Research and Development

Research and Development at the heart of a modern economy R&D expenditure – a major driver of economic growth Investing 3% of GDP in R&D is headline target in the European Union SNA 2008 and ESA 2010 treat R&D as capital formation resulting in intellectual property products

Definition of Research and Development – Frascati manual "Research and experimental development (R&D) is 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"

Distinguishing R&D from other activities Distinguishing R&D from other activities such as education, training or market research poses problems. This problem has an impact on GDP as only R&D is considered capital formation and so directly contributing to GDP.

ESA 95 production account for manufacturing Uses   Resources Intermediate consumption Output 800 R & D 100 Other 200 GVA: 500 Comp of employment 300 Operating surplus

 ESA 95 Capital account Uses   Resources Capital formation  Savings 200 Financial surplus

ESA 2010 production account for manufacturing Uses   Resources Intermediate consumption Output 800 R & D 100  R & D  100 Other 200 GVA: 600 Comp of employment 300 Operating surplus

 ESA 2010 Capital account Uses   Resources Capital formation 100  Savings 300 Financial surplus 200

R&D generates Intellectual Property The performance of Research and Development generates assets of intellectual property These assets will lose value over time through capital consumption.

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: the performance of R&D is 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 to 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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