Service lives of R&D

Other fixed capital stocks measured directly or through PIM. Direct measurement of value of stocks of R&D is much more difficult, since R&D is by definition unique (no market price), much is own account production, and it may not be registered as an asset by the enterprises. Means that R&D stocks will have to be estimated using PIM, so that data on service lives are needed.

The length of R&D service lives has been estimated in academic research in the past using various assumptions. In more recent work, panel data detailed by industry were used, and differences in service lives over time and between industries were explored. Diewert (2005) found most of these econometric models unsatisfactory, but considered it possible to estimate the depreciation patterns using improved models.

Following a suggestion from Charles Aspden (OECD) the Central Bureau of Statistics in Israel has examined an alternative solution from the beginning of 2007: obtaining information on service lives directly from producers or users of R&D, similarly to what is done to estimate service lives for tangible assets.

The pilot survey - framework Data from important R&D performers in main industries. If imports of R&D are very common, collection of data should also be made in framework of a regular business survey. New survey on exports and imports of services indicates that imports of R&D significant in some industries.

The pilot survey - framework Many important R&D performers produce R&D used by businesses abroad. Their data on service lives less relevant for domestic capital. But due to their experience may be used for expert opinions for international use.

Choice of contact persons A VC funds expert: the preferred respondents Vice President of R&D, CTO (Chief Technical Officer), or if it is an R&D enterprise, Product Manager. Marketing people or financial managers may not have the relevant information. A number of representatives for each enterprise were interviewed. Financial managers sometimes were reluctant to respond. But R&D managers understood the questions well, supplied all information, often added important information that could improve the survey.

2 stages of the pilot survey 1. stage: survey using only personal interviews, one or two representatives from survey department and representative from NA unit. Long questionnaire to determine how to pose the shorter questions in a regular survey. 2. stage: shorter questionnaire sent by mail. For first batch sent, follow-up with a personal interview – to get respondents opinion. The second batch only by mail.

Information collected Length of stages covered in questionnaire: Gestation lag : time lag between start and completion of R&D projects. Longer than a year for almost all R&D. Application lag: between end of development and beginning of use. Often short. The stage when R&D is used in production

Inclusion of lengths of project and application lag needed Major parts of R&D is own account production, and for practical reasons expenditure on R&D will be classified as capital formation from the start of R&D projects. Length of R&D project and application lag also needed for enterprises that sell R&D produced. Before sales R&D will be work in progress.

The feasibility of obtaining data All respondents interviewed were able to give estimates of average length of service lives of R&D. When more than one enterprise in a certain industry responded - similar length. But some explained that length has changed in recent years, and become shorter. Implies that data need to be collected every few years.

Types of R&D In many cases: more than one kind of R&D, each with special length of service life. Examples: Semiconductor industry - applications for communication and for transportation. Pharmaceutical industry - new medicine and generic medicine. Means that important to collect data on the composition of R&D. It is possible to obtain composition, mostly separate units.

Service life and duration of R&D projects Length of service lives appears to be closely connected to the cost and duration of R&D projects. If R&D project has a very long duration or is expensive, then service lives are usually longer. Data on the duration of R&D projects were easy to obtain – the enterprises had structured working programmes for R&D projects.

Successful and unsuccessful R&D The fact that part of R&D is unsuccessful was taken into account in work programmes. Usually a time schedule for decisions to abandon unsuccessful projects. Respondents were aware of the rate of success. Revenues on successful R&D usually cover all R&D, also unsuccessful attempts

Length of application lags The length of the application lags often quite short. Enterprises work simultaneously on R&D and on designs for use of R&D in production, so implementation almost immediately. Enterprises have tight work programmes for a number of years ahead, and are well able to respond to questions about application periods

Reason for ceasing to use R&D Reason given by the respondents: use of new R&D, which replaced and improved upon the former R&D. In most cases the old R&D asset is entirely abandoned, when replacement introduced, but in some cases it may be used in production on a minor scale to reap some remaining benefits from it.

Conclusion Seems possible to obtain relatively firm and consistent responses on length of service lives. Similar lengths for similar types of R&D indicate that collection of expert opinions may be sufficient. Lengths could even be identical at a global level, so that international figures could be used. Important that additional countries collect similar information.