Intangibles and innovation Jonathan Haskel Middlesex, 2009

Broad questions Better understanding of the “new” or “knowledge” economy: work on intangibles –“Old economy” = tangibles traditional machines, production lines etc –“New Economy” = intangibles Software, design, brand reputation Move to knowledge-intensive activities Rise of the service sector Better understanding of innovation: relate intangibles to innovation –DIUS “Innovation Nation” White Paper: commission an “innovation index” Presentation –Where do we see new/knowledge economy in the data? –How this relates to innovation –What research can do to shed more light on these questions –(Papers at plus links)

How does the iPod show up in (US) National Accounts? iPod: designed in California, made in China Apple –nominal value added = Sales – value of imports – (design+marketing+R&D) –Initially value added is negative, with spending on design etc. and no sales –Then value added is positive when sales on stream –Sources of rise in value added is a residual so hard to understand knowledge economy Alternative model –Apple invests in knowledge capital asset by investing in R&D, design, marketing –Real GDP rises with more investment –Innovation measured by more knowledge investment

Intangibles research programme Settle on list of intangible assets Measure investment in them Calculate knowledge assets created Incorporate into National Accounts –Output side: additional value added –Input side: additional input i.e. knowledge stock Hopefully gives –Better GDP measure –Better account of drivers of GDP –Better account of knowledge economy

Relation of intangibles to innovation What is innovation? –NESTA (2007) “change associated with the creation and adoption of ideas that are new-to-world, new-to-nation/region, new-to-industry or new-to-firm” –Frascati “Technological innovation activities are all of the scientific, technological, organisational, financial and commercial steps, including investments in new knowledge, which actually, or are intended to, lead to the implementation of technologically new or improved products and processes” –Oslo “A technological product innovation is the implementation/commercialisation of a product with improved performance characteristics such as to deliver objectively new or improved services to the consumer. A technological process innovation is the implementation/adoption of new or significantly improved production or delivery methods. It may involve changes in equipment, human resources, working methods or a combination of these”

Intangibles and innovation, our definition Innovation is about producing more output –Not ideas, happiness etc. But what part of this new output is due to innovation?

What part of extra output is due to innovation? Imagine an economy with no innovation How could we get more output? Ryanair –Lay on another plane and another crew –Deepening physical capital and labour = duplication How would we get more output from innovation? –Faster boarding, turnaround: better software –Deepening knowledge capital = innovation Summary: innovation is –extra output over and above that from use of additional physical capital and labour –Or, the extra output from use of new knowledge capital So what do we measure? Measure growth in output (GDP), and in inputs: physical capital, knowledge capital, labour Innovation accounts are data on knowledge investment Innovation index is contribution of knowledge investment to output growth

How would this affect the iPod? Current method –Inputs: Count scientific R&D only on separate survey –Output/value added: No effect by assumption: all R&D used up in a year, no enduring asset created or value added, so only an intermediate Intangibles approach –Count a wider range of inputs Upstream: more than just R&D –Upstream spending also on design, software Downstream: need associated coinvestment –Marketing, organisational change –Output/value added Rises: spending is an enduring knowledge asset so its investment Shows up as innovation spending on intangible assets

Intangibles and innovation research programme “Innovation accounting” –Settle on list of intangible assets –Measure investment in them –Calculate knowledge assets so created Needs deprecation, price indices “Innovation index” –Incorporate into National Accounts Output side: additional value added Input side: additional input i.e. knowledge stock –Work out contribution of increased knowledge stock to growth Needs elasticity of output with respect to labour, tangible inputs, knowledge inputs

Algebra of including intangibles Excluding intang: Including intang:

List of intangible assets (Corrado, Hulten, Sichel, 2005) A. Computerized information Computer software (bought in, own account) Computer databases B. Scientific and creative property Science and Eng R&D spending, usually leading to a patent/licence Mineral exploration (mostly R&D in oil and minerals) Artistic originals (mostly R&D in creating artistic originals) Other product development, design, research, usually not leading to a patent/licence (I.e. non-scientific R&D spend) –product devel costs in fin svcs –architect and eng design –R&D in soc sci and humanities C. Economic competencies Brand equity (to develop reputation capital via branding or trademarks) Firm-specific human capital Organizational structure (organisational capital)

A. Computerized information

B. Scientific and creative property

C. Economic competencies

Does it matter?

Industries

Tan and intang invest by ind

Intan investment by type (% total)

Intan investment by ind (% indVA)

Mkt sector intang invest, by asset type

Decomposition of ALP

Innovation index

Future work: extended survey

Ongoing work Better measurement –Spending on design, organisational capital, financial services –Depreciation –Current work: add-on module to official R&D questionnaire Cross country work –FP7 project comparisons across EU and US countries Comparative –Intang investment –Effects on growth –International comparisons of productivity levels –Running extended R&D survey in other countries (France, Sweden, Germany)