What Will Happen to Growth and Productivity and Related Policies if We Get Really Serious About Intangibles?

Transcription

1 What Will Happen to Growth and Productivity and Related Policies if We Get Really Serious About Intangibles? September 15, 2014 Bart van Ark The Conference Board

2 The economic view of intangibles ( knowledge based capital ) drastically changes view of growth and productivity Traditional capital estimates are understated because many costs of innovation are not counted as investment In economic view of investment any use of resources today designed to increase the productive capacity of the firm in the future is investment. (Corrado, Hulten and Sichel, CHS, 2006, 2009) CHS and Corrado, Haskel and Jona-Lasinio (CHJ-L) use the intangibles framework and propose building an innovation account to illuminate innovation processes. Many intangibles, beyond R&D, are difficult to value, market and trade creating potential non-rivalrous characteristics and spillovers Implementation of this view drastically changes our view of how the rise of the knowledge economy impacts on growth and productivity So policy-makers and accountants get more serious about intangibles

3 Standing on the shoulders of giants Intangibles

4 Projections show an investment pace which cannot be sustained with such low productivity growth Sources of GDP Growth, average annual contribution % change Only faster productivity growth can sustain investment Given weak investment in recent years, this pace doesn t seem feasible Commission has 1.4%, of which 0.6% in TFP growth too high? Source: The Conference Board Total Economy Database & Global Economic Outlook 2014, Update February 2014 (

5 Two schools of thoughts on secular stagnation: Demand side (Summers, Krugman): Macroeconomic policy will have difficulty to achieve full employment and production at potential, and if these goals are attained there is likely to be a price paid in terms of financial stability. Supply side (Gordon): The gap of actual performance below potential is quite narrow and slow growth is more a problem of slow potential than a remaining gap. The growth slowdown is structural related to demographics, education, inequality and government debt. The emergence of low (or negative) real interest rates, low inflation and weakened potential output growth are the key ingredients of the secular stagnation hypothesis. A long-term slowdown in productivity and investment, starting before the crisis, is the real economy side of the story Secular Stagnation Slow global growth and small home markets forces competition on the base of low prices Weak competitive pressures lessen incentive to invest in education & infrastructure. Deflationary pressures worsen debt resolution and slow growth prospects Unfulfilled promises to rising middle classes causes restiveness Between- and within-country inequality rises

6 A productivity gap? Labor productivity is on a slowing trend in most mature economies Phase 1

7 The total factor productivity gap is an especially large problem in the Euro Area Trend growth of total factor productivity using HP filter Note: Total factor productivity growth accounts for the changes in output not caused by changes in labor or capital inputs. Source: The Conference Board Total Economy Database

8 An investment gap could be the other part of secular stagnation. But this only TANGIBLE investment 125 Index, 2004= Real gross fixed capital formation U.S. (Q2 '14) Euro Area (Q2 '14) UK (Q1 '14) Japan (Q2 '14) Source: Haver Analytics

9 Since beginning of the crisis intangibles intensity has been marginally impacted Private-sector intangible categories as % of total GDP US Euro Area Source: Corrado, Haskel, Jona-Lasinio and Iommi, (2012)

10 Longer-term, intangible capital will gradually overtake tangible capital, fundamentally changing our perspective on growth.14 Investment, Private industries, 1977 to 2011 (ratio to existing GDP) Excludes real estate/housing. Intangible Tangible Source Corrado and Hulten (2010, 2012).

11 We are not seeing this in most European countries yet Investment in tangible and intangible assets, 2007 Percent of GDP Tangible Intangible 5 0 China Japan Euro Area UK US Note. Euro Area excludes Luxembourg. Source. Corrado and Hao (2013).

12 Why is it important to take a broader perspective on intangibles? Source: Corrado, Haskel, Jona-Lasinio and Iommi, (2014)

13 Despite progress on research, why is there caution on embracing the policy implications? Some forms of intangible assets are pretty exotic as they have no physical form, making valuation, depreciation, etc. all difficult national accounts integration goes slowly Intangibles can be marketized but in-house production is a large share of total production, making valuation difficult and potentially reducing possibility for spillovers. Integrating the impact of intangibles on growth is tricky: Spillovers and complementarities are difficult to measure and hard to convey. Causality is probably a bigger issue with intangibles than with tangibles If intangibles is the main story, the focus is long-term, not short-term requiring bigger policy commitments. Public-private partnerships is probably a bigger deal than for tangible investments

14 Intangible assets come in many forms Intangible assets have no physical form: Technology based R&D, Patents, Software, Databases, Trade secrets Artistic Books, Musical works, Pictures, Video Contract based Licensing, royal agreements, advertising contracts, lease agreements, non-compete agreements Customer related Customer Lists, Order backlogs, Customer contracts Marketing related Brands, Logos, Trademarks, Internet domain names, Images, Copy and Advertising campaigns Some intangibles (software, mineral exploration, artistic originals and since 2013 R&D) are already captured in national accounts Intangibles can be marketized but in-house production is a large share of total production, making valuation difficult and potentially reducing possibilility for spillovers

15 Three Categories of Intangible Assets Good progress Some progress Little progress

16 Is it simply the level of development? If so is there a causal relationship? Intangible Investment as % of GDP and Output per Person, 1995 and 2009 * China and India are total economy, while investment in the rest of the countries are for the market sector. China is also not included in the computation of the regression line. Sources: Labor productivity is from Total Economy Database (2012). Intangibles in China is from Hulten and Hao (2012), and in India form Hulten, Hao and Jaeger (2012), in Brazil is Dutz et. al. (2012), in Japan is RIETI. Other countries from Corrado et. al. (2012).

17 What to make of this finding? Many (including ourselves) have noted that intangible investment is, in essence, investment in innovation and that intangibles are complements to ICT in production It is therefore important to understand the underlying determinants of intangible investment (and to go beyond viewing R&D or ICT in isolation from intangibles) In previous work (van Ark et al. 2009) we noted that the intangible intensity of a country (defined as its intangible investment rate or the ratio of intangible investment to tangible investment) was related to Real GDP per capita Market capitalization Early-stage venture capital investment Market sector TFP growth (i.e., diffusion of innovations)

18 What to make of this finding? (continued) Recent work by the OECD (Andrews and Criscuolo 2013, p. 23) also found positive correlation between intangible intensity and Private credit to GDP Strength of patent rights. and negative correlation with indexes of Product market regulations restricting competition Creditor friendliness of bankruptcy law Stringency of job protection legislation Common factors may therefore explain the association between a country s wealth (broadly defined) and its intangible intensity To establish the impact more clearly we need to transition to growth

19 In several cases the role of intangible capital contribution to labor productivity growth is beginning to outpace tangibles Contributions to labour productivity growth, Source: Corrado, Haskel, Jona-Lasinio and Iommi, (2014)

20 And the non-ict & non-r&d components are taking up a larger share Decomposition of intangible capital contributionst o labour productivity growth, Source: Corrado, Haskel, Jona-Lasinio and Iommi, (2014)

21 Evidence points at combination of spillovers and complementarities from intangibles The non-rival nature of intangible capital implies a theoretical link to MFP growth via diffusion, suggesting that spillovers from intangibles likely exist beyond the well-researched effects from R&D Using a cross-country econometric approach, Corrado, Haskel and Jona-Lasinio (2012) find evidence for spillovers from intangible assets in EU countries (i.e., after controlling for endogeneity) CHJ-L also find strong complementarities between ICT intensity at the industry level and a country s intangible capital intensity Within intangibles components, the ICT complementarities are strongest for R&D, training, and organizational capital R&D has a complementary relation with design and advertising

22 Relationship between intangibles capital deepening and MFP growth raises possibility of spillovers % change MFP growth in 14 EU countries, Contribution of Intangible Capital Deepening (percentage points) Source: Corrado, Haskel, Jona-Lasinio and Iommi, (2012)

23 Relationship using non-r&d intangibles looks as strong as R&D MFP growth in 14 EU countries, 1995 to 2007 MFP growth in 14 EU countries, 1995 to 2007 Percent change Percent change Contribution of non-r&d intangible capital deepening -1.0 Contribution of R&D capital deepening (percentage points)

24 Intangibles and ICT are complementary Spillovers from ICT are hard to detect Percent change MFP growth in 12 EU countries But intangibles and ICT exhibit complementarity Percentage points Contribution of intangible capital deepening (less software) in 12 EU countries, Contribution of ICT Capital Deepening (percentage points) Contribution of ICT Capital Deepening (percentage points) Source: Corrado, Haskel, Jona-Lasinio, and Iommi (2013)

25 Corporate brand as an intangible asset? Percent of the S&P 500 market value represented by physical and financial assets versus intangible factors, some of which are explained within financial statements, but many of which are not. 100% % 60% % 20% 0% Other factors Physical and financial assets Source. Integrated Reporting..

26 Each function in the value chain affects your brand Functions in a global value chain Source Knowledge-based Capital, Growth and Competitiveness by Dirk Pilat. Available at

27 % Enterprises w/ Marketing Innovation Brand and R&D in innovation appear related Marketing innovation and R&D intensity in Europe, 2008 and Business Enterprise R&D Expenditure (% GDP) Source. Authors elaboration of information from BERD and Community Innovation Surveys for 28 European countries (Eurostat).

28 In the new work we use a broader list of services and examine occupations related to brand In-house Marketing managers and analysts compensation Marketing-related computer workers compensation Marketing-related media workers compensation Purchased Marketing consulting services Market research services Content development services Media dissemination costs Other PR, advertising and marketing services Source. The Conference Board.

29 What accounts for the difference? Brand Investment billions of dollars, 2010 Economic competencies investment billions of dollars, Old series New series In-house services, other* Strategic marketing services Market research services Long-lived advertising/ PR services Old series New series Brand Other firmspecific resources** * Strategic marketing and market research include both in-house and purchased components. ** Organizational capital and firm-specific human capital.

30 New U.S. work suggests contribution of brand to growth in output per hour increased in importance since 2007 Percentage point contribution to growth in output per hour New Brand Brand Source. Corrado and Hao (2013). Output is private industry excluding education, health, and real estate. The first three periods shown are between years with business cycle peaks as defined by the NBER. 30

31 Direct contribution of brand to growth compared with direct contribution of private R&D Percentage point contribution to growth in output per hour, Brand New Brand Brand Private R&D.00 EU Japan US Note. EU is the simple average of 12 European countries. Source. Corrado and Hao (2013). R&D and existing contribution of brand based on information reported in Corrado et al. (2013) and Miyagawa and Hisa (2013). Private R&D refers to R&D performed by for-profit industries only (i.e., academic R&D is excluded).

32 Three takeaway points from including brand measures Brands are productive assets, and marketing is not a zero-sum game. Branding thus contributes to economic growth. In the U.S. in-house brand investment is increasing in recent years, while purchased investment, mostly advertising, is shrinking. To maximize value creation, customer perceptions of a brand need to be aligned with other capabilities, such as innovative capacity.

33 The more obscure intangibles: brand investment s impact on economic growth doesn t have to work in the usual way Investment Capability Intangibles Macro measures (1) (2) (3) (4) Marketing and PR Market research Product R&D Process R&D Service Strong quality Low costs Know-how Speed to market Brand and Reputation Value to customers Innovative Capacity Intangible capital (knowledge capital of the firm) Value added, Employment, and Productivity Source. Corrado and Hao (2013) as adapted from Clayton and Turner (2000).

34 Broad intangibles approach to growth policy allows for sharper focus on growth constraints Tool-box to combine economic and innovation policy-making expands as non-r&d components get more emphasized Allows for greater emphasis on diffusion beyond creation of knowledge. Policies about debt-financed infrastructure should be informed by capitalization of intangible assets: How do we stimulate firm investments in workforce training if we don t know whether these investments are moving up, down, or sideways? Monetary and financial market policies will be impacted when allowing IPbacked collateral to be counted as tier 1 capital. Measurement of intangibles also creates better microeconomic framework for antitrust and tax policy. Framework policies (regulatory in labor, product and capital markets, macro, taxes, education) all apply to broader intangibles framework Promoting core intangible investment is consistent with goal of attaining a higher level of productivity and therefore a higher living standard.

35 Two schools of thoughts on secular stagnation: Demand side (Summers, Krugman): Macroeconomic policy will have difficulty to achieve full employment and production at potential, and if these goals are attained there is likely to be a price paid in terms of financial stability. Supply side (Gordon): The gap of actual performance below potential is quite narrow and slow growth is more a problem of slow potential than a remaining gap. The growth slowdown is structural related to demographics, education, inequality and government debt. The emergence of low (or negative) real interest rates, low inflation and weakened potential output growth are the key ingredients of the secular stagnation hypothesis. A long-term slowdown in productivity and investment, starting before the crisis, is the real economy side of the story Secular Stagnation Slow global growth and small home markets forces competition on the base of low prices Weak competitive pressures lessen incentive to invest in education & infrastructure. Deflationary pressures worsen debt resolution and slow growth prospects Unfulfilled promises to rising middle classes causes restiveness Between- and within-country inequality rises

36 Lessons and next steps Intangible investments need to include more than R&D The more obscure areas of intangible need to get more attention: Contract based Licensing, royal agreements, advertising contracts, lease agreements, non-compete agreements Customer related Customer Lists, Order backlogs, Customer contracts Marketing related Brands, Logos, Trademarks, Internet domain names, Images, Copy and Advertising campaigns Much progress on measurement, but more is needed to provide an adequate (national accounts) framework for policy making Completing the spillovers and complementarities picture requires estimates of public intangibles & private intangibles at industry level Public intangibles (SPINTAN) We need more current data real time estimates?

37 Policy makers need more current data Percentage points.8.7 Contribution of components of intangible capital to the growth of market sector labor productivity, 1995 to to 2011 Organization Training Brand Other NFP R&D Software EU* Japan US * Simple average of 12 EU countries. US Source: Corrado and Hao (2013) based in part on estimates kindly provided by Massimiliano Iommi and Tsutomu Miyagawa.

38 APPENDIX

39 Investment The major story is that strategic marketing services (whether inhouse or purchased) are now counted as investments in brand (rather than in organizational capital) In principle, the move makes little difference to overall intangible investment but its impact on the analysis of brands is major Methods to estimate this component were improved, however, and thus the change to this component has the net effect of raising overall investment Another part of the story is that an in-house component for all aspects of marketing has been added. Market research services look the same because the new data-based inhouse component was about equal to the assumption in CHS. Other in-house marketing services have the net effect of raising overall investment

40 Investment, continued Purchased component changes too (for reasons other than the move of marketing consulting services to brand) Previously, Coen/Galbi (national component only) was basis for brand investment, but series stops in Coen/Galbi national averages.6 of Coen/Galbi total (this is one basis of the previous capitalization factor) This was reported, based on data through 2003, in CHS, although beginning in about 2002, Coen national grew faster than the total due, to the rise of Internet With this report, the IRS series is the basic advertising series that is used. The IRS series is larger than the Coen/Galbi total (by about 10%), but the application of a smaller capitalization factor (.5 rather than.6) largely offsets this move. The multiple data sources on advertising create confusion

41 Differences between countries seem strongly related to sectoral structure of economy Major categories of private-sector intangibles as % of total GDP Source: Corrado, Haskel, Jona-Lasinio and Iommi, (2012)

42 Non-R&D intangibles are distributed more evenly across sectors (in these countries) Intangible Capital Factor Share by Major Sector, All intangibles Excluding R&D fr de uk it es.00 fr de uk it es Manufacturing Trade Other nonfinancial services* Manufacturing Trade Other nonfinancial services* Source: Elaboration of INTAN-Invest estimates. * Agriculture, mining, utilities, construction and financial services are excluded.