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Theroleofintangibleassetsinexplainingtheinvestment-profitpuzzle
ÖZGÜRORHANGAZIOZGURORHANGAZI@GMA IL .COM
PA P E R P RE PA RE D F O R T HE 2 1 S T F MM CO N F E RE NCE “ THE CR I S I S O F G LOBA LI SAT IO N,”N O V EMBE R 9 -1 1 , 2 0 1 7 , BE RL I N .
INVESTMENT-PROFITPUZZLE1. RATEOFCAPITALACCUMULATION
2. PROFITRATE
3. INVESTMENT– PROFITRATIO
NFCRATEOFCAPITALACCUMULATION
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
NFCPROFITRATE
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
INVESTMENTTOCASHFLOW
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
110.0%
1952
:Q1
1953
:Q3
1955
:Q1
1956
:Q3
1958
:Q1
1959
:Q3
1961
:Q1
1962
:Q3
1964
:Q1
1965
:Q3
1967
:Q1
1968
:Q3
1970
:Q1
1971
:Q3
1973
:Q1
1974
:Q3
1976
:Q1
1977
:Q3
1979
:Q1
1980
:Q3
1982
:Q1
1983
:Q3
1985
:Q1
1986
:Q3
1988
:Q1
1989
:Q3
1991
:Q1
1992
:Q3
1994
:Q1
1995
:Q3
1997
:Q1
1998
:Q3
2000
:Q1
2001
:Q3
2003
:Q1
2004
:Q3
2006
:Q1
2007
:Q3
2009
:Q1
2010
:Q3
2012
:Q1
2013
:Q3
2015
:Q1
2016
:Q3
PROFIT-INVESTMENTLINK1. PROFITSASANINDICATOROFEXPECTEDPROFITS
2. PROFITSASASOURCEOFFUNDS
3. INVESTMENTGENERATINGFURTHERPROFITS
WEAKENINGLINK1. FINANCIALIZATION
1. Crotty (2003), Stockhammer (2004) andOrhangazi (2008)
2. GLOBALIZATION(OFFSHORING)1. Milberg andWinkler (2010, 2013)
3. THISPAPER:ADDANOTHERLAYER– THEROLEOFINTANGIBLEASSETS
WHATAREINTANGIBLEASSETS?1. INTANGIBLES– DEFINITION
1. “identifiablenon-monetaryasset[s]withoutphysicalsubstance”thathave“probablefutureeconomicbenefitstoanentity”
2. brandnames,trademarks,patents,copyrights,designandlicenses, computerizedinformation,customerrelationships,andotherabstractformsofassets
2. MEASUREMENTPROBLEMS1. “theirimpossibility tobemeasuredaccordingtotraditionalaccountingstandards”
3. LITERATURE1. Nakamura(2008):marketvalueofintangibleassetsexceededthevalueoftangibleassetsintheUSby
2006.2. Corrado etal. (2006),Corrado (2009),andCorrado etal. (2012):proportionofcorporatemarketvalue
accountedforbyintangibleassetsdominatethevalueofmanyleadingglobalcorporationsandintangibleassetsrepresentover90percentofcorporatevalueformanyhigh-technologyandpharmaceuticalfirms.
3. Zeller(2008):asignificantincreaseinpatentsintheUSstartinginthelate1980s.While76,748patentsweregrantedin1985,thisnumberincreasedto107,124in1991andto221,437in2002
INTANGIBLEASSETSANDPROFITSANDINVESTMENT1. INTANGIBLESANDMARKETSTRUCTURES
1. ABSOLUTEMONOPOLIZATION2. BARRIERSTOENTRY3. MARKETPOWER4. ARTIFICIALSCARCITY
1.ABSOLUTEMONOPOLIZATION1. Thisiswell-recognized,especiallyinthecaseofpharmaceuticals,wherepatentsgive
pharmaceuticalfirmsmonopoly rightsintheproduction ofthepatentedproducts.
2. Themostextremecaseofthis iswhennewfieldssuchasDNAsequences, specificupstreamknowledgeportions inthefieldofmonoclonalantibodies orgeneticdatabasesofcertainpopulations arepatented
3. Whileitisclearthatthesemonopolyrightsgivefirmstheabilitytochargehighpricesandhencecontributetohigherprofits,thereisanongoingdebateontheirimpactoninvestment,especiallyinvestment inresearchanddevelopment.
2.BARRIERSTOENTRY1. especiallyforhigh-technologyandtelecommunications firms,theinherent intensityof
intangibleassetsalsoservesashighbarrierstoentry
2. Theskillsnecessarytodealwithcourtsandlawyersinvolveahighinitialset-upcost. Iflegalfightingskillsarecostly,deterrencerequiresevenmoretimeandmoreresourcestobecomeeffective:atoughreputation(tobeendowedwiththeskillsandthefinancialresourcesnecessarytochallengecompetitors’ IPRclaims)entailsanevenhigherset-upcost.Thustheso-calledknowledgeeconomyproduces anevidentparadox: thenon-rivalnatureofknowledge,whichcouldinprinciplefavorsmall(evenworker-managed)firms,isusedtocreateartificialeconomiesofsizethatmakethecheapacquisitionandthedefence ofpropertyrightspossible onlyforbigbusiness (Pagano2014:1421).
3.MARKETPOWER1. theemergenceofglobalvaluechainsandthewideningofoutsourcingandoffshoring
practicesmadeintangibleassetssuchasbrandnames,trademarks,designandlicenses,tradesecretsaswellaspatentsandcopyrightsveryimportantformanufacturingfirms
2. “manufacturerswithout factories”(e.g.Nike,Apple),or“retailerswith‘contract’factories”(e.g.Ikea,Walmart).
3. Offshoringsignificantlydecreasesthedomestic investmentneedsofthefirms,whileintangiblesenablethemhavesomedegreeofmarketcontrolandpricingpower,leadingtohighprofitswithout investment.
4.ARTIFICIALSCARCITY1. intangibleassetsservetogenerateartificialscarcityforproductsthathavereproduction
coststendingtozero
2. Inthecaseofcommoditiesusuallyreferredtoas“informationcommodities,”or“cognitivecommodities,”suchassoftware,theproduction ofthefirstunit involveshighcostsofproduction, butthecostsofreproductiontendtozeroandidenticalproductscanbeeasilyproducedbyotherswithout havingtospend theoriginalcostsfortheproductionofthefirstunit
3. Intellectualpropertyrightsintheformofcopyrightsandpatentsgenerateartificialscarcityfortheseproducts andpreventtheirreproduction; usuallytogetherwithtechnicalbarrierssuchasnon-accessible sourcecodesorcopyprotectionofcomputerprograms
SAMPLE1. StandardandPoors’Compustat database,1973-2016
2. sampleoflargestUS-incorporatedNFCs1. firms arerankedby theirtotalassets eachyear.2. Ikeep firms thathave been among thetop1000 largestfirms foratleastone yearanddrop the
firms thatnevermakeittothetop1000 list.
SAMPLE’SINVESTMENTSHARE
80.0%
82.0%
84.0%
86.0%
88.0%
90.0%
92.0%
94.0%
96.0%
98.0%
100.0%
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
top1000 sample
top 1000 only
INVESTMENTTOCASHFLOWRATIO
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
INVESTMENTTOAVAILABLEFUNDS
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
NUMBEROFFIRMS
0
200
400
600
800
1,000
1,200
1,400
1,600
1973-1980 1981-1990 1991-2000 2001-2007 2008-2016
NUMBEROFFIRMSAMONGTOP1000
0
50
100
150
200
250
1973-1980 1981-1990 1991-2000 2001-2007 2008-2016
WEIGHTBYTOTALASSETS
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1973-1980 1981-1990 1991-2000 2001-2007 2008-2016
INTANGIBLEASSETSTOCAPITALSTOCK
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
including goodwill
excluding goodwill
INTANGIBLEASSETSTOCAPITALSTOCK
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
1988-1990 1991-2000 2001-2007 2008-2016
INTANGIBLESANDINVESTMENTANDPROFITSIsuggestedabovethattheuseofintangibleassetscouldleadtohigherprofitsforfirmswithoutacorresponding increaseintheirinvestment levels.Thiswould implythatfirmswithhigherintangibleassetswould havehigherpricingpowerandlowerinvestment-to-cash-flow ratios.
SIMPLEMARKUP
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
1973-1980 1981-1990 1991-2000 2001-2007 2008-2016
TOTALCOSTMARKUP
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
200.0%
1973-1980 1981-1990 1991-2000 2001-2007 2008-2016
INDUSTRYPROFITRATES
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
1973-1980 1981-1990 1991-2000 2001-2007 2008-2016
INDUSTRYINVESTMENTTOCASHFLOWRATIOS
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
200.0%
1973-1980 1981-1990 1991-2000 2001-2007 2008-2016
INVESTMENTANDPROFITSHARES1973-1980 1981-1990
1991-2000 2001-2007
2008-2016
Rate of change from the first period to the last period
Nondurables Investment 3.9% 4.1% 3.8% 2.9% 2.5% -35.1%
Profits 5.9% 6.1% 6.9% 6.2% 5.5% -7.4%
Durables Investment 5.1% 5.7% 8.2% 5.8% 3.0% -40.7%
Profits 5.9% 5.9% 7.3% 4.5% 2.9% -51.5%
Machinery Investment 14.7% 12.6% 10.7% 7.1% 6.9% -53.2%
Profits 17.5% 13.2% 13.0% 11.3% 11.0% -37.4%
Energy Investment 16.9% 15.5% 10.8% 14.5% 22.9% 35.3%
Profits 16.0% 13.2% 7.7% 9.7% 9.2% -42.7%
Telecommunications Investment 15.5% 16.9% 19.4% 14.9% 9.9% -36.0%
Profits 13.6% 17.6% 16.6% 14.6% 12.1% -11.3%
Shops Investment 4.8% 5.5% 7.7% 9.6% 7.5% 54.5%
Profits 6.1% 6.5% 7.2% 8.9% 9.4% 54.8%
Utilities Investment 23.3% 18.8% 13.2% 18.5% 23.0% -1.4%
Profits 17.9% 18.7% 15.2% 13.8% 13.0% -27.5%
Other Investment 8.6% 12.2% 15.3% 15.4% 14.1% 63.8%
Profits 7.9% 9.2% 12.2% 14.1% 13.2% 66.0%
High-technology Investment 5.4% 6.2% 7.4% 6.8% 7.2% 33.6%
Profits 6.6% 6.4% 8.8% 9.9% 15.5% 133.7%
Healthcare Investment 1.5% 2.3% 3.2% 4.0% 2.7% 76.4%
Profits 2.4% 3.2% 5.2% 7.2% 8.3% 240.9%
SUMMARYOFFINDINGS1. Intangible assetstocapital stockratio increased ingeneral butthisincrease ishighest forfirmsin
high-technology, healthcare, nondurables andtelecommunications.
2. Industrieswithhigher intangible asset ratioshavelower investment toprofitratios.
3. Industrieswithhigher intangible asset ratioshavehighermarkupsandprofitability.
4. Thecompositionofthenonfinancial corporatesectorhavechangedandtheweightofhigh-technologyandhealthcare firmshaveincreased. However, thisincrease doesnotcorrespond toanequal increase intheir investmentshare.Thedecline intheinvestmentshareofdurables,nondurablesandmachinery ismadeupmostlybyfirmsinlocation-specific industries,mostnotablyinenergyandutilities. Location-specific industries ingeneral havesteadymarkupsandhigher levels ofinvestment toprofitratio.
5. Yet,intangible-intensive industries seemtocapturealarger shareoftheprofitsthansuggestedbytheir shareofinvestmentortotalassets.Forexample, whilehigh-tech represents around10percentoftotalinvestment, itreceives around20percentoftotalprofits.
SUMMARYOFFINDINGS
Allinall,thesefindingsareinlinewiththesuggestionthatthe increasedrelianceofthefirmsonintangibleassetsenablethemtocapturehigherprofitswithout acorrespondingincreaseininvestment.
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