The impact of intangible assets on regional productivity disparities in Great Britain Konstantinos Melachroinos & Nigel Spence School of Geography Queen Mary, University of London

Intangibles: a catalyst for economic growth A wide range of assets: software, databases, innovation property, market research, reputation, human and organisational capital, etc. A wide range of assets: software, databases, innovation property, market research, reputation, human and organisational capital, etc. Facilitate the accumulation of knowledge and information Facilitate the accumulation of knowledge and information Allow economies to become more efficient in the way that they utilise resources, create more value and thus become more competitive Allow economies to become more efficient in the way that they utilise resources, create more value and thus become more competitive

The treatment of intangibles within the National (and Regional) Accounts Framework They are considered intermediate expenditure that is completely used up during the production process They are considered intermediate expenditure that is completely used up during the production process They are not counted as a production factor They are not counted as a production factor They are not counted as Gross Value Added They are not counted as Gross Value Added

The consequences for regional productivity analysis Conventional measures of output underestimate the actual amount of Gross Value Added Conventional measures of output underestimate the actual amount of Gross Value Added Partial productivity measures (e.g. labour productivity) are likely to be underestimated Partial productivity measures (e.g. labour productivity) are likely to be underestimated Intangibles contribution to TFP levels either is omitted and/or allocated to other factors (fixed capital and labour) Intangibles contribution to TFP levels either is omitted and/or allocated to other factors (fixed capital and labour)

Objectives of this research: to investigate the role of intangible assets in the evolution of regional productivity disparities in Great Britain during the period to investigate the role of intangible assets in the evolution of regional productivity disparities in Great Britain during the period Partial productivity indicators (e.g. labour productivity) and TFP levels are estimated Partial productivity indicators (e.g. labour productivity) and TFP levels are estimated The possible presence of σ-convergence and β- convergence trends is also explored The possible presence of σ-convergence and β- convergence trends is also explored

Incorporating intangible capital into the neo-classical model Assuming that intangibles are intermediate expenditure the standard neo-classical production function assumes that: Assuming that intangibles are intermediate expenditure the standard neo-classical production function assumes that: (1)Y = A L α K β (1)Y = A L α K β where Y, L and K denote value-added, labour and fixed capital respectively, α is the value share of labour in value added, β is the value share of fixed capital in value-added (β = 1- α) and A is a Hicks neutral productivity term where Y, L and K denote value-added, labour and fixed capital respectively, α is the value share of labour in value added, β is the value share of fixed capital in value-added (β = 1- α) and A is a Hicks neutral productivity term

Incorporating intangible capital into the neo-classical model The TFP levels in any given year t can be calculated by rearranging and taking the natural logarithms of the previous equation The TFP levels in any given year t can be calculated by rearranging and taking the natural logarithms of the previous equation (2)lnA t = a ln(Y t /L t ) + β ln(Y t /K t ) (2)lnA t = a ln(Y t /L t ) + β ln(Y t /K t ) TFP is decomposed into labour productivity and fixed capital productivity weighted by the shares of labour and fixed capital in value-added TFP is decomposed into labour productivity and fixed capital productivity weighted by the shares of labour and fixed capital in value-added

Incorporating intangible capital into the neo-classical model Assuming that intangibles are investment the neo-classical production function is written: Assuming that intangibles are investment the neo-classical production function is written: (3)Y' = A' L a' K β' R γ (3)Y' = A' L a' K β' R γ where Y', A', L, K and R represent value-added, TFP, labour, fixed capital and intangible capital respectively, while a', ß' and γ are the value shares of labour, fixed capital and intangibles in value-added (a' + β' + γ = 1) where Y', A', L, K and R represent value-added, TFP, labour, fixed capital and intangible capital respectively, while a', ß' and γ are the value shares of labour, fixed capital and intangibles in value-added (a' + β' + γ = 1)

Incorporating intangible capital into the neo-classical model The TFP levels in any given year t can be calculated as follows: The TFP levels in any given year t can be calculated as follows: (4)lnA’ t = a’ ln(Y’ t /L t ) + β’ ln(Y’ t /K t ) + γ ln(Y’ t /R t ) (4)lnA’ t = a’ ln(Y’ t /L t ) + β’ ln(Y’ t /K t ) + γ ln(Y’ t /R t ) TFP is now decomposed into labour productivity, fixed capital productivity and intangible capital productivity weighted by the shares of labour, fixed capital and intangibles in value-added TFP is now decomposed into labour productivity, fixed capital productivity and intangible capital productivity weighted by the shares of labour, fixed capital and intangibles in value-added

Incorporating intangible capital into the neo-classical model The extension of the model requires some important adjustments: The extension of the model requires some important adjustments: Value-added needs adjustment (Y'>Y) Value-added needs adjustment (Y'>Y) The shares of labour (a') and fixed capital (ß') also change The shares of labour (a') and fixed capital (ß') also change TFP (A') is different to TFP (A) TFP (A') is different to TFP (A)

Incorporating intangible capital into the neo-classical model In order to investigate the effects of intangible assets on productivity levels the results of two TFP analyses (including and excluding intangibles) are compared In order to investigate the effects of intangible assets on productivity levels the results of two TFP analyses (including and excluding intangibles) are compared This is because not only GVA but also every production factor in the right hand-side of the equations is affected by the incorporation of intangibles into the neo-classical model This is because not only GVA but also every production factor in the right hand-side of the equations is affected by the incorporation of intangibles into the neo-classical model

Spatial coverage: the current Government Office Regions (GORs) excluding Northern Ireland the current Government Office Regions (GORs) excluding Northern Ireland The regions of East, London and the South East had to be aggregated (ELSE) to accommodate boundary changes The regions of East, London and the South East had to be aggregated (ELSE) to accommodate boundary changes

Regional investment on intangible assets and intangibles stock The regional investment on intangible assets have been produced by allocating to regions the intangible investment series constructed by Marrano et al (2009) for the UK The regional investment on intangible assets have been produced by allocating to regions the intangible investment series constructed by Marrano et al (2009) for the UK Five main categories of intangibles: computerised information, scientific R&D, non- scientific R&D, brand equity and firm specific resources Five main categories of intangibles: computerised information, scientific R&D, non- scientific R&D, brand equity and firm specific resources

Regional investment on intangible assets and intangibles stock Since intangibles are produced by skilled labour their spatial allocation should follow closely the regional distribution of skilled labour performing these activities Since intangibles are produced by skilled labour their spatial allocation should follow closely the regional distribution of skilled labour performing these activities Estimates of regional intangibles investments were developed by using regional shares to the total national employment in intangible producing sectors (4-digit SIC) as weights Estimates of regional intangibles investments were developed by using regional shares to the total national employment in intangible producing sectors (4-digit SIC) as weights

Regional investment on intangible assets and intangibles stock The annual investment data were deflated by using a gross value-added deflator The annual investment data were deflated by using a gross value-added deflator

Gross value-added Estimates of workplace based GVA at current basic prices (million GBP) that allocate incomes to the region in which commuters work Estimates of workplace based GVA at current basic prices (million GBP) that allocate incomes to the region in which commuters work The data were deflated by using a gross value- added deflator The data were deflated by using a gross value- added deflator For the TFP calculations that include intangibles the output variable was adjusted by incorporating the annual regional investment in intangible assets to the GVA figures For the TFP calculations that include intangibles the output variable was adjusted by incorporating the annual regional investment in intangible assets to the GVA figures

Regional fixed capital stock Regional estimates are based on Eurostat's annual series of net total stocks of fixed assets for the entire United Kingdom Regional estimates are based on Eurostat's annual series of net total stocks of fixed assets for the entire United Kingdom The national net total stocks of fixed assets were allocated to regions according to regional shares of total fixed capital investment The national net total stocks of fixed assets were allocated to regions according to regional shares of total fixed capital investment

Labour The annual labour input is measured as total hours worked during any given year The annual labour input is measured as total hours worked during any given year employment x weekly hours x 52 employment x weekly hours x 52 Employment and hours worked data come from ONS surveys Employment and hours worked data come from ONS surveys

Regional labour productivity

Regional fixed capital productivity

Regional intangible capital productivity

Regional TFP

Regional labour productivity Labour productivity is generally increasing everywhere Labour productivity is generally increasing everywhere It varies relatively little over the British regions and shows little signs of convergence It varies relatively little over the British regions and shows little signs of convergence ELSE leads Great Britain in terms of labour productivity levels ELSE leads Great Britain in terms of labour productivity levels

Regional fixed capital productivity Fixed capital productivity is not markedly increasing except in the North East and Wales Fixed capital productivity is not markedly increasing except in the North East and Wales It exhibitswide regional variation and clear convergence trends It exhibits wide regional variation and clear convergence trends ELSE again leads Great Britain in terms of fixed capital productivity levels ELSE again leads Great Britain in terms of fixed capital productivity levels

Regional intangible capital productivity Intangible capital productivity is declining everywhere Intangible capital productivity is declining everywhere There is some regional variation and some hints of convergence There is some regional variation and some hints of convergence Surprisingly ELSE lags in relation to other British regions Surprisingly ELSE lags in relation to other British regions

Regional TFP TFP is generally increasing everywhere TFP is generally increasing everywhere There is some regional variation and some signs of convergence There is some regional variation and some signs of convergence ELSE once more leads Great Britain in terms of TFP levels ELSE once more leads Great Britain in terms of TFP levels

The intangibles’ effect Intangibles do raise labour and fixed capital productivity as well as TFP levels Intangibles do raise labour and fixed capital productivity as well as TFP levels Intangibles increase the growth rates of labour and fixed capital productivity but reduce the growth rates of TFP Intangibles increase the growth rates of labour and fixed capital productivity but reduce the growth rates of TFP Intangibles do not exacerbate regional productivity inequalities Intangibles do not exacerbate regional productivity inequalities

The intangibles’ effect Convergence tendencies (or lack of them except for capital productivity) remain unaltered in the presence of intangibles Convergence tendencies (or lack of them except for capital productivity) remain unaltered in the presence of intangibles The surprising finding is that the intangibles' effect is important but favours no one region substantially more than any other The surprising finding is that the intangibles' effect is important but favours no one region substantially more than any other