Developing a UK R&D Satellite Account

Progress made and developments

Fernando Galindo-Rueda

Economic Analysis Division

Office for National Statistics

Presentation to Eurostat R&D Task Force 27 March 2008

1. Background

2. Methods and conceptual issues

3. Practicalities & data

4. Experimental results for UK

5. Future developments • OECD Task Force involvement• Constraints & objectives

1. Background

• SNA 1993 Revision 1– R&D should be treated as gross fixed capital formation in

the SNA, defined as in the Frascati Manual.– Valued at cost to reflect most activity on own account.– R&D Spillovers to be excluded– Patents subsumed into R&D assets

• Previous ONS analysis for Eurostat • Revised in recent published analysis • OECD Task Force

2. Methods and conceptual issues

• Production account – Traded R&D services: Simple reclassification of use from

IC to capital formation – Own account R&D: De facto treated as ancillary output.

Estimate own account output / use as above– Licences for use (rental) of IP: No changes– Non market R&D: Services from Government R&D stock– External G&S account: Outright sale/purchase patents

ROW becomes trade in services

• Generation of income – Subsidies on production (R&D tax credits) already in – Operational Surplus revised up

2. Methods and conceptual issues (cont.)

• Allocation of income – GOS (resource) revised up – Property income

• R&D performed by UK MNEs overseas generates notional GOS• Reinvested earnings on outward FDI• Same applies to foreign MNEs in UK• Net property income impact ambiguous

– National income likely to be revised up• Secondary distribution of income

– Transfers to do R&D no longer current (removed)– (?) “Free” provision of knowledge within MNEs– (?) Other transfers “in kind”– Disposable income likely to be revised up

• Use of income account– Consumption by non profits revised down (treated as FCF), up

(services of R&D capital to non-market owners)– Saving likely to be revised up

2. Methods and conceptual issues (cont.)

• Capital account– GFCF: Acquisitions less disposals of intangible produced assets

revised up• New assets – reflect R&D services

• Existing assets – reflect outright sale/purchase of existing R&D knowledge (i.e. patents)

– Ownership transfer costs for patented entities (removed), into GFCF– Consumption of fixed capital (Revised up to reflect depreciation of

new asset) – Changes in inventories (already some R&D work in progress) (?)– Acquisition less disposal of non produced non financial intangible

assets (remove those related to patented entities linked to R&D)– Capital transfers: Revised to acknowledge R&D transfers previously

treated as current – Net lending. Ambiguous impact.

2. Methods and conceptual issues (cont.)

• Financial account– Direct foreign investment arising from reinvested earnings

• Other changes in volume of assets & revaluation– Accounts not produced: would have recorded appearance

of patents and obsolescence– Expected obsolescence of R&D asset in CFC – Revaluations to reflect success / failure of R&D? vs cost

approach– Revaluations to financial assets & liabilities to reflect

obsolescence of knowledge (e.g. other changes to international investment position)

• Balance sheet (etc…) – Estimate stocks of R&D knowledge

3. Practicalities and data

• Need to work with Frascati sources – Cheap, easy, only way to capture own-account

• Need to “build a bridge” from Frascati to SNA– Current sources (assumptions needed) – Improve / further develop Frascati sources (work with NESTI)

• Short term “solutions” vs long term questions– Changes to SBS / purchase inquiries – SERVCOM– Government & non-profit data– FDI sources– Overlaps BERD / SBS

Experimental analysis (sketch)

• Frascati intramural costs R&D output basic prices– Compensation of employees– Intermediate consumption

• Treatment of extramural R&D as an input in R&D production

– Operating surplus: Capital services of fixed stock– Taxes less subsidies on production : R&D tax credits– Scope: Business / Other / Social sciences / Software DC

• R&D output R&D resources• R&D resources R&D uses

– (adjusted perfomer-funder approach)– Problem with non-performers of R&D

New R&D supply/demand flows• Adjust supply / use table

– New R&D “row” replaces old– Adjustments to other goods and services

Can work out GDP(O) & GDP(E) revisions

Experimental analysis (sketch)

• R&D deflator – Costs of inputs – Quality adjustments (?)

• Depreciation rates– Different rates for owner & industry (?)

• R&D stocks (PIM) for R&D capital consumption

• R&D capital services – Additional output of non-market producers – Useful for productivity analysis

     

FM R&D expenditure NA economic cost of R&D production Source

Wages and salaries current expenditure

Compensation of employees Data from BERD, MA14

Other current expenditure Purchases of goods and services other than R&D

Data from BERD, MA14

- Intermediate consumption of R&D services

Estimated, various sources

Capital expenditure - Data from BERD, MA14

-Consumption of fixed capital used in

R&D productionEstimated, various

sources

- Net operating surplus (net return on capital used)

Estimated, various sources

- Taxes less subsidies on R&D production

ONS from R&D tax credits data

Sum: Intramural R&D expenditure

Sum: Gross R&D output at basic prices  

4. Experimental results

Published in

http://www.statistics.gov.uk/cci/article.asp?ID=1903

 Bridge from Intramural R&D to R&D supply Corps Gov NPISH

Starting point: Frascati Manual intramural R&D expenditure 12,816 2,170 5,411

less software adjustment -550 0 0

equals: within scope R&D expenditure 12,267 2,170 5,411

plus adjustment for tangible fixed assets 1,316 -36 -89

equals: cost of R&D production excluding R&D IC 13,582 2,134 5,322

plus intermediate consumption (IC) of R&D in production of R&D 72 39 2

equals: R&D output at producers' prices 13,655 2,173 5,325

less subsidies on production -717 0 0

equals: R&D gross output at basic prices 12,938 2,173 5,325

plus taxes less subsidies on R&D services 324 0 0

equals: R&D gross output at purchasers’ prices 13,262 2,173 5,325

plus imports of R&D 1,421 583 0

plus intermediation margins 0 0 0

equals: total R&D supply 14,683 2,756 5,325

Source: Author's calculations on a number of ONS sources

Comparison of alternative R&D output estimates by sector, 2004

“Firms” Govt Non-profits

All

Economy

R&D intramural expenditure

(R&D stats)

12.8 2.1 5.4 20.3

R&D output

(National Accounts)

6.5 0.7 0.7 8.0

R&D output

(experimental)

12.9 2.1 5.3 20.4

Source: Galindo-Rueda (2007) Economic & Labour Market Review

(£ billion)

Deflators for R&D

85

90

95

100

105

110

115

120

125

1997 1998 1999 2000 2001 2002 2003 2004 2005

Buildings Equipment Salaries

Other current BERD - fixed weight GDP

Implied R&D output

Source: Galindo-Rueda (2007) Economic & Labour Market Review

Resources   Uses  

R&D output 12,403 R&D intermediate consumption -5,274Output of other goods and services (OGS)

(double counting) -9,089Intermediate consumption OGS (double

counting) -1,363Output of OGS from non-market consumption

of R&D capital services 4,216 R&D gross fixed capital formation 19,407R&D imports (adjustment from BoP to FM sources) 197

Changes in inventories (elimination of work in progress) 12Final consumption of R&D by NPISH

(elimination) -325Final consumption of OGS by NPISH

(double counting) -5,084Final consumption of services from R&D

capital by NPISH 1,776Government final consumption of OGS

(double counting) -2,641Final consumption of services from R&D

capital by government 2,440R&D exports (adjustment from BoP to FM

sources) -1,219Total supply of R&D 12,600 Total demand of R&D 12,600

Total supply of OGS -4,873 Total demand of OGS -4,873

Total supply 7,727   Total demand 7,727

Impact of R&D capitalisation on Goods and Services Account

Impact on GDP growth rates

          Percentages

Real GDP annual growth rateNominal GDP annual growth

rate

  Blue Book2006Satellite estimate Blue Book2006

Satellite estimate

1998 3.32 3.32 6.11 6.02

1999 2.98 2.98 5.32 5.30

2000 3.79 3.75 5.15 5.17

2001 2.36 2.33 4.59 4.53

2002 2.10 2.12 5.19 5.18

2003 2.67 2.61 5.87 5.75

2004 3.30 3.25   5.97 5.89

Estimates of impact of changes on key economic ratios

• R&D intensity (GERD/GDP)– Stays almost unchanged, below 2%

• R&D investment rate similar, but slightly lower• Overall investment rate up from 16% to 18%• Profit share (GOS/GDP) – Up by 1 pp.• Saving rate up by 1 to 1.5 pp

– Still to figure out precise divergence GDP – National Income.

Balance of new surplus from R&D by UK MNEs abroad and R&D by foreign MNEs in UK.

5. Future developments

• Objectives and constraints– Meet user needs – considerable policy interest in

intangibles as a whole – Ensure conceptually sound yet practical

recommendations– Minimise admin burdens on survey respondents – Contribute to key ONS commitments

(re-engineered systems and efficiency savings)

5. Future developments (continued)

• Contribute to drafting of OECD handbook on intellectual property assets through involvement in its task-force

– Data-linking analysis to address trade and MNE issues– Identify additional sources on IP stocks and flows – Expert-group approach to estimating some key

parameters, such as service lives – Align this with efforts to measure government output.

• Develop revised (experimental) estimates in line with OECD recommendations by end of 2008.

5. Future developments (continued)

• Work with NESTI & ONS R&D sources team to bridge R&D sources gaps

• ONS National Accounts position: – No decision reached– Will assess analysis provided by EAD and international

guidance in relation to: • Need to fit with re-engineered systems & re-structured

National Accounts Division • Links with identified weaknesses in systems • Priority-driven, coherent development of R&D within the new

systems