JOINT UNECE/EUROSTAT/OECD MEETING ON NATIONAL ACCOUNTS, GENEVA APRIL DERIVING ESTIMATES OF GROSS FIXED CAPITAL FORMATION OF RESEARCH AND DEVELOPMENT USING R&D SURVEY DATA CHARLES ASPDEN OECD Agenda item 2b Invited paper 13

Introduction Recognition of R&D as a fixed asset is one of the major changes in the new SNA OECD and EU task forces created to promote its implementation quickly, efficiently, and accurately, while achieving international comparability New OECD handbook to provide guidance on compiling estimates of intellectual property products (IPP)

Outline of presentation Details of the SNA recommendation Implementation process Quantitative impact Definition of R&D GFCF and its practical implementation Spillovers Using FM R&D survey data Additional data requirements Major outstanding issues

Recommendations Research and development should be treated as gross fixed capital formation in the SNA. It should be defined as in the Frascati Manual, namely “research and experimental development comprises creative work undertaken on a systematic basis in order to increase the stock of knowledge, including the knowledge of man, culture and society and use of this stock of knowledge to devise new applications.” This definition should not be interpreted as including human capital as capital formation within the SNA. (OECD Frascati Manual 2002: Proposed Standard Practice for Surveys on Research and Experimental Development)

Recommendations By convention, since much R&D is carried out on own account, it should be valued at cost. In practice, the information collected in accordance with the Frascati Manual will provide estimates of R&D expenditure; discussion is ongoing to make adjustments to this Manual to meet the needs of the SNA more closely. It is recognised that a detailed guide to implementation will be desirable to assist implementation of this recommendation.

Recommendations All R&D expenditure that is sold or is expected to bring a benefit in the future to its owner (including for the provision of public services in the case of R&D undertaken by government) is included within the asset boundary. Only R&D that brings no economic benefit discernable at the time of its completion is excluded. With the inclusion of R&D in the asset boundary, patented entities will no longer be separately identified as such in the system, but they will be subsumed into R&D assets.

However….. While there is strong support by countries for adopting these recommendations in the SNA, there is also considerable concern that it is premature to do so because of technical difficulties that have yet to be overcome. In conclusion, R&D expenditure should be recognized, in principle, as part of capital formation. However, recognising the difficulties to be overcome before this objective can be reached, satellite accounts will provide a useful way of working towards solutions that give the appropriate level of confidence in the resulting measures and practical guidance on implementation will help to ensure international comparability.

R&D satellite accounts Countries such as Israel, Denmark, US, Netherlands and Australia have already compiled experimental estimates US BEA is taking a step-by-step approach and numerous papers are available on its website From 2009 EU countries expected to compile satellite accounts

Introduction of R&D GFCF in core accounts Australia 2009 US and Canada 2012 Europe no earlier than 2014

Scope of R&D GFCF Definition of an asset 3.30 An asset is a store of value representing a benefit or series of benefits accruing to the economic owner by holding or using the entity over a period of time. It is a means of transferring value from one accounting period to another. Implications – the value of an R&D asset is determined by the benefits accruing to its economic owner. This implies that any benefits accruing to other units are not included in the value of the asset. – economic owner and not legal owner – sometimes different because of licence agreements. – assets are a means of transferring value from one accounting period to another, i.e. expected to produce benefits for more than a year.

Spillovers R&D output – knowledge – spreads from the owner to other units – Publication of research papers – Patent documents – Observation of owner’s activity – Made freely available But it is only an asset for its owner Even if R&D output is made freely available it is still an asset if it is expected to provide future economic benefits for its owner. – Medical research undertaken by government and used in government hospitals

Identifying those R&D expenditures that should be recorded as GFCF R&D undertaken with no expectation of economic benefits to the owner, or an affiliated unit, should be recorded as intermediate consumption, not GFCF Probably nearly all R&D acquired by market producers should be recorded as GFCF. But probably not all R&D acquired by non- market producers should be recorded as GFCF. OECD task force is investigating this issue

Compiling estimates of R&D GFCF GFCF mostly conducted on own account. GFCF estimated by summing costs. R&D surveys conducted in accordance with the Frascati Manual (FM) to be the principal data source - FM and SNA have same definition of R&D FM surveys conducted over many years for many countries FM surveys collect detailed expenditures on R&D by performers, with similar, but not always the same, definitions as the SNA

FM data Intramural expenditures: all expenditures for R&D performed in a unit, whatever the source of funds Current costs – Labour (same as SNA) – Other (similar to intermediate consumption in SNA, but no allowance for changes in inventories) Capital costs – Land and buildings (combined) – Instruments and equipment (including embodied software) – Computer software (purchases plus licence fees)

FM data FM collects sources of funds by sector, but does not discriminate between transfers and purchases FM also collects “extramural” expenditures: purchases of R&D from other units and grants to other units, but not separately identified.

Outline of bridge tables – From FM to SNA GFCF Basic approach – Expenditures on inputs by performers from FM surveys – Plus imports – Equals total supply of R&D, – Use commodity flow approach to determine GFCF To accomplish this requires three kinds of bridges between the FM and SNA data: – Between FM sectors and SNA sectors – Between FM’s expenditures on R&D and SNA output – Between FM’s classifications of expenditures and funding, and the SNA supply and use tables. Annex 3 of the FM describes the differences and similarities in the SNA and FM treatments of R&D. This includes a discussion of the differences in sectoring and the differences between SNA output and total intramural R&D.

OECD Frascati ManualSNA Business enterprise sectorNon-financial corporations Financial corporations Government sectorGeneral government Private non-profit sectorNPISH Households Higher education sectorCorporations and quasi corporations General government NPISH AbroadRest of world Table 1: Linking FM and SNA Sectors

Bridge tables – FM’s expenditures on R&D and SNA output Starting with intramural expenditures Add other taxes less subsidies not already included Add extramural expenditures (excluding grants) Add imputation for free labour provided by postgraduate students Replace expenditures on land and buildings with the capital services they provide

Bridge tables – Imports and Exports FM funding data can provide estimates of imports by performers and the exports of performers Need to be supplemented and reconciled using – Trade in services data – Foreign direct investment data

Bridge tables – Deriving GFCF Output + imports = Intermediate consumption plus Exports plus Changes in inventories (only R&D produced for sale) plus GFCF

Additional data requirements from FM surveys Extramural expenditures and funding data need to distinguish between: – Purchases and transfers – Resident and non-residents Intramural expenditures require – Data on other taxes and subsidies – More detailed breakdown of capital expenditures to support the PIM

Outstanding issues pursued by OECD Task Force Determining practical means for identifying which R&D expenditures should be recorded as GFCF Other boundary issues, such as avoiding double counting with other fixed assets Service lives for R&D assets (for use in the PIM) Price indices Measuring international trade in R&D, including between affiliated units