Item III.3: Research and Development Training on general introduction to ESA 2010 Luxembourg, 9 - 10 December 2013 Eurostat, JMO M4

Definition of Research and Development "Research and experimental development (R&D) comprise creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society and the use of this stock of knowledge to devise new applications" (Frascati Manual, 2002 edition, § 63)

Distinguishing R&D from other activities Despite the precise definition of R&D, distinguishing R&D from other activities such as e.g. education, training or market research may pose problems. This problem already exists in the current system, but whereas a confusion between two activities (e.g. research and training) does not have any impact on GDP in the current system, it will have in the future system since R&D expenditure will be considered as an investment, i.e. a GDP component.

Capitalisation of market R&D (1) Example with two activities: R&D and manufacturing.

Capitalisation of market R&D (2)

Capitalisation of market R&D (3)

Capitalisation of market R&D (4)

Assets of intellectual property “An asset is a store of value representing a benefit or series of benefits accruing to the economic owner by holding or using the entity over a period of time.” R&D services generate assets of intellectual property. A consumption of fixed capital must be estimated for these assets.

Capitalisation of non-market R&D (1) Example with activities of defence and R&D for the GG:

Capitalisation of non-market R&D (2)

Consequences of the new treatment of R&D for National Accounts (1) Consequences of the change for market producers: R&D services are reclassified from intermediate consumption to gross fixed capital formation - this increases value added and GDP value of the output for own final use includes a mark-up for profit - this increases value added and GDP

Consequences of the new treatment of R&D for National Accounts (2) Consequences of the change for non-market producers (General Government, NPISH) new consumption of fixed capital (taking into account depreciation of R&D assets) is included in output for non-market producers that is calculated as a sum of costs – this increases value added and GDP on the expenditure side: GFCF increases; however, there is no impact on GDP because the increase of GFCF is compensated by decrease of final consumption expenditure of government and NPISH

The main difficulties in the capitalisation of R&D: conceptual issues Treatment of freely available non-market R&D should it be capitalised? can it be considered as an asset? does it bring economic benefits to the owner? is all freely available non-market R&D used for the production of public services?

Possible double counting of own-account software The main difficulties in the capitalisation of R&D: practical issues (1) Possible double counting of own-account software a problem can arise with the output for own final use of these services when the output is estimated by the sum of costs and when data concerning these costs are collected by independent surveys Valuation of R&D services, especially when they are not sold (non-market output) inclusion of the R&D assets in the calculation of consumption of fixed capital estimation of the net return to fixed capital

The main difficulties in the capitalisation of R&D: practical issues (2) Compilation of R&D assets and consumption of fixed capital life times of various categories of R&D assets the lack of availability of long series of gross fixed capital formation in R&D services depreciation and mortality functions used Price index to arrive at estimates in volume terms R&D services cannot be standardised so it is very difficult do define both prices and quantities input methods can appear as a solution but they exclude the possibility of measuring productivity progress

Eurostat Task Force on capitalisation of R&D The main objective of the Task Force on R&D was to prepare templates for R&D bridge tables (from R&D expenditure data based on the so called Frascati surveys to R&D output and gross fixed capital formation concepts). The tables make it possible to test the reliability of the data in a satellite R&D account before the ultimate implementation of the capitalisation of R&D, as foreseen by ESA2010. The Task Force met 5 times in 2008 and 2009. Most Member States, EFTA countries, OECD were represented Task Force cooperated with the OECD Task Force on R&D and Other Intellectual Property Products in order to avoid duplication of efforts.

Eurostat Task Force on capitalisation of R&D (2) The vast majority of Task Force members concluded that they see no major obstacles against implementing the capitalisation of R&D in National Accounts. They supported the recommendations of the Task Force.

Task Force on R&D – Templates Two templates for the calculation of output of R&D, based on: Frascati Surveys Other data sources Templates for: Gross fixed Capital Formation, R&D assets, Consumption of fixed Capital Impact of reclassification of R&D on the value added by industries Impact of reclassification of R&D on GDP

Calculation of output of R&D based on FS

Calculation of GFCF of R&D based on FS

Task Force on R&D – Recommendations (1) Full consistency between the data in the agreed compulsory R&D tables and the national accounts should be ensured in the course of the capitalisation of R&D services; until the R&D stocks are available, the consumption of the R&D assets used in the production of R&D services does not have to be taken into account in the estimates of the R&D output (as a part of the consumption of fixed capital); the input method is recommended in the calculation of R&D in volume terms;

Task Force on R&D – Recommendations (2) geometric depreciation function is recommended as a reference method in the calculation of the consumption of fixed capital of R&D; however, countries that have developed alternative methods may continue to use them; the R&D services subcontracted by one R&D company to another R&D company should be recorded as intermediate consumption. However, the possibility of recording the output of R&D companies net of subcontracted R&D or on a gross basis would be left open to countries that encounter problems in obtaining data needed to adjust the Frascati intramural expenditures on R&D to gross recording;

Task Force on R&D – Recommendations (3) all expenditures by government on Intellectual Property Products (IPPs), including freely available R&D, should be recorded as GFCF, if they satisfy the requirement that IPPs is intended for use in the production of more than one year; the net operating surplus of market producers of R&D is derived as mark-up including unsuccessful R&D. The mark-up may be calculated as industry specific or as a single mark-up for all industries. To ensure stability of the mark-up time series, an average or a weighted moving average of several years should be used;

Task Force on R&D – Recommendations (4) service Life estimates used in the calculations of R&D should be based on dedicated surveys or other relevant research information, including information of other countries with comparable market/industry characteristics. Where such information is not available, a single average service life of 10 years should be retained. It is also recommended that the above mentioned Service Life estimates should be investigated regularly, e.g. every 10 years.

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