1 Innovation, Intangibles and Economic Growth: Towards a Comprehensive Accounting of the Knowledge Economy Bart van Ark* University of Groningen and The Conference Board Seminar on Measurement of Capital – Beyond the Traditional Measures Conference of European Statisticians 12 June 2007, Geneva * In co-operation with Charles Hulten, University of Maryland and The Conference Board

2 Grab your iPod, flip it over, and read the script at the bottom. It says: "Designed by Apple in California. Assembled in China." Where the gizmo is made is immaterial to its popularity. It is great design, technical innovation, and savvy marketing that have helped Apple Computer sell more than 40 million iPods. Yet the folks at the BEA don't count what Apple spends on R&D and brand development, which totaled at least $800 million in Rather, they count each iPod twice: when it arrives from China, and when it sells. That, in effect, reduces Apple -- one of the world's greatest innovators -- to a reseller of imported goods.

3 Do the Official Statistics Capture the Knowledge Economy?  How do we measure innovation?  New ways of making current products better, faster, cheaper  Creating something not previously created  Is the impact of innovations accurately represented in official statistics on national income and productivity? NO !!  “You see the computers everywhere except in the productivity data.” Solow (1987)  Official statistics “miss the most important technological revolutions in history.” Nordhaus (1997)  Hence: “Whilst the knowledge economy is all around us, it is still hard to see it in the official statistics”  Skepticism about GDP, CPI and productivity statistics capturing key components of the knowledge economy

4 National Accounts Framework Provides Adequate Point of Departure  Basic solutions require rethinking of:  The scope of national accounts on output side  The measurement of output in particular in services  The measurement of prices to capture product quality  Consistency of output and input measures to provide productivity  The treatment of inputs in terms of expenditure versus investment  Development of growth accounts in conjunction to national accounts is key  KLEMS framework  Measurement of intangibles

5 Basic Determinants of Sources of Growth/ Growth Accounts Model  Output is key measure of standard of living  Output is driven by  capital (K)  labor (L)  intermediate inputs (E, M, S)  productivity (LP, MFP)  Capital and labor can by divided into  quantity  quality/composition  Output increases that cannot be explained by these “inputs” are attributed to multifactor productivity (MFP)

6 EU KLEMS Growth and Productivity Accounts Complements National Accounts  EU KLEMS is analytical research database, based on national accounts and complementary official sources (LFS and production statistics)  Long time coverage , with greatest detail for post-1995  Harmonized industry classification, capital and labour input, deflation and industry aggregations (e.g. market economy, market services)  Decomposition of capital and labour input:  Capital assets in 7 asset types  Labour input in 18 categories (3 x skill; 3 x age; gender)  Broad coverage of EU countries and comparisons with U.S. and Japan  Public database:

Growth in Quantity of Standard Factor Inputs Accounts for only Small Part of Real GDP Growth in Market Economy EU15ex excludes Portugal, Luxembourg, Ireland, Sweden and Greece

Growth in Quantity of Standard Factor Inputs Accounts for only Small Part of Real GDP Growth in Market Economy

Even in the Traditional Growth Accounts System the Knowledge Economy Features Strongly but Unequal

The knowledge economy

Fast Growing Countries Get Bigger Bang from Knowledge Economy, Notably MFP

Unmeasured intangible capital is hidden in MFP a) Physical Capital a1) ICT capital (IT hardware, communications equipment) a2) Other capital (plant, machinery, buildings) b) Human Capital b1) Formal Education b2) Company training c) Knowledge Capital c1) Research and Development c2) Patents c3) Licenses, brands, copyrights c3) Other technological innovations, not related to b1) to b3) [c4) Software]* c5) Mineral Exploration c6) Experience d) Process Capital d1) Engineering design d2) Organisation design d3) Construction and use of data bases d4) Remuneration of innovative ideas e) Customer Capital e1) Marketing of new products f) Multi Factor Productivity (residual) As long as intangibles capital remain unmeasured, its productivity effects are hidden in MFP

14 Corrado, Hulten and Sichel (CHS, 2005) calculated intangible investment in U.S.  Inherent measurement difficulties of intangible capital going beyond those of tangible capital as follows:  The knowledge-input problem  The knowledge-investment problem  The quality improvement problem  The obsolescence problem (Howell, 1996)  But no clearcut distinction between tangibles and intangibles that justify a distinction between capitalizing and expensing  “Any outlay than is intended to increase future rather than current consumption is treated as a capital investment”

Source: Corrado, Hulten and Sichel (2005)

16 CHS (2005) measure $1.2 trillion of intangible investment in U.S. nonfarm business,  COMPUTERIZED INFORMATION ($154,$154)  COMPUTER SOFT WARE ($151)  COMPUTERIZED DATABASES ($3)  SCIENTIFIC AND CREATIVE PROPERTY ($424,$424)  SCIENTIFIC R&D ($184)  MINERAL EXPLORATION ($18)  COPYRIGHT AND LICENCE COSTS ($75)  OTHER PRODUCT DEVELOPMENT (FINANCE, ARCHIT.) ($149)  ECONOMIC COMPETENCIES ($642,$505)  BRAND EQUITY (ADVERTISING) ($236)  FIRM-SPECIFIC HUMAN CAPITAL (TRAINING) ($116)  ORGANIZATIONAL STRUCTURE MANANGEMENT CONSULTING, PLANNING ETC.) ($291) Source: Corrado, Hulten and Sichel (2005)

17 When including intangibles, investment share in U.S. GDP holds up Source: Corrado, Hulten and Sichel (2005)

18 … but the difference in growth rates arises from firm specific resources, not R&D Source: Corrado, Hulten and Sichel (2005)

19 Results for U.S. Economy, Source: Corrado, Hulten and Sichel (2005) (70.4%) (29.6%) (60%) (25%) (15%)

20 When including intangibles in growth accounts the weight on capital raises Source: Corrado, Hulten and Sichel (2006)

21 Source: Corrado, Hulten and Sichel (2006)

22 Source: Corrado, Hulten and Sichel (2006)

23 Source: Corrado, Hulten and Sichel (2006)

24 The Research Program on Intangibles  Extend studies to more countries  UK: Haskell and Marrano  Japan: Fukao et al.  Ongoing work for Finland, France and Netherlands  Price and output statistics that explicitly recognize product innovations (“quality” change).  Uncover the subtleties of interaction between tangibles/intangibles and innovation/productivity growth  A stronger link in the data between human capital and worker competencies  More detailed study at industry level (mnf/services)  Intangibles need more accurately represented in the financial data of the innovators themselves

25 The Role of National Statistical Institutes  Intangible accounting is in early days, but statistical description of knowledge economy is too far removed from reality to ignore  Official statistics need to be as precise as possible  … but it is sometimes better to be “imprecisely right than precisely wrong” (Keynes)  … requiring a balance between research and official statistics  NSI’s could help to:  develop concepts of intangibles  set (international) standards for measurement  provide value metrics of intangibles, e.g., survey metrics on innovation with quantitative magnitudes.  Transfer experimental and research based measures into national accounts satellites that can help to move the measurement agenda forward