Research and Development

Research and Development at the heart of a modern economy R&D expenditure represents one of the major drivers of economic growth in a knowledge-based economy Investing 3% of GDP in R&D is one of the headline targets in the Europe 2020 strategy for the smart, sustainable and inclusive growth To reflect the importance of the R&D in the modern economy a new treatment of R&D expenditure in the ESA 2010 has been decided: capitalisation of R&D

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

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