R&D as a Value Creating Asset

Emma Edworthy

Gavin Wallis

Methodological Overview: Linking Tables

• UK Business R&D linking Tables:

MINUS

PLUS

PLUS

BERD

Capital expenditure on land and buildings and plant and machinery

Acquisition of R&D to be used as input in R&D production

Capital Services

Methodological overview: Freely available R&D

• Canberra II group made the following recommendation:

‘In principle, freely available R&D should not be included as Capital formation, but in practice it may not be possible to exclude it. The assumption is that including freely available R&D would not lead to significant error’.

• On the basis that it is too difficult to separate it out, the UK are going to include all freely disseminated R&D.

Methodological overview: Double Counting

• Computer software: software development outside the computer industry is likely to be picked up in the BERD and own account software numbers

• GFCF

• 1. Estimates from surveys collecting data on GFCF (CAPEX, ABI) will include some intellectual property

• 2. Not all expenditure by companies in the R&D industry will result in intellectual property. They will also invest in furniture and fittings etc.

Current Price GFCF

= + + =

estimation

addition of R&D GFCF

estimation

+ =

R&D related expenditure on other

assets (Plant and machinery, purchased

software etc.)

Derived estimate of capital service flows

from other asset classes*

Current expenditure on R&D (labour costs etc.)

* Can either be derived as consumption of fixed capital COFC (capital consumption) plus a normal return on capital used or direct capital services estimates

R&D GFCF

R&D related expenditure on other

assets (Plant and machinery, purchased

software etc.)

non-R&D related expenditure on assets (Plant and machinery,

software etc.)

National Accounts GFCF

National Account capital stock

Capital consumption

GDP

Total expenditure on R&D (Frascati Manual

based)

Current expenditure on R&D (labour costs etc.)

Current Price GFCF

• We use three different methods for calculating the capital service flows from other asset classes:

• Method 1: Consumption of Fixed capital (COFC) plus an assumed return

• Method 2: Capital services estimated using rentals

• Method 3: Capital services estimated using capital services growth rates

t t at at at ata a a a

GFCF C I I COFC R

t t at at ata a a

GFCF C I I CS

t t at at ata a a

GFCF C I I CS

0 0 0a a aCS K r

at at atCS K r

at at aCOFC K

1at at atCS CS g 1,2,t

Current Price GFCF

• Method one is a proxy estimate of Capital services

• In methods two and three the capital service flow from the asset used in R&D is measured directly.

• Capital services growth rate is a much more common output of statistical offices than estimated rental rates.

• UK currently publishes capital services growth rates annually, but not rentals.

• Methods two and three are preferred on theoretical grounds, as they directly measure capital services flows. Which is best?

Constant Price GFCF

Data sources used:

R&D component Proxied by Source

Wages and salaries •Index of earnings of science and technology Professionals•Index of average earnings of technicians•Index of average earnings of Administrative occupations

ASHE

Other current (materials etc)

PPI (input) materials and fuels purchased by manufacturing excluding FBTP

PPI

Capital Separate index for plant and machinery and land and buildings

National Accounts capital stock deflators

Constant Price GFCF

90

95

100

105

110

115

120

1998 1999 2000 2001 2002 2003year

GDP deflator

R&D deflator

Depreciation rate

In calculating an R&D stock, we use the Perpetual Inventory model.

• We made the following assumption about the net capital stock in the

initial year, assuming a steady state.

, ,0

(1 )at a t a tK I

0 0 /a a aK I

Depreciation rate

We estimated a depreciation rate for the whole economy using econometric methods.

• Looked at the impact past R&D had on productivity (GVA at market prices)

• We estimated the following:

ts

stst GGVA...1

Depreciation rate

Our preliminary results were run for the period 1998-2003:

Gva_diff coefficient Standard error t

L1 -0.770473 7.516772 -0.01

L2 -18.89507 10.71141 -1.76

L3 42.80761 10.53161 4.06

L4 -26.19576 10.39732 -2.52

L5 2.838254 8.741311 0.32

Depreciation Rate:

• Suggest a life length mean of 5 years

• Depreciation is calculated as follows:

Where R is the declining balance rate (equal to 2) and T is the life length mean (5)

• Implies a depreciation rate of 40%

• We recognise that this is a very crude method. It is just an early investigation in to a possible approach.

• The approach taken could provide sensible estimates of depreciation following more development

/R T

Results: Current price Business GFCF

• The results from the three methods are quite similar

Year MA14: Total

R&D expenditure

Method 1 Method 2 Method 3

2003 13.7 15.1 15.1 14.6

2002 13.1 14.9 15 14.5

2001 12.3 13.5 13.4 13.1

2000 11.5 12.4 12.5 12.1

1999 11.3 12.5 12.7 12.3

1998 10.1 10.9 11.1 10.8

1997 9.5 11.3 10.4 11.2

Results: Business R&D Capital stock

15% Depreciation 40% Depreciation

Year Method 1

Method 2

Method 3

Year Method 1

Method 2

Method 3

2003 64.2 64.5 62.7 2003 34.9 35.1 33.92002 57.8 58 56.7 2002 33.1 33.3 32.32001 50.4 50.1 49.6 2001 30.4 30.4 29.82000 43.5 43.9 42.9 2000 28.3 28.5 27.91999 36.7 37 36.3 1999 26.5 26.7 26.11998 28.4 28.7 28.2 1998 23.2 23.5 23.11997 20.5 20.6 20.5 1997 20.5 20.7 20.51996 12 12.1 12.1 1996 17 17.1 17.1

Preliminary Productivity Analysis: Firm Level

Where:

y: value added

n: labour

: tangible capital

a: impact of external knowledge on the firm’s productivity

: R&D

e: error term

D: Service industry dummy

,T itk

,R itk

1 2 , 3 , 4it it T it R it ity a n k k D e

Preliminary Productivity Analysis:

*** significant at 1% level

** significant at 5% level

* Significant at 10% level

Employment 0.71*** (40)

Tangible Capital 0.25*** (19)

R&D Capital stock (RD) 0.08*** (11)

Services dummy 0.17*** (4.4)

Services*RD 0.01*** (3.2)

Patent Dummy 0.08*** (4.0)

Domestic Dummy 0.05** (2.5)

Patent dummy*RD 0.0 (0.05)

UK dummy*RD 0.005** (2.01)

US dummy*RD 0.007** (2.23)

Japan dummy*RD 0.01 (1.38)

EU dummy*RD 0.00 (-1.82)

Preliminary Productivity Analysis:

• Our analysis considers the link between the level of value added and the level of R&D

• By estimating the Cobb Douglas production function we obtained a coefficient on R&D that represents the elasticity of R&D with respect to TFP i.e. the % change in productivity for a % change in R&D

• The estimates of R&D elasticity is 0.08. This implies that a 10% increase in BERD is associated with a productivity increase of 0.8%.

• Average difference between the impact of services and manufacturing on productivity. Services firms are on average more productive.

Preliminary Productivity Analysis:

• Interacting services and the R&D capital stock suggested that an increase in R&D capital stock leads to a bigger increase in productivity for Services than manufacturing.

• Sector breakdown: An increase in the R&D capital stock in services and primary industries leads to a larger increase in productivity than manufacturing.

• Whereas construction and energy have a negative impact compared to manufacturing.

Preliminary Productivity Analysis:

• The addition of dummies for patented industries and foreign ownership showed that patented firms and UK firms add more to productivity.

• R&D coefficient on R&D capital stock still remains significant after the addition of the patent dummy.

• UK owned, manufacturing firms in the patent industry add most to productivity.

• However, interacting the patent and foreign owned dummies with the R&D capital stock showed that there was no additional affect from being a UK firm or in a patent industry.

• UK owned firms and US firms have an additional effect from an increase in the R&D capital stock on productivity over and above the rest of the world.