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

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1980

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1984

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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

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1991

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2011

2012

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2015

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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

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2003

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2011

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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

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1987

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1989

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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

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1997

1998

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2000

2001

2002

2003

2004

2005

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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.