries

Proposed sector categories SIC code NACE1 sections

A Agriculture, hunting and forestry

B Fishing 1 Agriculture, Fishing and Mining 1 - 14

C Mining and quarrying

2 Manufacturing 15 - 37 D Total manufacturing

3 Electricity, Gas and Water Supply 40 - 41 E Electricity, gas and water supply

4 Construction 45 F Construction

G Wholesale and retail trade

H Hotels and restaurants 5 Wholesale and Retail Trade, Hotels and Restaurants, Transport and Communications

50 t- 64

I Transport and storage and communication

J Financial intermediation 6 Financial Intermediation and Business

Services 65 - 74 K Real estate, renting and business

activities

Tan and intang invest by ind

Total tangible and intangible investment by industry, 1997-2005 (£bn).

Agriculture, Fisihing & Mining Manufacturing

Electricity, Gas & Water Construction

Trade, Hotels & Rest., Transport & Comm.

Financial & Business Services Total Market Sector

Tangibles Intangibles Tangibles Intangibles Tangibles Intangibles Tangibles Intangibles Tangibles Intangibles Tangibles Intangibles Tangibles Intangibles

1997 7.2 2.5 19.8 26.1 5.3 1.1 1.9 3.2 30.8 17.6 16.1 25.1 81.0 75.6

2005 6.5 1.8 13.0 31.4 5.4 1.5 2.5 6.4 37.0 31.2 31.9 45.0 96.3 117.3

Intan investment by type (% total)

17.8

24.3

2.6

9.1

0.3

12.0

6.1

5.2

0.2

0.3

7.9

14.3

15.0

22.4

1.8

10.4

0.4

11.1

6.3

6.4

0.2

0.4

9.6

16.0

0.0 5.0 10.0 15.0 20.0 25.0 30.0

Organizational structure

Firm-specific human capital

Market research

Advertising

R&D in social sciences and humanities

Own-account architectural & engineering design

Purchased architectural & engineering design

Financial services innovation

Copyright licenses

Mineral exploration

Scientific R&D

Software

%

2000

2004

Intan investment by ind (% indVA)

0

2

4

6

8

10

12

14

16

18

20

1997 1998 1999 2000 2001 2002 2003 2004 2005

%

Agriculture, Fishing & Mining Manufacturing

Electricity, Gas & Water Construction

Trade, Hotels & Rest., Transp. & Comm. Financial & Business Services

Mkt sector intang invest, by asset type

0

5

10

15

20

25

30

1997 1998 1999 2000 2001 2002 2003 2004 2005

£bn

Software

R&D

Mining

Copyright

Finance

Design (purch.)

Design (own-

acc.)Non-scientific

R&DAdvertising

Market research

Training

Org. Structure

Decomposition of ALP

Excluding Software Including All Intangibles

Growth Rates

Aggregate Value-Added 2.81 2.80

Average labour productivity 2.74 2.74

Hours 0.08 0.07 Contributions

Average labour productivity 2.74 2.74

Capital Deepening 1.15 2.23

ICT Tangible Capital Deepening 0.52 0.47

Non-ICT Tangible Capital Deepening 0.63 0.58

Intangible Capital Deepening - 1.19

Labour Quality 0.52 0.45

Aggregate TFP 1.07 0.05

Innovation index Contribution of

Intangible Capital Deepening

Contribution of Aggregate TFP Total

All industries 1.19 0.05 1.24 1 Agriculture, Fishing and Mining 0.01 -0.19 -0.18 2 Manufacturing 0.54 0.18 0.72 3 Electricity, Gas and Water Supply 0.02 -0.02 0.00 4 Construction 0.08 -0.02 0.06 5 Trade, Hotels & Rest., T ransport & Comm. 0.29 0.18 0.47 6 Financial Intermediation and Business Services 0.25 -0.08 0.17 % of column totals 1 Agriculture, Fishing and Mining 1% -15%

2 Manufacturing 45% 58%

3 Electricity, Gas and Water Supply 2% 0%

4 Construction 7% 5%

5 Trade, Hotels & Rest., Transport & Comm. 24% 38%

6 Financial Intermediation and Business Services 21% 14%

6 Total 100% 100%

Future work: extended surveyIntangible investment type

Includes the following intangibles

Status

(1) Computer software √(2) Computer databases √(1) Scientific R&D √(2) Mineral exploration √(3) Copyright and license costs √(4) New product development costs in the financial industry

X

(5) New architectural and engineering designs

Part

(6) R&D in social science and humanities

√

(1) Brand Equity Part(2) Firm-specific human capital Part(3) Organisational structure X

Economic competencies

Computerised informationInnovative property

Ongoing work

• Better measurement– Spending on design, organisational capital, financial services– Depreciation– Current work: add-on module to official R&D questionnaire

• Cross country work– FP7 project

• comparisons across EU and US countries• Comparative

– Intang investment– Effects on growth– International comparisons of productivity levels

– Running extended R&D survey in other countries (France, Sweden, Germany)