Using FM data for an R&D satellite account EU TF on R&D 19-20 June 2008 Charles Aspden (OECD)

Features of the FM data FM and 2008 SNA have the same definition of R&D FM –based R&D surveys conducted over many years by many countries FM definitions have been consciously moving closer to those of the SNA FM surveys are of R&D performers Principal aim is to measure their intramural expenditures (GERD)

Features of the FM data Intramural expenditures All expenditures for R&D performed within a statistical unit or sector of the economy during a specific period, whatever the source of funds. Expenditures made outside the statistical unit or sector but in support of intramural R&D (e.g. purchase of supplies for R&D are included. Both current and capital expenditures are included.

Intramural expenditures Current costs The labour costs of R&D personnel, which comprises all persons employed directly on R&D including those providing direct services such R&D managers, administrators and clerical staff. Other current costs, which includes intermediate expenditures to support R&D, administrative overheads and on-site consultants.

Intramural expenditures Capital costs Land and buildings, which comprises the share of these assets used for R&D. Land includes that under buildings and any other land used for R&D, such as testing sites; Instruments and equipment, which includes embodied software; and Computer software, which includes purchases as well as annual licence fees

Sources of funds Detailed breakdown by source BUT records “Transfers” which comprise purchases, grants, subsidies Need a breakdown, otherwise assume that non-government R&D performers mainly make outlays to acquire R&D, while government R&D performers make almost none.

Extramural expenditures the sums a unit, organisation or sector reports having paid or committed themselves to pay to another unit, organisation or sector for the performance of R&D during a specific period. This includes acquisition of R&D performed by other units and grants given to others for performing R&D. Detailed breakdown of type of unit

Extramural expenditures BUT no distinction between grants and purchases. In principle, the two sets of funding data should correspond for the domestic economy, but don’t. Source of funds regarded as superior, extramural used as a check. BUT extramural provides source for estimating imports

Linking FM to SNA Three links between FM sectors and SNA sectors FM’s expenditures on R&D and SNA output FM’s classifications of expenditures and funding and the SNA supply and use tables.

Table 1: Linking FM and SNA Sectors [1 Table 1: Linking FM and SNA Sectors OECD Frascati Manual SNA Business enterprise sector Non-financial corporations Financial corporations Government sector General government Private non-profit sector NPISH Households Higher education sector Corporations and quasi corporations Abroad Rest of world

Intramural expenditure and output When summing costs to measure output by market producers: Intermediate consumption; Compensation of employees; Consumption of fixed capital; A net return to fixed capital Other taxes (less subsidies) on production For non-market producers, item (d), a net return to fixed capital, is omitted.

Intermediate consumption Other costs records actual expenditures, should take account of changes in inventories in principle – ignore in practice Also include licence payments to use R&D output. Should be excluded if they qualify as GFCF Need to add intermediate consumption of purchased R&D

Compensation of employees Need to make an adjustment for postgraduate students not on the payroll. Seek assistance of R&D survey statisticians in first instance.

Capital services Use past capital expenditure data to estimate capital services using the PIM Need a more detailed breakdown of capital expenditures.

Other taxes less subsidies on production Some taxes, such as payroll taxes, are already included in current costs. BUT an estimate of subsidies needs to be included Use subsidies component of transfers from government, or Government budget appropriations data (see chapter 8 of FM). Otherwise estimate using subsidies data from national accounts

Table 2 Summary of steps to derive output of R&D Starting point: FM Intramural expenditures on R&D for each sector 1. Exclusion of own account R&D consumed in production of other products Subtract expenditures on software R&D, but add back in any capital services as per item 5. 2. Intermediate consumption of goods and services other than R&D Subtract payments for licences to use intellectual products (principally R&D assets, such as patents) that should be recorded as GFCF. See item 5 below and item 7 of table 4. 3. Intermediate consumption of R&D services used to produce R&D Add extramural purchases of R&D that should be recorded as intermediate consumption, but not those that should be recorded as GFCF or those used in producing other types of fixed asset. 4. Compensation of employees Add payments to postgraduate students not included in FM data. 5. Cost of capital services Subtract capital expenditures Add cost of capital services (only CFC for non-market producers), including R&D assets specifically identified as contributing to R&D output. 6. Other taxes less subsidies on production Add taxes not included in FM data Subtract subsidies Equals Output of R&D for each sector

Using funding to derive SU tables Imports and exports Use source of funds data for exports and extramural expenditure data for imports in combination with data from BOP (trade in services and foreign direct investment data) Net purchases between domestic sectors (GFCF) Use source of funds data

Other uses Intermediate consumption of R&D used to produce other R&D (already included in output) R&D output that does not meet the asset criteria : mainly that undertaken by non-market producers R&D that should be excluded because of double counting GFCF derived residually

Table 4 Summary steps to derive total supply, total use and GFCF of R&D Starting point: R&D output for each sector 1. Add Imports of R&D 2. Equals Total supply of R&D for each sector 3. Equals Total use of R&D for each sector 4. Subtract Intermediate consumption of R&D Same as item 3 from table 2 5. Subtract Acquisitions of R&D not expected to provide a benefit Mainly applies to R&D acquired by non-market producers for which there are no expected benefits. 6. Subtract Exports of R&D 7. Add Net purchases of R&D between domestic sectors Net purchases that are R&D GFCF. As per funding data between domestic sectors, excluding data for items 4, 5, transfers, subsidies and double counting. Include payments to acquire a licence to use R&D output that qualifies as GFCF. 8. Subtract Changes in inventories of finished R&D and work in progress Equals Total GFCF of R&D for each sector Add/subtract capital transfers of R&D assets between sectors in capital account

Double counting The OECD TF agreed that an acquisition of R&D should be recorded as: IC if it is expected to be used up in less than a year; IC if it is expected to be completely, or almost completely, incorporated in the production of another single product; and GFCF if it is expected to provide capital services for over a year in the production of a number of different products.

Double counting OECD TF recommendations All R&D purchased or undertaken on own account by the Scientific R&D industry (72 ISIC rev. 4) should be recorded as IC, or otherwise expensed, on the presumption that such units produce R&D for sale, and any purchases are incorporated in products for sale. Only when specific information is available to the contrary should acquisitions of R&D be recorded as GFCF, such as cases when a unit takes out a patent and sells licences to use.

Double counting OECD TF recommendations R&D GFCF for the Software publishing industry (582 ISIC rev. 4) should be measured as a proportion of expenditures on R&D, where the proportion should be determined on the basis of information obtained from software performers.

Double counting OECD TF recommendations All R&D purchased or undertaken on own account by other industries should be recorded as R&D GFCF on the presumption that most acquisitions are intended to be used as complete fixed assets in the production of many products. Only when specific information is available to the contrary should they be recorded as IC, or otherwise expensed, in the production of a non-R&D asset.

Double counting OECD TF recommendations Major problem is with software Members of the TF should analyse the R&D data they have for expenditures on software R&D, by industry of activity, to determine the significance of these expenditures. If the expenditures are substantial they should contact a small sample of R&D performers that make large expenditures to produce software R&D in the Software publishing industry and other industries to determine how they use their software R&D.

Double counting OECD TF recommendations If software expenditure data are currently unavailable from R&D surveys then major R&D performers, including those in the Software publishing industry, should be surveyed anyway. Use this information to refine earlier recommendations as needed.

R&D: GFCF or IC OECD TF recommendations As a general rule, all R&D purchased or produced on own account by market producers should be treated as GFCF. Only when the R&D is produced for sale or to avoid double counting or when explicit information is available of non-market production should it be treated as consumption. For non-market producers, principally R&D and educational establishments classified to either the general government or NPISH sectors, R&D that is purchased or performed on own account should be treated as GFCF if it is expected to provide economic benefits for the unit or an affiliated unit, such as another government-owned unit. This includes R&D that is not made with the initial intention of providing economic benefits, but has expected economic benefits when the R&D is completed, for example when a university patents R&D. R&D that is purchased or performed on own account without this expectation should be excluded from GFCF, even if it may later be used for the creation of other R&D.

R&D: GFCF or IC OECD TF recommendations For non-market producers, principally R&D and educational establishments classified to either the general government or NPISH sectors, R&D that is purchased or performed on own account should be treated as GFCF if it is expected to provide economic benefits for the unit or an affiliated unit, such as another government-owned unit.

R&D: GFCF or IC OECD TF has Developed questions that could be included in surveys Is considering how existing data could be used, e.g. expenditures by socio-economic objective