1 Intangible Capital and Productivity Growth in European countries C. Jona-Lasinio, M. Iommi, S.Manzocchi (LUISS LAB OF EUROPEAN ECONOMICS) COINVEST CONFERENCE Istituto Superior Tecnico Lisbon – March 18-19, 2010 Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

2  Descriptive analysis  New Intangible Investment across EU27  Growth accounting analysis  Intangible capital as a driver of growth in EU countries  Main implications for measured LP and TFP  Future developments Outline Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

3  In , EU economies experienced a slowdown of labour productivity growth.  But, high degree of heterogeneity of productivity performances across EU countries.  There is a mix of drivers of productivity growth in European economies.  Corrado, Hulten and Sichel showed that intangible capital can be a sizable source of growth: “Intangible business investment was 45 percent larger than tangible investment in the U.S. in ”. Introduction Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

4  Many authors, applying the CHS methodology, provided evidence of the bias in the estimates of TFP growth when intangible assets are ignored in a number of country studies.  Marrano, Haskel and Wallis (2007), Jalava, Aulin- Ahmavaara and Alanen (2007), van Rooijen- Horsten et al. (2008), Fukao et al. (2008), Hao, Manole and van Ark (2008). Introduction Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

5  Measure intangible investment for EU27 member countries and to provide an internationally comparable estimate of intangible assets.  Quantify the bias in the estimate of Labour and Total Factor Productivity when intangible assets are ignored  Analyze the diffusion of intangibles across European countries and their contribution to economic growth. Our aim Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

6 To improve our understanding of the international differences in the mix of drivers of productivity growth in Europe. WHY? Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

7  Our estimates of intangibles refer to the Business sector  It includes: (Non Financial corporations (S11), Financial corporations (S12) and Households (S14))  The Geographical and Time Coverage. Two levels of analysis:  Descriptive analysis ( ) for EU27  Growth accounting analysis for selected EU countries  AUT, DNK, FIN, GER, ITA, NDL, PRT, SWE, UK Data Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

8  We adopted an expenditure based approach so that we produce direct estimates of intangible gross fixed capital formation and capital, including both purchased and own-account components, based on expenditure data.  The proportion of intangible expenditure to be capitalized are as in CHS (2005)  Our intangible measures are obtained by means of official data sources homogeneous across countries (mainly Eurostat surveys, national accounts data and supply and use tables, data from National Statistical Institutes) to guarantee reproducibility and international comparability. Data Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

9 Diffusion of Intangible capital in EU countries We analyze the GDP shares of New Intangible GFCF that consists of all those assets identified by CHS as intangibles but not included in national accounts. New intangibles include: R&D, New Product Development in financial industry, New Architectural and Engineering Design and all the items classified as Economic Competencies by CHS. Intangible GFCF in EU27 Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

10 New Intangible Shares of GDP: EU Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010 NMS_2004: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia NMS_2007: NMS_2004 plus Bulgaria and Romania

11 New Intangibles shares of gdp: European Countries ( ) Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

12 New Intangibles shares of gdp: European Countries change ( ) Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

13 New Intangibles shares of gdp: European Countries change ( ) Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

14 New Intangibles shares of gdp: European Countries change ( ) Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

15 How much the composition of intangibles varies across countries and over time? Here we look at the composition of intangible investment, as defined by CHS, for a sample of countries whose estimates and data sources are more reliable. Composition of Intangibles Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

16 Composition of intangible GFCF(1) Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

17 Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010 Composition of intangible GFCF(2)

18 Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010 Composition of intangible GFCF(3)

19  New intangible shares of GDP are highly heterogeneous across countries:  from 2 % to 7% of GDP;  the most dynamic countries are the Eastern European Economies;  all the Old European economies but Austria recorded a decrease of the GDP share of intangibles Stylized facts Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

20  Economic competencies account for the largest share of Intangibles ranging from 45 % to 75% of all intangibles assets across all countries.  For most of the selected economies Advertising and Organizational capital account for the biggest share of Economic Competencies. Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010 Stylized facts

21 GA with intangible capital (Corrado,Hulten,Sichel (2006)) where g X (t) denotes the logarithmic rate of growth of variable X and v Y (t) denotes the share of input Y in total output (more precisely the average of the shares at time t and at time t-1). L, T and I are, respectively, the input of labour, tangible capital and intangible capital and g A (t) denotes the growth rate of multifactor productivity CHS show that the extended framework involves: 1) a different definition of final output 2) a restatement of input shares 3) the inclusion of the rate of growth of intangible capital input in the growth accounting equation. Growth Accounting Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

22 Capital input where S i t is the productive stock of asset i, and is the cost-share of asset i in period t, u i t is its user cost and n is the number of asset types (both tangibles and intangibles) Growth Accounting Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

23 Capital input If there are z intangible-type assets, then the index of intangible capital services is where is the share of intangible asset i in the value of total cost for intangible capital services and SI i t is the productive stock of intangible asset i Growth Accounting Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

24 Implementation issues  The first step to calculate the flow of capital services is the estimate of productive capital stock. In this respect we adopted the following simplifying assumptions:  geometric pattern (see Hulten, 1990; and Schreyer, Diewert, Harrison (2005))  constant depreciation rates through time  the depreciation rate for each type of asset is the same for all countries Growth Accounting Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

25 Growth Accounting Results (1) Including NA Intangible Assets: Contributions to Labour Productivity Growth LPG stands for labour productivity growth CD is capital deepening TFP is total factor productivity Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

26 Including New Intangible Assets: Contributions to Labour Productivity Growth NI - CD includes national account intangible assets, new intangible and tangible assets NA - CD includes national account intangible assets and tangible assets Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010 Growth Accounting Results (2)

27 Impact of New Intangibles on LPG and TFPG Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010 Growth Accounting Results (3)

28 Main findings  The capitalization of intangibles has a positive effect on LPG and a negative effect on TFPG, but:  The inclusion of intangibles has a mixed effect on the rate of growth of labour productivity according to the period of analysis. (Is it a business cycle effect?)  In , the capitalization of intangibles increases labour productivity in all countries considered, while in it has the opposite effect. Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

29 Main findings  The contribution of capital deepening increases (with only very few exceptions in sub-periods):  Very strong increase in Finland (+0.29 pp), Sweden (+0.27 pp) and Austria (+0.24 pp)  Denmark, Germany, Netherlands and UK registered a quite similar effect (on average equal to 0.17 pp)  Italy and, to a lesser extent, Portugal, show the lowest increase (respectively to 0.04 and 0.08 pp) Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

30 Main findings  TFP growth in almost all countries decreases (with few exceptions in sub-periods):  Italy is the only exception (only a negligible positive effect)  The effect on TFP growth is quite heterogeneous across countries and mirrors only partially the effect on capital deepening  The decrease of TFP contribution to labour productivity growth is more pronounced for the period Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

31 Main findings  The relative contribution of capital deepening and TFP to labour productivity growth changed considerably after the inclusion of all intangibles.  The fall in the rate of TFP growth indicates that before the capitalization a portion of labour productivity growth that was attributed to TFP was actually driven by intangible capital deepening. Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

32 Summing up Our results suggest that:  Intangibles matters for growth accounting analysis because they are an important source of growth in all the countries considered;  The role of capital deepening in the growth of labour productivity is significantly larger when intangibles are included;  As in CHS (2005), our results confirm that the composition of the sources of growth is affected by the inclusion of intangible capital, with a considerably greater role for capital deepening and a proportionally smaller role for TFP. Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

33 Future developments  Try different deflators.  Extend the growth accounting analysis to EU aggregates (according to data availability).  Deeper investigate the influence of business cycle on our growth accounting results. Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

34 Backup slides Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

35  Organizational structure (own account)  the Structure of Earnings surveys (SES)  Labour Force Surveys  Organizational structure (purchased)  Structural Business Statistics (Eurostat – NSIs - Innomembers)  Turnover of nace 7410 is available only for some selected countries and some selected year  Alternative Data source: FEACO Survey of the European Management Consultancy Market (FEACO is the European Federation of Management Consultancies Associations) Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010 Main data sources

36  Firm-specific human capital  Eurostat Continuing Vocational Training Survey (CVTS)  R&D  R&D surveys (BERD)  Advertising  Structural Business Statistics (Eurostat – NSIs - Innomembers)  Alternative data source: Zenith Optimedia (one of world’s leading global media servicing agencies) Main data sources Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010

37  Market research  Structural Business Statistics (Eurostat – NSIs - Innomembers)  Alternative data source: ESOMAR (European Society for Opinion and Marketing Research)  National Accounts  Euklems  NSI for countries not included in the Euklems dataset (Bulgaria, Romania, Norway) Main data sources Cecilia Jona Lasinio – COINVEST Conference – Lisbon 03/2010