Item 14a: Research and Development ESTP course on National Accounts ESA 2010 Luxembourg, 30 May – 03 June 2016 Eurostat

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 and systematic work undertaken in order to increase the stock of knowledge - including knowledge of humankind, culture and society - and to devise new applications of available knowledge (Frascati Manual, 2015 edition, par 2.5)

Bigger picture In ESA 95 already was capitalised: In ESA 2010: Computer software (AN.11731) Databases (AN.11732) Entertainment, literary or artistic originals (AN.1174) In ESA 2010: Research & development recognised as assets (AN.1171) In future ESA: Other intellectual property products?

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 existed under ESA 95, but whereas a confusion between two activities (e.g. research and training) does not have any impact on GDP under ESA 95, it has under ESA 2010 since R&D expenditure is considered as an investment, i.e. a GDP component

Estimating output ESA 2010 (Annex 7.1): The value is determined in terms of the economic benefits expected in the future. Unless the value can be reasonably estimated it is, by convention, valued as the sum of the costs

Capitalisation of market R&D ESA 95

Capitalisation of market R&D ESA 2010

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 ESA 95

Capitalisation of non-market R&D ESA 2010

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

Some practical issues (1) Possible double counting of own-account software Consumption of fixed capital The lack of availability of long series of gross fixed capital formation in R&D services Geometric depreciation function is recommended Life times of various categories of R&D assets If no specific information available on service lives: default service life 10 years

Some practical issues (2) Price index to arrive at estimates in volume terms R&D services cannot be standardised so it is very difficult to define both prices and quantities input methods can appear as a solution but they exclude the possibility of measuring productivity progress Including freely available R&D What about unsuccessful R&D

Templates developed by the Task Force on R&D

Bridge table from Frascati Manual to output of R&D

Estimating GFCF in R&D

Manual available on Eurostat website

Total impact on EU GDP level – 2010 3.67% Methodological changes (ESA 2010) 2.27% Statistical improvements 1.40% +

Methodological changes (ESA 2010) Impact on EU GDP 2010 1 Research and development 1.86% 2 Expenditure on weapon systems 0.17% 3 Inexpensive tools for common operations 0.07% 4 Government, public/private sector delineation 0.06% 5 Employers' pension schemes 6 Other methodological changes 0.05% T Total 2.27%

Statistical improvements Impact on EU GDP 2010 1 New or improved data sources 0.45% 2 Exhaustiveness and improvements related to GNI reservations: illegal activities 0.38% 3 Exhaustiveness and improvements related to GNI reservations: other 0.37% 4 Other statistical changes 0.20% T Total 1.40%

Summarising the changes to EU GDP %

Summarising the changes to EU GDP % Other methodological changes

Summarising the changes to EU GDP % Other methodological changes

Summarising the changes to EU GDP % Other statistical improvements Other methodological changes

Changes in GDP levels: country data %

Changes in GDP levels: country data %

Changes in GDP levels: country data %

Thanks for your attention!