CAN INVESTMENT IN INTANGIBLES EXPLAIN THE SWEDISH PRODUCTIVITY BOOM IN THE 1990s?

Transcription

1 roiw_ Review of Income and Wealh Series 57, Number 4, December 2011 DOI: /j x CAN INVESTMENT IN INTANGIBLES EXPLAIN THE SWEDISH PRODUCTIVITY BOOM IN THE 1990s? by Harald Edquis* Research Insiue of Indusrial Economics, Sockholm In he early 1990s he Swedish economy experienced a severe economic and financial crisis which resuled in a subsanial GDP decrease. Even hough he crisis was no a complee surprise for many economiss, almos no one expeced ha he Swedish economy would be prospering wih booming produciviy growh only a few years laer. Economiss have presened hree explanaions for he fas recovery and produciviy growh in : marke reforms, crisis recovery, and he impac of ICT. This paper offers an alernaive view, emphasizing insead firms subsanial invesmen in inangible asses such as R&D, design, and adverising. Based on he growh accouning framework, inangible capial accouned for more han 30 percen of he labor produciviy growh in he Swedish business secor from 1995 o Thus, Swedish TFP growh, one of he highes among OECD counries, is reduced subsanially when invesmen in inangibles is included in he growh accouning analysis. 1. Inroducion In auumn 2008 he invesmen bank Lehman Brohers wen bankrup, riggering crises in mos counries worldwide. Sweden was no excepion, wih a GDP drop of almos 5 percen in In he early 1990s Sweden had experienced anoher economic and financial crisis ha also resuled in a subsanial decline in GDP growh. Over he period GDP decreased by 4.3 percen. The crisis was characerized by a sharp increase in real ineres rae, a bank crisis, and a currency crisis (Hagberg and Jonung, 2005). The crisis was no a oal surprise for many economiss who had been criicizing he design of he Swedish welfare sae, bu almos none of hem hough he Swedish economy would prosper jus a few years afer he crisis. In 1994 he Swedish economy sared o recover from he crisis wih subsanial economic and produciviy growh. Many economiss hough he high produciviy growh could be ascribed o he recovery in wake of he crisis and ha i would evaporae afer a few years. Bu produciviy growh remained high hroughou , even during he economic slowdown a he beginning of he millennium. In fac, produciviy growh in he Swedish business secor was one of he highes hroughou he wesern world (see Figure 1). Economiss have emphasized wo reasons behind he comparably high produciviy growh in he Swedish business secor: marke reforms in he 1980s, and he revoluion in informaion and communicaion echnology (ICT). Marke Noe: I am graeful for useful commens and suggesions by Lena Hagman, Jonahan Haskel, Henrik Jordahl, Annarosa Pesole, Erik Ruis, and paricipans a COINVEST seminars in Lisbon, Mannheim, Paris, and Sockholm. Financial suppor from he European Commission is also graefully acknowledged. *Correspondence o: Harald Edquis, Research Insiue of Indusrial Economics (IFN), Box 55665, SE Sockholm, Sweden (Harald.Edquis@ifn.se) The Auhor Review of Income and Wealh 2011 Inernaional Associaion for Research in Income and Wealh Published by Blackwell Publishing, 9600 Garsingon Road, Oxford OX4 2DQ, U and 350 Main S, Malden, MA, 02148, USA. 658

2 Review of Income and Wealh, Series 57, Number 4, December 2011 Ireland Sweden Finland USA U Japan Neherlands Ausria France Porugal Germany Belgium Luxembourg Denmark Ialy Spain TFP LP -2,0% -1,0% 0,0% 1,0% 2,0% 3,0% 4,0% 5,0% Figure 1. Labor and Toal Facor Produciviy Growh in he Business Secor in EU-15, Japan, and he U.S., (percen) Noe: TFP esimaes for Luxembourg and Porugal are based on he period Daa for Greece are missing. Source: EU LEMS (2008, 2009) and own calculaions. reforms are believed o affec compeiion, hereby increasing resource efficiency and hus produciviy (Nickell, 1996). In heory, efficien markes also lead o increased diffusion of new echnology and increase he incenives o innovae. According o Schumpeer (1939), innovaion is crucial for economic growh. During he las decades, breakhroughs in ICT have spurred a echnological revoluion. The invenion of he ransisor launched he revoluion ha generaed innovaions such as he semiconducor and he inegraed circui, he inerne, and cell phones. Alhough hese new producs were available on he marke, heir effec on macroeconomic produciviy growh maerialized slowly. 1 Several sudies have shown ha ICT has had a significan impac on produciviy growh in Sweden since he mid-1990s (Edquis and Henrekson, 2006; Edquis, 2008). Similar evidence was found for he U.S. economy (Gordon, 2000; Oliner and Sichel, 2000; Jorgenson, 2001; Siroh, 2002; Jorgenson e al., 2008; van Ark e al., 2008). Alhough ICT invesmens have been inerpreed as an imporan facor o he recovery from he crisis, TFP has remained high hroughou he period (Edquis, 2008; Jorgenson e al., 2008). Thus, he radiional inpus, i.e. capial and labor, are far from accouning for mos of he srong economic growh in Sweden and some oher counries. In response, several sudies have poined o invesmen in inangible asses as an addiional explanaion for economic growh (Corrado e al., 2005, 2006, 2009; Marrano and Haskel, 2006; van Rooijen- Horsen e al., 2008; Fukao e al., 2009; Hao e al., 2009; Marrano e al., 2009). 1 This was named he Solow paradox afer Nobel Laureae Rober Solow s famous remark ha you can see he compuer age everywhere bu in he produciviy saisics (Solow, 1987) The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

3 Review of Income and Wealh, Series 57, Number 4, December 2011 In he Naional Accouns, inangibles have been idenified as an inermediae expense and no as an invesmen. 2 Indeed, inangibles are considered difficul o measure compared o angible asses such as buildings and machinery. Neverheless, many advanced economies are moving oward knowledge economy aciviies, in which inangible asses play a large role (Marrano and Haskel, 2006). As some economies have become more dependen on high-ech producs and knowledge inensive services, invesmen in inangible asses such as vocaional raining and research and developmen has increased. The purpose of his paper is o explore he role of inangible invesmen for he recovery of he Swedish economy afer he financial crisis of he 1990s. Inangible invesmen can be defined as expendiures by businesses inended o boos oupu in he fuure ha do no ake he form of radiional physical capial (Corrado e al., 2005, 2006). To he bes of my knowledge, he impac of inangibles on he Swedish economy has never been sysemaically explored a he macro-level. 3 This paper will adap he mehods developed by Corrado e al. (2006) and Marrano and Haskel (2006) o esimae expendiures and invesmen in inangibles in he Swedish business secor from 1995 o The following quesions will be invesigaed: How large were inangible spending and invesmen in he Swedish business secor in 2006? How does inangible invesmen in Sweden compare o oher counries like Japan, he U.., and he U.S.? How imporan was invesmen in inangibles for economic growh and produciviy growh in he Swedish business secor , i.e. afer a severe economic and financial crisis? 2. Daa and Sources Corrado e al. (2006) and Marrano and Haskel (2006) focus on inangible invesmen in he business secor. To faciliae he comparison of heir resuls wih he Swedish daa, his paper will only address invesmen in inangibles in he business secor. Inangible invesmen in he public secor is also imporan, and will be explored in fuure papers. This paper follows he mehodological framework of Corrado e al. (2006) which poins o he feasibiliy of organizing inangible asses in hree main groups: 1. Compuerized informaion (sofware, compuerized daabases). 2. Innovaive propery (research and developmen (R&D), mineral exploraions, copyrigh and license cos, produc developmen in financial indusries, and design). 3. Economic compeencies (brand equiy, vocaional raining, and organizaional capial). Various mehods and surveys are used o esimae he spending on such asses for he years , he specifics of which are described in Secion Compuer sofware, copyrigh and license coss ha are defined as inangible capial in his paper are included in he Swedish GDP figures. 3 Eliasson (2000) invesigaes he impac of some inangibles on he 17 larges manufacuring firms in Sweden The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

4 Review of Income and Wealh, Series 57, Number 4, December Compuerized Informaion Compuer Sofware The esimaes for compuer sofware sem from he EU LEMS (2009), a daabase financed by he European Commission o analyze produciviy in he European Union a he indusry level. Invesmen is measured by nominal gross fixed capial formaion (GFCF) in sofware for Sweden during he years from 1993 o Compuerized Daabases Spending on compuerized daabases is already included in he esimaes of sofware spending provided by he EU LEMS (2009) daabase for Sweden Innovaive Propery Research and Developmen R&D expendiure daa for Sweden is derived from he ANBERD daabase (OECD, 2009a). The ANBERD daabase exiss o creae a consisen daase ha covers business enerprise expendiures on R&D (BERD) in OECD counries, as delineaed by he Frescai Manual (OECD, 2002). The Frescai Manual defines R&D as creaive work underaken on a sysemaic basis in order o increase he sock of knowledge, including knowledge of man, culure and sociey, and he use of his sock of knowledge o devise new applicaions. R&D should include an appreciable elemen of novely and involve he resoluion of scienific and echnological uncerainy. Thus, i is likely ha mos repored R&D is of a scienific naure and work such as design and marke research will no be included in R&D figures. Moreover, in order o avoid double couning wih sofware figures, oal R&D spending was deduced wih he R&D spending on compuer and relaed aciviies Mineral Exploraion Mineral exploraion is based on daa from he Geological Survey of Sweden. I primarily covers he prospecing for new ore deposis wih he expecaion of fuure reurns (as opposed o expendiure on ore mining o exrac exising ore deposis) Copyrigh and License Cos Copyrigh and license cos are measured as invesmen in enerainmen, lieracy, and arisic originals in he GFCF accouns. These figures cover lieracy, musical works, and he producion of film and cerain TV and radio programs. However, o be included hey mus be covered by copyrigh, have primary arisic 4 R&D in social science and humaniies has been added. I is measured as he oupu of he indusry producing social science research (SNI 732). In 2005, R&D in social science and humaniies only accouned for 0.3 percen of oal R&D spending The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

5 Review of Income and Wealh, Series 57, Number 4, December 2011 inen, mee he capializaion crierion of use for more han one year, and no be accouned for anywhere else in he Naional Accouns Developmen Coss in Financial Services Corrado e al. (2006) measured produc developmen in he financial services indusry, finding i o be 20 percen of oal inermediae spending. This paper follows heir mehod and uses a measure of inermediae inpu for financial inermediaion (ISIC 65) and aciviies relaed o financial inermediaion (ISIC 67). 5 The source of he inermediae spending is EU LEMS (2008, 2009) Design Disinguishing design from oher aciviies maers because several designrelaed aciviies are already couned in he formaion of capial in he Naional Accouns. Marrano and Haskel (2006) define design aciviy as he relaionship beween design aciviies and he official measuremen of R&D under he Frescai Manual framework. The manual saes ha if design is made for he seing up and operaing of pilo plans and prooypes, hese coss should be included in R&D. In conras, if design is carried ou for he preparaion, execuion, and mainenance of producion sandardizaion or o promoe he sale of producs, hey should be excluded from he definiion of R&D. In Corrado e al. (2006), half of he urnover of he archiecural and design indusry was used as a proxy for purchased and own accoun expendiure on archiecural and engineering design (AED). However, purchased and own accoun design aciviies are esimaed by more sophisicaed mehods in his paper: boh AED services bough in he markeplace and AED services produced in-house for inernal use will be measured. The AED services bough in he markeplace are esimaed as he urnover of he archiecural aciviies and echnical consulancy indusry (SIC 742). Due o he lack of supply-use ables, i has no been possible o esimae how much of he marke design services are acually produced by SIC 742. Noneheless, he oal oupu is weighed by he share of he oal proporion of employmen in SIC 742 ha is relaed o design occupaions. 6 Thus he spending on purchased design aciviies can be wrien: 7 (1) Y p 742 N = Y N 742AED, The purchase of oher inangibles ha are couned elsewhere (i.e. sofware, consulancy services, archiecural and engineering services, and adverising) is subraced from inermediae inpus. 6 Based on Galindo-Rueda e al. (2008) he following occupaions are defined as design occupaions: archiecs and own planners, civil engineers, elecrical engineers, elecronics and elecommunicaions engineers, mechanical engineers, chemical engineers, designers, decoraors, and commercial designers. 7 For some engineering occupaions, i is likely ha he employees o some exen are also involved in R&D aciviies which implies double couning. This problem is furher discussed in he Appendix The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

6 Review of Income and Wealh, Series 57, Number 4, December 2011 where Y p is he measured purchased AED oupu, Y 742 is he oupu of SIC 742, N 742AED is he number of employees wih design occupaions in SIC 742, and N 742 is he number of oal employees in SIC 742. To esimae he AED produced by indusries ouside SIC 742 (own accoun), we divide purchased AED (Y p) wih he wage bill of designers in SIC 742 (wn 742AED ). Thus, a raio indicaing he oupu per invesed wage uni in SIC 742 is obained. I is hen assumed ha each invesed wage uni is he same for persons wih design occupaions working eiher wihin SIC 742 or ouside. This implies ha muliplying his raio Y p/wn 742AED by he wage bill of persons wih design occupaions no working in SIC 742 (wn BAED ) allows us o obain he own accoun oupu. This can be expressed in he following formula: (2) Y own Yp = wn AED wn BAED, 742 where Y own is he own accoun oupu, and Y p he purchased oupu Economic Compeences Brand Equiy Adverising Daa on spending on adverising comes from he Swedish Insiue for Adverisemen (IRM). Daa on classified ads were deduced based on figures for Classified ads hen accouned for approximaely 8 percen of oal adverisemen and 35 percen of he adverisemen in newspapers. 9 The available daa includes he public secor. According o a survey by SIFO Research Inernaional, he governmen secor accouned for approximaely 1.1 percen of oal spending on adverisemen. Hence, i is assumed ha his share is he same for he period ; oal invesmen is deduced by 1.1 percen for each year. Marke Research Expendiure on marke research is measured as wice he urnover of he marke and consumer research indusry (ISIC 7413). The esimaion is based on he assumpion ha own accoun marke research equals purchased marke research Vocaional Training Corrado e al. (2005) argue ha spending on firm-specific human capial can be measured by he spending of employer-provided workforce raining. This can 8 Daa for all variables in equaions (1) and (2) are available for he period For he period he wage bill has been esimaed based on he average raio of wage bill/urnover for he years Moreover, daa on he number of persons employed in SIC 742 in are based on he average raio of employmen in SIC 742 and oal employmen in I is assumed ha classified ads also accouned for 8 percen of he oal spending on adverisemen for he period The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

7 Review of Income and Wealh, Series 57, Number 4, December 2011 be measured by spending on vocaional raining ha includes boh he direc firm expenses and he wage/salary cos of employees underaking vocaional raining. The measure of vocaional raining includes boh general and firm-specific raining. 10 Becker (1962) argued ha firms would only pay for raining which would no be of use o workers if hey moved o anoher company. In realiy, raining paid by firms is usually boh general and firm-specific (Acemoglu and Pischke, 1998, 1999; Barnes and McClure, 2009). Moreover, even hough he skills are general, i is sill likely ha for any firm in he economy hey have an effec on produciviy growh and herefore should be included as an inpu in he growh accouning analysis. I could be viewed as an exra skill ha is paid for by firms and is hus a complemen o he general skills picked up in he measure of labor qualiy. Spending on vocaional raining is measured using daa reporing how much firms in he business secor spend on coninuing vocaional raining (CVT). The source is a survey of employer provided raining conduced by Saisics Sweden in 1999 (CVTS, 1999). CVTS (1999) measures he direc and indirec coss of coninuing vocaional raining (in firms wih a leas en employees) as a percenage of oal labor coss in Organizaional Srucure Purchased Organizaional Srucure Invesmen in organizaional srucure (OS) includes invesmen in purchased OS and own accoun OS. Purchased OS is measured wih he urnover of business and managemen consulancy aciviies (SIC 7414). The urnover has been adjused so ha only producs which include services ha affec organizaional srucure are included. 12 Moreover, he share of he urnover purchased by he public secor is excluded, based on daa from he Swedish business magazine Affärsvärlden ( ). 13 Own Accoun Organizaional Srucure Invesmen in own-accoun organizaional srucure is measured as 20 percen of managers compensaion. The occupaions idenified as managers are legislaors, senior officials, and managers. However, legislaors and senior governmen officials are excluded because he public secor is excluded. The wage daa ha are used o esimae own accoun organizaional srucure are provided by Saisics Sweden. Wage daa for each group of managers are available for he period 10 General raining is defined as any raining which increases he marginal produciviy of employees by exacly he same amoun in firms providing he raining as in oher firms. Firm-specific raining has no effec on he produciviy of rainees ha would be useful in oher firms. 11 I is assumed ha firms wih less han 10 employees spend he same proporion of heir oal labor coss on vocaional raining and ha he proporion of labor coss spen by firms in is he same as in The following services are assumed o affec organizaional srucure: advice regarding disribuion, employees, mergers and acquisiion, organizaions, axes, markeing, producion, projec leadership, and adminisraion. I has only been possible o esimae he share of hese services for he year 2006; he same share is herefore used o esimae purchased organizaional srucure for oher years. 13 I is assumed ha he share of urnover purchased by he public secor is he same for he period as he average share for he period The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

8 Review of Income and Wealh, Series 57, Number 4, December For hese groups his informaion is unavailable for he period Therefore, i has been assumed he wages follow he average developmen for wages in he privae secor and ha he number of managers remained he same as in Resuls of Inangible Spending and Invesmen 3.1. Inangible Spending in Sweden Table 1 shows ha he oal spending on inangibles in Sweden in 2006 was 352 billion SE. Thus, he spending was approximaely 12 percen of oal GDP and 18 percen of gross value added (GVA) in he business secor. Table 1 also shows he spending for he differen caegories of inangibles. The larges expendiure was on R&D, a 77 billion or 22 percen of oal spending on inangibles. This corresponds well wih he general view of Sweden as an R&D inensive counry. Spending on design, sofware, adverising, vocaional raining, and purchased organizaional srucure was also considerable. In fac, ogeher wih R&D, hese caegories of asses accouned for more han 90 percen of oal spending on inangibles. Spending on own accoun organizaional srucure was 17 billion SE, accouning for 5 percen of oal spending. For all oher caegories of inangibles, spending amouned o 2 percen or less of he oal expendiure on inangibles. Spending on mineral exploraion was as low as 0.1 percen of oal spending How Much of he Spending is Invesmen? According o Corrado e al. (2005, 2009) and Marrano e al. (2009), no all spending on inangibles can be considered as invesmen. I is necessary o separae he expense of curren producion from oulays ha expand fuure producive capaciy. For physical capial, his disincion is ofen made on he basis of he durabiliy or expeced service life of a purchase. Ye he service life of a specific asse can a imes be ambiguous. The BEA esimaes ha business fixed asses have a useful service life of a leas hree years, while oher sudies define business secor equipmen as having a service life of more han one year. Based on his logic, Corrado e al. (2005) assume ha he proporion of spending ha can be considered as invesmen should be based on four seps: 1. If economic research has clearly shown ha a given ype of spending is fixed invesmen, hen 100 percen is classified as capial invesmen. 2. If economic research suggess ha only a porion of he spending on an inangible pays off in fuure year (or years), hese findings are applied. 3. When here is srong suspicion ha he lifeime of a ype of inangible may no be a leas hree years, he iem is discouned by 20 percen and a range of esimaes of capial invesmen is shown for he iem. 4. When here is srong suspicion ha a porion of he spending may be for rouine asks or represen curren consumpion, he poin esimae is discouned 20 percen. Table 1 shows he proporion of spending considered as invesmen according o Corrado e al. (2005). Lile is known abou he service life of sofware, ye he 2011 The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

9 Review of Income and Wealh, Series 57, Number 4, December 2011 TABLE 1 Business Secor Spending on Inangible Asses in Sweden in 2006 (billion SE) Type of Inangible Invesmen Sources Toal Spending 2006 (bn SE) Percen of Inangibles Proporion of Spending Considered as Invesmen 1. Compuerized informaion a) Compuer sofware EU-LEMS b) Compuerized daabases Included in compuer sofware n.a. n.a 1 2. Innovaive propery a) R&D OECD ANBERD 76.5* 22 1 b) Mineral exploraion SGU (Geological Survey of Sweden) c) Copyrigh and license coss Saisics Sweden d) Developmen coss in financial indusry EU-LEMS e) Design Saisics Sweden Economic compeencies a) Brand equiy Advering Swedish Insiue for Adverisemen (IRM) Marke research Saisics Sweden b) Vocaional raining Saisics Sweden c) Organizaional srucure Purchased Saisics Sweden and Affärsvärlden Own accoun Saisics Sweden Toal spending Noe: *To avoid double couning, he invesmen in R&D is deduced wih he R&D invesmen for compuer and relaed aciviies. Source: Sources in he able and own calculaions The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

10 Review of Income and Wealh, Series 57, Number 4, December 2011 BEA assumes a hree-year service life for all prepackaged sofware and a fiveyear service life for cusom and owned sofware. Therefore Corrado e al. (2006) assume ha 100 percen of oal spending on compuerized informaion should be classified as capial invesmen. The same rule applies for scienific R&D spending, mineral exploraion, copyrigh and license cos, and developmen coss in financial services. Based on esimaes provided by Galindo-Rueda e al. (2008), only 50 percen of design spending should be couned as invesmen. Economic research on markeing has found ha he effecs of adverising are generally shor lived. However, according o Landes and Rosenfield (1994), more han half of he expendiure on adverising has a service life of a leas one year and one-hird has an impac of more han hree years. Thus, Corrado e al. (2005) esimae ha approximaely 60 percen of oal adverising expendiures have long-lasing effecs. In addiion, coninuing vocaional raining has long-lived effecs and is herefore couned as invesmen. While spending on organizaional change also has likely long-lived effecs, only 80 percen is considered as invesmen because a porion of purchased managemen experise comprises raher rouine asks. I is eviden ha in many cases he process of esimaing how much spending is acually invesmen is no very precise, ofen based on ad hoc assumpions. Neverheless, an aemp o measure invesmen in inangibles mus use he bes available informaion. Moreover, for some of he more imporan ypes of inangibles like scienific R&D and vocaional raining, he service life is cerainly a leas hree years, and 100 percen of he spending should herefore be couned as invesmen. Figure 2 shows ha he spending on inangible asses was approximaely 12 percen of GDP in Based on he mehod described above, he oal 25% 20% 15% 10% 5% 0% Spending on inangibles, 2006 Invesmen in inangibles, 2006 Invesmen in physical capial, 2006 Invesmen in physical capial, 1960 Invesmen in inangibles and physical capial, 2006 Figure 2. Business Secor Spending and Invesmen in Inangible Capial and Physical Capial in Sweden (percen of GDP) Noe: Copyrigh and license cos and sofware are excluded in physical capial. GDP is convenionally measured, i.e. including sofware and copyrigh bu excluding oher inangibles. Source: Own calculaions based on he framework in Corrado e al. (2006), Marrano and Haskel (2006), and Edvinsson (2005) The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

11 Review of Income and Wealh, Series 57, Number 4, December % 18% 16% 14% 12% 10% 8% 6% 4% 2% GDP Business secor 0% Japan Sweden U US Figure 3. Invesmen in Inangibles as a Share of Toal GDP and Business Secor GVA in Sweden, Japan, he U.., and he U.S. in 2006 Noe: Daa for Japan are for he period GDP and GVA are convenionally measured, i.e. including sofware and copyrigh bu excluding oher inangibles. Source: van Ark e al. (2009), Fukao e al. (2009), EU LEMS (2009), OECD (2009b), and own calculaions. invesmen in inangibles is esimaed o be 288 billion SE or 10 percen of GDP. The Swedish invesmen in fixed capial for he business secor in 2006 was 382 billion SE or 13 percen of GDP. 14 Hence, he esimaed invesmen in inangibles was approximaely 75 percen of he invesmen in physical capial. This clearly shows ha invesmen in inangibles was considerable in comparison wih invesmen in physical capial. I is also ineresing o noe ha in 1960, invesmen in physical capial in he Swedish business secor came o 22 percen of GDP. Invesmen in physical capial has hus decreased considerably in he Swedish business secor since However, if invesmen in inangible capial is added o physical capial, oal invesmen reaches he figure of 23 percen of GDP. There are no esimaes available for inangible capial in 1960, bu i is likely ha invesmen in inangibles was much lower in 1960 compared o Thus, i is no necessarily rue ha invesmen in he Swedish economy has decreased quie rapidly, as many economiss have argued. I is more likely ha he srucure of he Swedish economy has become more service-based Comparisons wih Oher Counries Toal Invesmen Figure 3 shows invesmen in inangibles as a share of oal GDP and business secor GVA in Sweden, Japan, he U.., and he U.S. In erms of GDP, he U.S. had he highes invesmen in inangibles wih 12 percen of GDP, while Japan had 14 Invesmens in sofware and copyrigh and license coss were subraced from fixed capial since hey are defined as inangible invesmens The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

12 Review of Income and Wealh, Series 57, Number 4, December 2011 he second highes wih 11 percen of GDP. Sweden and he U.. had approximaely he same invesmen raio, namely 10 percen of GDP. In erms of business secor value added, he invesmen raio was sill highes in he U.S. wih 18 percen. Sweden and he U.. had invesmen raios of 16 percen, while he corresponding figure for Japan was 15 percen. I is ineresing o noe ha he invesmen raio in Sweden increases more han in oher counries in erms of business secor value added insead of GDP; his can be raced o he fac ha Sweden has a larger public secor han hese oher counries. Since only business secor invesmen in inangibles is measured, business secor GVA would consiue he more valid measure o use for comparisons beween counries, raher han GDP Developmen Cos in Financial Services In he afermah of he worldwide financial crisis in 2008, he impac of developmen coss in he financial indusry on economic growh has been quesioned. Financial services have ypically been described as highly innovaive, and afer he financial crisis seen as excessively innovaive. Neverheless, mos expers would agree ha financial innovaions such as inerne banking, auomaic eller machines, and derivaives have had subsanial posiive effecs on produciviy in he world economy over many decades. Since financial innovaions are poorly picked up in he R&D measures, i is of paricular ineres o ry o measure and compare he developmen cos in financial services. Figure 4 shows developmen coss in financial services in 2006 in four differen counries based on he mehod advocaed by Corrado e al. (2006), i.e. 20 percen of oal inermediae spending by financial services. According o Figure 4, 0,8% 0,7% 0,6% 0,5% 0,4% 0,3% 0,2% 0,1% 0,0% Japan Sweden U US Figure 4. Developmen Coss in he Financial Indusry in Japan, Sweden, he U.., and he U.S. in 2006 (percen of GDP) Noe: The developmen coss are measured as 20% of inermediae inpu for financial inermediaion (ISIC 65) and aciviies relaed o financial inermediaion (ISIC 67). Sofware invesmen has been subraced from inermediae inpus. GDP is convenionally measured. Source: EU LEMS (2008, 2009) The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

13 Review of Income and Wealh, Series 57, Number 4, December 2011 developmen coss in he financial indusry were considerably higher in he U.. and he U.S. han in Sweden and Japan. In Sweden he developmen cos only accouned for 0.2 percen of GDP, compared o as much as 0.7 percen in he U.. and he U.S. An ineresing poin is ha boh Sweden and Japan experienced severe financial crises in he 1990s while he U.. and U.S. did no. Haskel and Pesole (2010) argue ha financial innovaion requires invesmen in produc developmen, sofware, markeing, raining, and organizaional change. They herefore use labor force daa o ry o esimae developmen coss based on spending on occupaional groups in he financial indusry. Their findings are ha invesmen in developmen coss of U.. financial services only accouns for 0.07 percen of GDP when he effecs from oher inangible invesmens are excluded. Their esimae is considerably lower han he resul presened for he U.. in Figure 4. Thus, i is probable ha he impac of developmen coss in financial services is lower han suggesed by earlier sudies. However, for Sweden he impac of his would no be very large since he esimaes based on he mehod used by Corrado e al. are already so low Growh Accouning Mehodology Growh accouning mehodology can be used o analyze he impac of inangibles on produciviy growh and labor produciviy growh. The model used is once again he same as Corrado e al. (2006) and Marrano e al. (2009). I assumes here are hree goods produced: a consumpion good, wih real oupu volume C wih price P C ; a angible invesmen good, I wih price P I ; and an inangible invesmen good, N wih price P N, where he subscrip denoes ime. In Swedish Naional Accouns, mos inangibles are reaed as inermediaes, alhough i could be argued ha hey should be reaed as capial Inangibles Treaed as Inermediaes Assume ha he inangible invesmen good is regarded as an inermediae. Then he angible capial sock is assumed o accumulae according o he perpeual invenory mehod: (3) = I + ( 1 δ ) 1 wih depreciaion rae d. Suppose ha facors are paid heir marginal produc and he producion funcion is homogenous of degree 1. Then i is possible o denoe he producion funcion and money flows for each secor as follows: (a) Inangible secor: (4) N N L N = F ( L,, ) ; P N = P L + P N, N, N, N, 15 The figure for developmen cos in financial services in Sweden remains a 0.2 percen of GDP when consulancy services, archiecural and engineering services, and adverising are excluded from inermediae inpus The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

14 Review of Income and Wealh, Series 57, Number 4, December 2011 (b) Tangible secor: (5) I I L N I = F ( L,, N, ) ; P I = P L + P + P N I, I, I, I, I, I, (c) Consumpion secor: (6) C C L N C = F ( L,, N, ) ; P C = P L + P + P N. C, C, C, C, C, C, Equaion (4) saes ha he oupu of inangibles is produced by labor and angible capial in he inangible secor and ha wih facors paid heir marginal producs, he value of he inangibles produced equals he reurns o labor and angible capial used in ha secor. Since inangibles are supposed o be inermediaes, he producion funcions for he angible and consumpion secors show ha he volume of inangible oupu is simply an inpu ino he producion of angible and consumpion goods. Thus, inangibles are inermediae inpus and do no appear in oal oupu: (7) Q C I L P Q = P C + P I = P L + P, where he prime indicaes he case where inangibles are reaed as inermediae expendiure and L = L N + L I + L C and = N + I + C. Equaion (7) shows he equaliy of GDP on he expendiure side and income side Inangibles Treaed as Capial Suppose ha he inangible invesmen good is regarded as capial. The inangible capial sock, R also accumulaes according o he perpeual invenory model: (8) R = N + ( δr) R 1 1 where R depreciaes a rae d R. The producion funcion and money flows for each secor can be wrien: (a) Inangible secor: (9) N N L R N = F ( L,, R, ) ; P N = P L + P + P R N, N, N, N, N, N, (b) Tangible secor: (10) I I L N I = F ( L,, R, ) ; P I = P L + P + P R I, I, I, I, I, I, (c) Consumpion secor: (11) C C L N C = F ( L,, R, ) ; P C = P L + P + P R. C, C, C, C, C, C, In conras o equaion (4), he sock of inangible capial, R, raher han inangible oupu, appears as an inpu in he producion funcions and he R paymen o ha sock; in addiion, P R, appears in he paymen equaions raher 2011 The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

15 Review of Income and Wealh, Series 57, Number 4, December 2011 han paymen for he enire used up inermediae oupu. The corresponding oupu ideniy now includes he value of oupu of he inangible good on he N R producion side, P N, and he paymens o he sock of inangibles, P R, on he income side: (12) Q C I N L R P Q = P C + P I + P N = P L + P + P R, where he oal oupu of he inangible good N = N N + N I + N C and he inangible sock is R = R N + R I + R C. Wih inangibles being reaed as capial, oupu is Q increased from P Q o P Q Q Growh Accouning Based on he growh accouning framework described in Secions 4.1 and 4.2, he growh accouning relaions can be wrien in he following way: (13) (14) L ΔlnQ = s Δln L + s Δln + ΔlnTFP L R ΔlnQ = s Δln L + s Δln + s ΔlnR + Δln TFP, where equaion (13) shows he expression in he case where inangibles are expensed and equaion (14) shows he case where hey are capialized. The equaions show ha he effec of including inangibles on growh is ambiguous, depending on he growh rae of real inangible invesmen. Moreover, he shares differ beween (13) and (14) since boh oupu and paymen o capial differ. In erms of decomposing labor produciviy we ge he following equaions: (15) (16) ( ) = ( ) + ( ) + L QA Δln Q L s Δln L L s Δln L ΔlnTFP ( ) = ( ) + ( ) + ( ) + L QA R Δln Q L s Δln L L s Δln L s Δln R L Δln TFP. Since he qualiy of labor hours varies we disinguish beween employee hours, L, and qualiy adjused employee hours, L QA. The facor shares are denoed wih an s and are averages of shares over which he ime difference is aken, so ha is a Törnquis index number. The share of capial is defined as one minus he share of labor. 16 In equaion (16) he level of oupu has risen, ye he growh rae may or may no rise depending on he growh rae of real inangible invesmen. There are many differen capial asses. For example, angibles involve plans, buildings, vehicles, and compuer hardware; for inangibles here are R&D, sofware, design, and so forh. Thus, he Dln and DlnR erms mus be consruced o incorporae hese many ypes. According o Jorgenson and Griliches (1967), he heoreically correc capial measure in a producion funcion is he services ha capial provides ino oupu. These services for each ype of capial can be measured by he renal paymens ha a profi-maximizing firm would pay when i is 16 This is accurae if here are consan reurns o scale a he overall economy level, bu clearly an area where beer measuremen would be helpful The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

16 Review of Income and Wealh, Series 57, Number 4, December 2011 rening is capial. Since firms rarely do his bu raher buy he capial asse for a price p A and hen use i over is lifeime, he marke-clearing renal paymen for an asse B, p B, can be derived as: (17) B A A A A P = T r p + δ p p p B R i [ ( )] = i i i, 1 i i i i, 1, where T is a ax adjusmen and r is he rae of reurn on he asse. This equaion holds for each ype of capial i. The relaion beween his and he Dln and DlnR erms in (14) can be derived as follows. The overall level of profi in he economy, j, is by definiion he overall paymen o capial which is he sum of all renal paymens o each capial ype (Marrano e al., 2009). This can be wrien: (18) ϕ n m R P i i i i= 1 i= n+ 1 = + P R, i where here are n angible asses and n + 1om inangible asses. Second, he overall volume index of capial services can be shown o be a share weighed average of all he asse-specific Dln and DlnR erms (Marrano e al., 2009): (19) (20) Δln p ϕ Δln n = ( i, ) i= 1 i i R ΔlnR p R ϕ ΔlnR m = ( i, ) i= n+ 1 i i where he shares are he flow of renal paymen for each asse as a share of oal renal paymens (j). There are no ime-varying depreciaion raes available and hey herefore are se consan over ime. Moreover, here are no asse-specific raes of reurn, r i, bu in a compeiive marke r i will equalize across asses. Under hese assumpions i is possible o solve for r and p in equaions (17) and (18). Since he overall paymen o capial is known in he economy i is possible o solve for he unobserved asse-specific renal prices ha would ensure ha all paymens o capial asses added up o j. To summarize, growh accouning is implemened by collecing a ime series of nominal invesmen in inangible and angible asses. The series is deflaed o ge real invesmen series. The deflaors ha are used are oupu deflaors based on EU-LEMS (2009). 17 Real capial socks are consruced by using he perpeual invenory mehod; see equaions (3) and (8). Marke secor value added is recalculaed by including inangibles (see equaion (7)), and he operaing surplus j for marke secor value added is adjused (see equaion (18)). A volume index of capial services of all capial inpus is calculaed, ensuring ha he asse renal paymens are consisen wih he adjusing operaing surplus; see equaions (17) (20). A qualiy adjused labor index o measure L QA in equaions (13) (16) is 17 Corrado e al. (2009) also use oupu deflaors. More research is needed in order o improve deflaors The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

17 Review of Income and Wealh, Series 57, Number 4, December 2011 consruced. Finally, growh accouning in equaions (13) (16) can be carried ou. I should also be noed ha he growh accouning framework assumes a closed economy, which implies ha here is no inernaional rade in goods and services or financial asses. All daa excep for inangibles are based on EU LEMS (2008, 2009). Since daa on labor qualiy for Sweden are no available in EU LEMS (2009), he earlier version EU LEMS (2008) was used. 18 Daa on invesmen in inangibles has been colleced from differen sources for he period (see Secion 2). Business secor oupu deflaors were used o creae series of real inangible invesmen for all inangibles excep sofware. The logic for choosing an oupu deflaor insead of a wage deflaor is explained by Corrado e al. (2009, pp ) and Marrano e al. (2009, pp ). Moreover, relaively lile is known abou depreciaion raes of inangibles; for pracical reasons bes available esimaes are he ones presened in Corrado e al. (2009). 19 Since here is no benchmark of iniial capial socks for inangibles i is assumed he iniial capial sock was zero in Growh Accouning Resuls Growh accouning for he Swedish business secor was performed for boh business secor GVA growh (see equaions (13) and (14)) and labor produciviy growh (see equaions (15) and (16)). The growh of GVA and labor produciviy is analyzed boh including and excluding inangible capial. The analysis is based on he ime period and he sub-periods and The sub-periods were chosen for heir value in analyzing he years direcly following he economic and financial crisis in Sweden and he years afer he burs of he Swedish ICT bubble Conribuion o Business Secor Growh Table 2 shows he resul of growh accouning for he enire period of When inangibles are excluded, average annual business secor growh was 4.1 percen. I should be noed ha par of his growh has been driven by demand for Swedish producs abroad. Ne expor has been subsanial during he whole period analyzed. The impac from ne rade is no possible o analyze in he growh accouning framework since i assumes a closed economy. ICT angible capial accouned for 0.3 percenage poins of he value added increase while oher angible capial accouned for 1.3 percenage poins. Labor and labor qualiy accouned for 0.2 and 0.3 percenage poins, respecively. The residual, TFP, 18 I is assumed ha labor qualiy is he same in 2006 as in The depreciaion raes are: 0.33 for compuerized informaion; 0.2 for R&D, mineral exploraion, copyrigh and license cos, and design; 0.4 for vocaional raining, purchased and own accoun organizaional srucure; and 0.6 for advering and marke research. 20 Seing iniial capial sock o zero in 1992 migh be subjec o measuremen errors since all of he rue value of he benchmark will no have depreciaed away in 1995 when measuring sars. In he Appendix, he period is used o see how he impac from inangibles is affeced when he period from he year when he capial sock is assumed o be zero o he acual measuremen period is prolonged The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

18 Review of Income and Wealh, Series 57, Number 4, December 2011 TABLE 2 Growh Accouning Resuls for he Business Secor in Sweden, Excluding inangible capial (%) Annual value added growh Conribuion of inpus ICT angible capial Non-ICT angible capial Labor Labor qualiy TFP Including inangible capial (%) Annual value added growh Conribuion of inpus ICT angible capial Non-ICT angible capial Labor Labor qualiy Inangible capial TFP Source: EU LEMS (2008, 2009), sources lised in Table 1, and own calculaions. accouned for 1.9 percenage poins. Thus, a considerable share of he Swedish business secor growh could no be explained by radiional ypes of inpus, namely labor and angible capial. Table 2 also presens growh accouning, esimaes wih inangible asses included. Value added growh increases o 4.3 percen, indicaing ha inangibles had a posiive effec no only on he level of value added, bu also on he business secor growh. ICT angible capial and non-ict angible capial accouned for 0.3 and 1.1 percenage poins, respecively. The same holds for labor and labor qualiy wih 0.2 and 0.3 percenage poins of business secor growh rae. The larges difference came in he guise of inangible capial, which accouned for as much as 1.3 percenage poins of business secor growh. Consequenly, inangible capial accouned for 30 percen of oal business secor growh in TFP accouned for 1.2 percenage poins; hence, TFP decreased subsanially when inangible capial was included in he growh accouning analysis. For he sub-period , annual business secor growh was 4.5 percen when inangibles were excluded. Labor growh accouned for a considerably larger share of growh wih 0.9 percenage poins when compared o he period , implying ha TFP accouned for 1.1 percenage. When inangible capial was included in he analysis, i accouned for nearly 1.7 percenage poins of value added, resuling in TFP growh of 0.4 percenage poins as well. Thus, here was considerable invesmen in inangible capial during he years following he economic and financial crisis in Sweden. For he period , annual business secor growh wih inangibles excluded decreased o 3.8 percen. Boh he conribuion from ICT-angible capial and non-ict angible capial was lower han for he earlier period wih 0.3 and 1.0 percenage poins, respecively. Labor had a negaive impac on growh wih approximaely -0.4 percenage poins. TFP accouned for 2.5 percenage 2011 The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

19 Review of Income and Wealh, Series 57, Number 4, December 2011 poins of value added. When inangible capial was included, he growh rae decreased o 3.7 percen. Inangible capial accouned for 0.9 percenage poins of business secor growh, while he impac of oher inpus decreased slighly and TFP accouned for 1.8 percenage poins. In oal, he resuls show ha inangible capial accouned for a large share of oal business secor growh in When inangible capial was included in he growh accouning analysis, TFP decreased considerably. The resuls for he sub-periods and show ha inangibles had a much larger impac on business secor growh in he earlier period following he economic and financial crisis in Sweden. TFP only accouned for 0.4 percen of GVA growh in his period. For he period , TFP accouned for a larger share of GVA Conribuion o Labor Produciviy Growh While GVA is a measure of he growh rae of all final goods and services produced, labor produciviy measures he growh rae of GVA per amoun of labor resources used o produce he oupu in he economy. Table 3 shows he labor produciviy growh in he Swedish business secor and for he sub-periods and For he period , he annual labor produciviy growh was 3.8 percen when inangible capial was excluded. ICT angible capial and non-ict angible capial accouned for 0.3 and 1.2 percenage poins, respecively. Labor qualiy accouned for 0.3 percenage poins while TFP accouned for 1.9 percenage poins. When inangible capial was included, labor produciviy growh increased slighly o 4.0 percen. The oher inpus all accouned for slighly smaller shares, while inangible capial accouned for 1.2 percenage poins of he growh rae and hus 31 percen of he oal labor produciviy growh. TFP accouned for 1.2 percenage poins of he produciviy growh when inangibles were included. TABLE 3 Labor Produciviy Growh Accouning Resuls for he Business Secor in Sweden, Excluding inangible capial (%) Labor produciviy growh Conribuion of inpus ICT angible capial Non-ICT angible capial Labor qualiy TFP Including inangible capial (%) Labor produciviy growh Conribuion of inpus ICT angible capial Non-ICT angible capial Inangible capial Labor qualiy TFP Source: EU LEMS (2008, 2009), sources lised in Table 1, and own calculaions The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh

20 Review of Income and Wealh, Series 57, Number 4, December 2011 TABLE 4 Conribuion of Inangible Capial Deepening o he Annual Change in Labor Produciviy in he Business Secor (percenage poins) Compuerized informaion Innovaive propery a) R&D b) Mineral exploraion c) Copyrigh and license coss d) Developmen coss in financial indusry e) Design Economic compeencies a) Brand equiy Adverising Marke research b) Vocaional raining c) Organizaional srucure Purchased Own accoun Toal inangible capial deepening Source: EU LEMS (2008, 2009), sources lised in Table 1, and own calculaions. For he sub-period , he labor produciviy growh was 3.2 percen when inangibles were excluded, while i increased o 3.7 when hey were included in he growh accouning analysis. Inangible capial accouned for 1.5 percenage poins and hus for more han 40 percen of he labor produciviy growh. In oal, inpus accouned for mos of he labor produciviy growh, implying in urn ha TFP was only 0.4 percenage poins. Thus, in he period following he economic and financial crisis, invesmen in inangibles accouned for a very large share of labor produciviy growh, which almos reduced TFP o zero. For he period , he labor produciviy growh was 4.3 percen and hus more han 1 percenage poin higher han in TFP was as high as 2.5 percenage poins. When inangible capial was included he labor produciviy growh rae became 4.2 percen. Inangible capial hen accouned for 1.0 percenage poins and TFP decreased o 1.8 percenage poins. Table 4 shows he decomposiion of inangible capial ino he differen caegories of inangible capial. For he period , compuerized informaion, innovaive propery, and economic compeencies accouned for 0.2, 0.7, and 0.4 percenage poins, respecively, of labor produciviy growh. R&D accouned for he larges share, wih approximaely 0.4 percenage poins, indicaing ha invesmen in R&D was of major imporance o labor produciviy growh. Design, vocaional raining, and purchased organizaional srucure were also imporan for labor produciviy growh, wih a conribuion of 0.2, 0.1, and 0.1 percenage poins, respecively. Compuerized informaion and adverising also accouned for significan shares of labor produciviy growh. In oal, inangibles accouned for as much as 31 percen of labor produciviy growh in he business secor in For he early period , he share was even higher han 40 percen. For he laer period he impac 2011 The Auhor Review of Income and Wealh Inernaional Associaion for Research in Income and Wealh