1 Innovation, Intangibles and Economic Growth: Towards a Comprehensive Accounting of the Knowledge Economy Bart van Ark* University of Groningen and The

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Innovation, Intangibles and Economic Growth: Towards a Comprehensive Accounting

of the Knowledge Economy

Bart van Ark*University of Groningen

and The Conference Board

Seminar on Measurement of Capital – Beyond the Traditional Measures

Conference of European Statisticians12 June 2007, Geneva

* In co-operation with Charles Hulten, University of Maryland and The Conference Board

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Grab your iPod, flip it over, and read the script at the bottom. It says: "Designed by Apple in California. Assembled in China." Where the gizmo is made is immaterial to its popularity. It is great design, technical innovation, and savvy marketing that have helped Apple Computer sell more than 40 million iPods. Yet the folks at the BEA don't count what Apple spends on R&D and brand development, which totaled at least $800 million in 2005. Rather, they count each iPod twice: when it arrives from China, and when it sells. That, in effect, reduces Apple -- one of the world's greatest innovators -- to a reseller of imported goods.

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Do the Official Statistics Capture the Knowledge Economy?

How do we measure innovation? New ways of making current products better, faster,

cheaper Creating something not previously created

Is the impact of innovations accurately represented in official statistics on national income and productivity? NO !! “You see the computers everywhere except in the

productivity data.” Solow (1987) Official statistics “miss the most important technological

revolutions in history.” Nordhaus (1997) Hence: “Whilst the knowledge economy is

all around us, it is still hard to see it in the official statistics” Skepticism about GDP, CPI and productivity statistics

capturing key components of the knowledge economy

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National Accounts Framework Provides Adequate Point of Departure

Basic solutions require rethinking of: The scope of national accounts on output side The measurement of output in particular in services The measurement of prices to capture product quality Consistency of output and input measures to provide

productivity The treatment of inputs in terms of expenditure versus

investment Development of growth accounts in conjunction

to national accounts is key KLEMS framework Measurement of intangibles

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Basic Determinants of Sources of Growth/ Growth Accounts Model

Output is key measure of standard of living Output is driven by

capital (K) labor (L) intermediate inputs (E, M, S) productivity (LP, MFP)

Capital and labor can by divided into quantity quality/composition

Output increases that cannot be explained by these “inputs” are attributed to multifactor productivity (MFP)

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EU KLEMS Growth and Productivity Accounts Complements National Accounts

EU KLEMS is analytical research database, based on national accounts and complementary official sources (LFS and production statistics)

Long time coverage 1970-2004, with greatest detail for post-1995

Harmonized industry classification, capital and labour input, deflation and industry aggregations (e.g. market economy, market services)

Decomposition of capital and labour input: Capital assets in 7 asset types Labour input in 18 categories (3 x skill; 3 x age; gender)

Broad coverage of EU countries and comparisons with U.S. and Japan

Public database: www.euklems.net

-1.0

0.0

1.0

2.0

3.0

4.0

EU15ex USA-SIC Japan EU15ex USA-SIC Japan

Hours worked

1995-20041980-1995

Growth in Quantity of Standard Factor Inputs Accounts for only Small Part of Real GDP Growth in Market Economy

EU15ex excludes Portugal, Luxembourg, Ireland, Sweden and Greece

Growth in Quantity of Standard Factor Inputs Accounts for only Small Part of Real GDP Growth in Market Economy

-1.0

0.0

1.0

2.0

3.0

4.0


Hours worked Non-ICT Capital

1995-20041980-1995

Even in the Traditional Growth Accounts System the Knowledge Economy Features Strongly but Unequal

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0.0

1.0

2.0

3.0

4.0


Hours worked Non-ICT Capital ICT Capital

1995-20041980-1995


-1.0

0.0

1.0

2.0

3.0

4.0


Hours worked Non-ICT Capital

ICT Capital Labour Composition

1995-20041980-1995


-1.0

0.0

1.0

2.0

3.0

4.0


Hours worked Non-ICT CapitalICT Capital Labour CompositionMFP

1995-20041980-1995

The knowledge economy

Fast Growing Countries Get Bigger Bang from Knowledge Economy, Notably MFP

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0.0

1.0

2.0

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GER ITA LUX DNK BEL FRA AUT NLD SWE UK ESP USA FIN

Hours worked Non-ICT CapitalICT Capital Labour CompositionMFP

Unmeasured intangible capital is hidden in MFP

a) Physical Capitala1) ICT capital (IT hardware, communications equipment)a2) Other capital (plant, machinery, buildings)

b) Human Capitalb1) Formal Educationb2) Company training

c) Knowledge Capitalc1) Research and Developmentc2) Patentsc3) Licenses, brands, copyrightsc3) Other technological innovations, not related to b1) to b3)[c4) Software]*c5) Mineral Explorationc6) Experience

d) Process Capitald1) Engineering designd2) Organisation designd3) Construction and use of data basesd4) Remuneration of innovative ideas

e) Customer Capitale1) Marketing of new products

f) Multi Factor Productivity (residual)

As long as intangibles capital remain unmeasured, its productivity effects are hidden in MFP

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Corrado, Hulten and Sichel (CHS, 2005) calculated intangible investment in U.S.

Inherent measurement difficulties of intangible capital going beyond those of tangible capital as follows: The knowledge-input problem The knowledge-investment problem The quality improvement problem The obsolescence problem (Howell, 1996)

But no clearcut distinction between tangibles and intangibles that justify a distinction between capitalizing and expensing

“Any outlay than is intended to increase future rather than current consumption is treated as a capital investment”

Source: Corrado, Hulten and Sichel (2005)

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CHS (2005) measure $1.2 trillion of intangible investment in U.S. nonfarm

business, 1998-2000

COMPUTERIZED INFORMATION ($154,$154) COMPUTER SOFT WARE ($151) COMPUTERIZED DATABASES ($3)

SCIENTIFIC AND CREATIVE PROPERTY ($424,$424) SCIENTIFIC R&D ($184) MINERAL EXPLORATION ($18) COPYRIGHT AND LICENCE COSTS ($75) OTHER PRODUCT DEVELOPMENT (FINANCE, ARCHIT.)

($149)

ECONOMIC COMPETENCIES ($642,$505) BRAND EQUITY (ADVERTISING) ($236) FIRM-SPECIFIC HUMAN CAPITAL (TRAINING) ($116) ORGANIZATIONAL STRUCTURE MANANGEMENT

CONSULTING, PLANNING ETC.) ($291)


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When including intangibles, investment share in U.S. GDP holds up


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… but the difference in growth rates arises from firm specific resources, not R&D


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Results for U.S. Economy, 2000-03


(70.4%)

(29.6%)

(60%)

(25%)

(15%)

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When including intangibles in growth accounts the weight on capital raises


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MFPMFP

L QUAL

L QUAL

INTANGIT CAP

IT CAP

2.78%3.09%

25%

11% 14%

50%

19%

8% 11%

35%

27%

SOURCES OF GROWTH IN OUTPUT PER HOUR

NFB 1995-2003

WITHOUTINTANGIBLES

WITHINTANGIBLES


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MFPMFPMFP

L QUAL

INTANG

IT CAP

IT CAP1.63%

3.09%

18% 15% 15% 25%

19%

8% 11%

35%

27%

SOURCES OF GROWTH IN OUTPUT PER HOUR NON-FARM BUSINESS SECTOR

MFP

L QUAL

IT CAP

INTANG 26%

1973-1995 1995-2003Source: Corrado, Hulten and Sichel (2006)

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MFPMFP

0.43%

0.84%

12% 19% 9% 30%

10%

17%

10%

32%

32%

CONTRIBUTION OF DIFFERENT INTANGIBLES TO ANNUAL CHANGE IN LABOR PRODUCTIVITY

FIRM SPECL QUAL

SOFTWARE 28%

1973-1995 1995-2003

SCI R&D

BRANDN SCI R&D

SOFTWARE

SCI R&D

N SCI R&D

BRAND

FIRM SPEC


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The Research Program on Intangibles

Extend studies to more countries UK: Haskell and Marrano Japan: Fukao et al. Ongoing work for Finland, France and Netherlands

Price and output statistics that explicitly recognize product innovations (“quality” change).

Uncover the subtleties of interaction between tangibles/intangibles and innovation/productivity growth

A stronger link in the data between human capital and worker competencies

More detailed study at industry level (mnf/services) Intangibles need more accurately represented in

the financial data of the innovators themselves

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The Role of National Statistical Institutes Intangible accounting is in early days, but

statistical description of knowledge economy is too far removed from reality to ignore

Official statistics need to be as precise as possible … but it is sometimes better to be “imprecisely

right than precisely wrong” (Keynes) … requiring a balance between research and

official statistics NSI’s could help to:

develop concepts of intangibles set (international) standards for measurement provide value metrics of intangibles, e.g., survey metrics

on innovation with quantitative magnitudes. Transfer experimental and research based measures into

national accounts satellites that can help to move the measurement agenda forward

Documents

1 Innovation, Intangibles and Economic Growth: Towards a Comprehensive Accounting of the Knowledge Economy Bart van Ark* University of Groningen and The