Intangibles, Innovation & Growth: Review of COINVEST project Jonathan Haskel Imperial College Business School, Imperial College London All data, papers, presentations: Beyond EUKLEMS seminar, Brx Dec 2010 COINVEST is a European Commission Framework 7 project funded under the Socio-economic Sciences and Humanities theme

COINVEST project Questions asked to address today History and theoretical basis of the project Current state of the project and resulting datasets including geographical coverage, years and main variables Specific problems remaining to be resolved Future data deliveries Interactions with other projects in the cluster and elsewhere (EU funded or not) Policy use so far Analytical use so far Potential policy uses Analytical prospects The most interesting results so far

Objective: better understanding of growth and innovation What drives growth and innovation? –Henry Ford manufacturing economy: machines = “tangible capital” –iPhone service economy: knowledge = “intangible capital” What “intangible capital” is behind the iPhone? –Some R&D –But also: design, software, marketing, business organisation etc. So what has COINVEST done? –Measured wide set of intangible assets across 7 countries for the market sector. Some industry level work where data permits –Integrated such measures with National Accounts –Calculated effects of intangible investment on productivity and growth –Backed with micro studies Q1. History and theoretical basis of the project

Q2. Current state of the project and resulting datasets including geographical coverage, years and main variables Macro work –Reseachers based in/with contact in national statistic bureau for countries: Bulgaria, France, Germany, Portugal, Sweden, UK, US, /5/6 –Measure investment in intangible assets Software Innovative property (R&D, Design, Product development in finance) Firm competencies (Branding, Training, Organisational capital) –measure impact on growth by growth accounting –vary original Corrado et al method Data posted on web for these countries, different versions per country based on different assumptions, deliverable 9 on Micro work –Accounting data, new questionaires, micro firm data

Q3. Specific problems remaining to be resolved Q4. Future data deliveries Q5. Interactions with other projects Q3. Data issues –More consistent measurement especially of big ticket items: training and design –Implementation of software method for design and financial services –Organisational capital –Deflators Q4. Future data –Ongoing work using UK data on all of above Q5. Interaction with other projects –Data designed to fit with KLEMS-type approach –Innodrive: we have gone beyond CHS method. Training data to be resolved –Interactions with various domestic projects e.g. UK innovation index, capitalisation of R&D –Welcome future interaction

Q6. Policy use so far, Q7. Analytical use so far Q8. Potential policy uses Q6. Policy use so far –OECD COINVEST data Figure 1 in OECD innovation strategy and ministerial release. Central role in innovation conceptual and measurement strategy Further meetings at NESTI and Washington National Academy Science, Feb Feeding into innovation survey design –EU Various presentations in Brussels Presentation to Mrs. Geoghhegan-Quinn. Approach adopted by high-level committee on the measurement of innovation in Europe, chair Prof Mas-Collel –Sweden Used by IFN in policy briefs, presented in Swedish Parliament Follow meeting in Euro Parliament, 2 nd Feb 2011 –UK Centrepiece of UK innovation index and UK annual report (other indicators dropped) Key evidence in UK science budget policy Extensively quoted in Treasury documents Work presented to Governer and Monetary Policy Committee of Bank of England Q7. Analytical use so far –Macro spending, growth accounting, cross-country correlations –Micro/accounting studies Q8. Potential policy uses –Cross-country comparisons with policy variables –Evaluation of private and social returns to market sector spend –Role of public sector R&D –Design of innovation surveys

Q9. The most interesting results so far

Intangibles are assets (Average benefit lives by asset, years) UK firm-level study on how long companies expect to benefit from typical investments in various intangible assets

Intangible/tangible investment varies significantly across countries (2006, % market sector GDP, COINVEST + other countries)

Sweden, Germany intensive in R&D UK, US intensive in competencies (Investment by intangible asset share in GDP, 2005 selected countries)

Industry picture: UK, Sweden intensive in finance

Intangible contributions Retail: similar; Mfr: Sweden high; Finance: UK high

Growth accounting (selected countries, )

Policy What policy variables are associated with cross-country intangible investment?

Source: Hao et al. (2009) for Germany, France, Italy and Spain; CHS (2009) for the US, Marrano et al. (2009) for the UK, Jalava et al. (2007) for Finland, Fukao et al. (2009) for Japan, Edquist (2009) for Sweden, Van Rooijen-Horsten et al. (2008) for the Netherlands and Barnes and McClure (2009) for Australia. R&D as a share of governmetn budget is from Eurostat.

Summary A portfolio of results –macro –micro (accounting, Innovation survey and questionaire data) More to do –Comparability and robustness –Data development, especially deflators –Policy analysis

Spares

UK Intangible Investment Survey Survey –Conducted by ONS in October 2009 –Voluntary postal survey of 2,004 UK companies with ten or more employees across the production and service sectors. Response rate 42% –Stratified by industry and employment –Linkable via business register Questions –Firms’ spending on main intangible assets: R&D, software, training, branding, design, organisation or business process improvement Own account and Bought in –Life lengths Priorities –Ask for own account data –Linked to business register

Layout of questionnaire Assets divided into sections

Each section has a filter question which defines the asset with examples

Then asks purchased and own- account

Finally life lengths

% of respondent firms conducting intangible investment by asset category Confirms: non-R&D intangible spending is much more widespread than R&D spend

Total expenditure by category (£m), weighted to give estimates of UK totals Observe importance of in-house spending

Summary Intangible investments are structured way of thinking about growth and innovation Becoming part of measurement systems anyway –Software treated as investment –R&D to be so treated Need new questionnaires: some being developed

The intangibles agenda What drives growth? –Using more of existing factors = factor accumulation –Using existing factors better or developing new ones = new ideas = innovation Traditional approach –Account for output by Factor accumulation: in practice tangible factors Labour quality Innovation = the residual: that is, the increase in output that cannot be explained by increases in tangible inputs

The intangibles agenda, 2 Strength of growth accounting framework –Conditional on assumptions, consistent account of growth –Linked with core economic and national accounting measures, e.g. GDP –Link with economic theory means provides framework for evaluating where private and social returns differ = policy framework –Very successful in understanding the ICT revolution Weakness of framework –Relies on strong (?) assumptions –Measurement issues formidable –Account of innovation in the traditional approach (output, tangible capital, labour quality) not strong: Has to be freely available knowledge Policy makers and non-economists find residual approach unsatisfactory

The intangibles agenda, 3 Dissatisfaction with the residual moved innovation focus to –Patents –Innovation surveys and innovation indicators –Innovation scoreboards Growth accounting focus became –IT revolution –R&D Innovation literature became rather disparate… Many IT papers very much in growth accounting framework –Backed by theory, strong measurement focus: core questions (did IT earn normal market returns?) Much other innovation work –Patents work v detailed but Subset of innovation Citations data noisy Changes in registration methods affect time series –Innovation survey work wider than just R&D, but Disconnected with other measures e.g. problems with time series Hanging over this is feeling that innovation process has changed –Strongly related to IT, but broader e.g. organisational change –User innovation –Open innovation: companies innovating without patents –Innovative sectors are retailing, banking, airlines

The intangibles agenda, 4 The Corrado, Hulten, Sichel approach: extend the boundaries of growth accounting to more intangible assets besides R&D –Software –Innovative property R&D Design Financial services product development –Economic competencies Marketing Training Firm organisational capital Timely because –Fits with idea that innovation is more than just a residual –Fits the ICT revolution intuition that implementing ICT needs co- investment in branding, new organisations etc. –Keeps the discipline of outputs and inputs –Fits with the broader innovation idea…