Intellectual Capital for Communities

in the Knowledge Economy

Emerging Worlds, Growing Intangibles

The Role of Intangibles in the Public Sector -A Preliminary Study in Japan-

Tsutomu Miyagawa

(Gakushuin Univeristy)

6th and 7th of June, 2013 World Conference on Intellectual Capital for Communities

- 9th Edition - 1

1. An Overview of Studies on

Intangibles

• The information and communication technology

(ICT) revolution --that began in the 1990s--

accelerated economic growth in the United States.

However, despite aggressive ICT investment,

other advanced countries did not experience the

same accelerated growth.

• The Economic Report of the President in the US in

2007 stated: “Only when they made intangible

investments to complement their ICT investments

did productivity growth really take off.”

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1. An Overview of Studies on

Intangibles

• Corrado, Hulten, and Sichel (“CHS”, 2005, 2009)

estimated aggregate intangible investment in the

US.

• Following CHS, many economists estimated

aggregate intangible investment in advanced

countries (e.g., Marrano, Haskel, and Wallis, 2009,

for the UK; Fukao et al., 2009, for Japan;

Delbecque and Bounfour, 2011, for France and

Germany; Pyo, Chun, and Rhee, 2011, for Korea,

Corrado, Hulten, Jona-Lasinio, and Iommi, 2012

for EU countries).

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2. Intangible Investment in Japan

• Our estimate of total annual spending on

intangible assets in Japan for the period 2001-2008

was about 44 trillion yen on average. Annual

capital spending on intangibles was about 39

trillion yen in the same period.

• Intangible investment in the ICT sector was 18

trillion yen (2001-08) which was greater than that

in the non-ICT sector, because software

investment in the ICT sector was twice of that in

the non-ICT sector

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Estimated spending on intangible assets in Japan

(billions of JPY)

Total Market Economy Manufacturing Service ICT sector Non-ICT sector

1991-2000 Computerized information 5,572 4,986 1,530 3,445 3,242 1,744

(5,572) (4,986) (1,530) (3,445) (3,242) (1,744)

Innovative property 17,978 17,651 12,166 5,435 10,231 7,421

(17,761) (17,434) (12,166) (5,218) (10,014) (7,421)

Economic competencies 14,176 12,652 3,831 8,592 6,380 6,272

(10,296) (9,031) (2,615) (6,233) (4,413) (4,618)

Total 37,726 35,289 17,527 17,472 19,853 15,437

(33,628) (31,440) (16,311) (14,885) (17,696) (13,677)

2001-2008 Computerized information 9,319 8,227 2,654 5,546 5,551 2,676

(9,379) (8,227) (2,654) (5,546) (5,551) (2,676)

Innovative property 19,931 19,181 11,996 7,158 11,881 7,300

(19,518) (18,869) (11,996) (6,829) (11,569) (7,300)

Economic competencies 14,627 13,041 3,791 9,038 6,966 6,076

(10,118) (8,858) (2,497) (6,191) (4,607) (4,251)

Total 43,877 40,449 18,441 21,742 24,398 16,052

(38,955) (35,938) (17,147) (18,566) (18,401) (13,975)

* Capital spending on intangibles is shown in parentheses.

2. Intangible Investment in Japan

• The total capital investment/GVA ratio in Japan

was 8.9% for the period from 2001 to 2008.

• The intangible investment/GVA ratio in the

manufacturing sector was higher than that in the

service sector, as already shown in Fukao et al.

(2009).

• When we compare ratios of intangible

investment/GVA between the ICT and the non-

ICT sectors, the ratio in the ICT sector is much

higher than that in the non-ICT sector.

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Intangible investment/GVA ratio in Japan

1981-1990 1991-2000 2001-2008 1981-2008

Total economy

CI 0.75% 1.35% 2.16% 1.34%

IP 3.23% 4.09% 4.46% 3.87%

EC 2.12% 2.35% 2.30% 2.25%

Total 6.10% 7.79% 8.92% 7.46%

Manufacturing

CI 0.64% 1.55% 2.76% 1.53%

IP 8.31% 11.41% 12.05% 10.43%

EC 2.04% 2.43% 2.51% 2.31%

Total 10.99% 15.40% 17.32% 14.26%

Service

CI 0.77% 1.32% 1.95% 1.28%

IP 1.25% 1.78% 2.25% 1.71%

EC 2.20% 2.39% 2.30% 2.30%

Total 4.23% 5.49% 6.51% 5.29%

IT sector

CI 1.09% 1.83% 3.11% 2.06%

IP 4.59% 5.65% 6.49% 5.65%

EC 2.42% 2.49% 2.58% 2.50%

Total 8.10% 9.97% 12.19% 10.21%

Non-IT sector

CI 0.40% 0.77% 1.27% 0.81%

IP 2.64% 3.25% 3.46% 3.13%

EC 1.74% 2.03% 2.02% 1.94%

Total 4.77% 6.05% 6.75% 5.88%

*CI: computerized information, IP: innovative property, EC: economic competencies

3. Comparison with Other Countries

• Among large advanced countries, the US’s ratio of

intangible investment to GDP is the highest.

• Although Japan’s intangible investment itself is not low, its

contribution to labor productivity growth is the lowest in

the advanced countries.

• The reason for the low contribution of intangibles in Japan

is low accumulation in intangibles in the 2000s (1.3%). In

particular, the accumulation in firm specific human

resources turned to be negative in the 2000s due to the

harsh restructuring.

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Decomposition of labor productivity growth（1995ー2007）

（％）

Labor

productivity

growth

Capital

deepening

Labor

compositionTFP growth

Tangible

assets

Intangible

assets

France 1.9 1.0 0.4 0.6 0.4 0.4

Germany 1.7 1.0 0.7 0.3 0.0 0.7

Italy 0.6 0.7 0.5 0.2 0.2 -0.4

Japan 2.1 0.9 0.7 0.2 0.8 0.5

Netherlands 2.3 0.9 0.4 0.5 0.7 2.8

UK 2.9 1.5 0.8 0.7 0.4 1.1

US 2.7 1.7 0.8 0.9 0.2 0.8

Source:Corrado, et, al. (2012) and Miyagawa and Hisa (2013)

4. The Role of Intangibles in the Public Sector

• The previous studies on intangibles have focused

on the market economy.

• Intangibles in the public sector have different

roles from those in the market economy.

• Two roles of intangibles--

(1)Efficiency (productivity) improvement in its own

sector

(2)External effects (contribution of productivity

improvement at the aggregate economy)

・Intangibles in the public sector: (2)>(1)

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4. The Role of Intangibles in the Public Sector

• Based on our estimates on intangibles by industry, I

measure intangible investment in the public sector. (Data is

available at

http://www.rieti.go.jp/en/database/JIP2012/index.html#04-

6.)

• The public sector includes sectors in education, health and

social work, and research institutions in the government

and non-profit organizations.

• I focus on expenditures in software, R&D and

improvement in human resources.

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4. The Role of Intangibles in the Public Sector

• Intangible investment in the public sector showed an

upward trend until 2002. However, it declined after 2003

due to the huge budget deficits in the Japanese

government.

• The amount of intangible investment was 1.6 trillions of

JPY in 2008. It was only 4% of intangible investment in

the market economy.

• Although R&D expenditures have increased, expenditures

in software and improvement in human resources have

recently declined.

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4. The Role of Intangibles in the Public Sector

• I check correlations between intangible investment in the

public sector and productivity growth to examine the role

of intangibles.

• Negative correlation between intangible investment in the

public sector and TFP growth (3 year moving average) in

the market sector.

• Positive correlation between intangible investment in the

public sector and TFP growth in the ICT sector after the

ICT revolution → While intangible investment in the

public sector does not contribute to TFP growth in the

market sector, it is likely to affect TFP growth in the ICT

sector.

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4. The Role of Intangibles in the Public Sector

• Negative correlation between intangible investment in the

public sector and TFP growth in the public sector after

1995.

• However, when I exclude TFP growth in 1995 (2.2%) and

1996 (2.1%), I find a strong and positive correlation

between intangible investment and productivity growth

(correlation coefficient is 0.56).

• We expect that the recent decline in intangible investment

in the public sector will delay the improvement of

efficiency in this sector.

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5. Future Research Agenda

1. Aggregate level: Measuring social rate of return

on intangibles in the public sector as in the

studies measuring the social rate on public

infrastructure.

2. Micro level: Examining the contribution of

intangibles to productivity improvement in

hospital, school, and public institutions (Bloom,

Propper, Seiler and Van Reenen (2010), NBER

WP 16032, Lee, McCullough, and Town (2012),

NBER WP 18025)

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Thank you for your attention!

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