Organizational Capital, R&D Assets, and Offshore Outsourcing Wendy Li 2015 Society of Economic Measurement Bureau of Economic Analysis July 22, 2015

bea.gov Motivation  Since the late 1990s, the degree of offshore outsourcing in the high-tech industries has been increasing (Li, 2008).  1998 to 2000: U.S. business spending on intangibles was 13.1% of GDP (Corrado et al. 2009).

bea.gov Key Research Questions 1. Do U.S. industries with a higher degree of offshore outsourcing invest more in intangibles? 2. Why do U.S. firms invest in different types of intangibles? 3. Is each U.S. industry’s intangible investment portfolio related to its degree of offshore outsourcing?

bea.gov Challenge and Approach Challenge: Measurement difficulties in organizational capital Approach: Expenditure data: Sales, general, and administrative (SG&A) expense (Lev and Radhakrishnan, 2005; Eisfeldt and Papanikolaou, 2013) Investment in organizational capital = SG&A expense – R&D expense Industries: R&D intensive industries Period: Source: Compustat/SIC based/Company based Develop a forward looking profit model to estimate the depreciation rate of organizational capital Use perpetual inventory method to construct the stock of organizational capital for all R&D intensive industries

bea.gov This Study  Estimate industry-specific depreciation rate of organizational capital for all R&D intensive industries  Construct the stock of organizational capital for all R&D intensive industries  Conduct panel regression analysis to examine the relationship between the degree of offshore outsourcing and the industry’s intangible investment portfolio

bea.gov Industryδ R&D with 2-year gestation lagδ OC with 1-year gestation lag Aerospace21% Communication31%18% Computer System Design43%12% Computer & peripherals41%9% Motor28%15% Navigational26%6% Pharmaceutical10%3% Scientific R&D16%9% Semiconductor27%24% Software24%11% Note: The R&D depreciation rates are estimated based on BEA’s R&D dataset. The depreciation rates of organization capital are estimated based on Compustat dataset. Both datasets cover the period of Comparison of the Depreciation Rates of R&D Assets and Organizational Capital

bea.gov Comparison Between Industry Leaders and Followers in the Depreciation Rates of R&D Assets and Organizational Capital Industryδ R&D, Leader δ R&D, Follower δ OC, Leader δ OC, Follower Aerospace29%28%19%37% Communication29%27%23%20% Computer System Design17%23%6%16% Computer & peripherals26%27%6%19% Motor21%23%13%14% Navigational27%34%7%10% Pharmaceutical9%39%4%23% Semiconductor26% 30% Software21%29%7%16% Note: All estimates are based on the Compustat dataset.

bea.gov More Intangibles, More Competitive Globally! RankR&D AssetsOrganizational Capital Global Top Ten Share 1Pharmaceutical Software (8) 2Software Medical Equipment and Supplies (7) Pharmaceutical (4) 3SemiconductorNavigational Semiconductor (5; 3 out of top 5) 4CommunicationComputer System Design Computer System Design (3) 5 Computer System DesignComputer & PeripheralsComputers & Peripherals (3) 6NavigationalCommunication Communication (3) 7Computers & PeripheralsSemiconductor Note: 1. The Global Top 10 Ranking is based on Forbes 2013 global 2000 ranking. 2. It is recognized that the data quality of Compustat is not good in the auto and aerospace industries. So, both industries are not included in the ranking.

bea.gov R&D Assets and Organizational Capital: Highly Correlated

bea.gov Market Value, R&D Assets, and the Ratio of R&D to Intangibles

bea.gov IndustryRDOCPPERD*OCRD*PPEOC*PPE Aerospace-/-/**+/** -/**+/** Communication+/** -/**+/**+/ Computer and Peripherals+/** -/-/**-/+/** Computer Systems Design-/**+/** -/+/**-/** Motor-/+/+/** -/*+/ Navigational-/**+/** +/ -/ Pharmaceutical-/**+/** -/** Semiconductor+/ +/** -/**-/ Software-/**+/** -/+/-/ Note: * 10% significant level. ** 5% significant level. Panel Regression: Summary of Impacts of R&D Assets, Organizational Capital, Physical Assets, and Their Relationship on Profitability

bea.gov Conclusion  Industries with more intangibles are more competitive in the global market.  Even in the R&D intensive industries, the estimated size of organizational capital is larger than that of R&D assets.  R&D assets and organizational capital are highly correlated. But, for industry leaders, the ratio of R&D assets to organizational capital converges to a narrow range.  In industries with a lower degree of offshore outsourcing (pharmaceuticals), R&D assets and organizational capital are complementary.  Industries with a higher degree of offshore outsourcing invest less in both R&D and organizational capital, but have higher productivity (this study and Jorgenson et al., 2014).