1. Item III.3: Research and Development
Training on general introduction to ESA 2010
Luxembourg, December Eurostat, JMO M4

2. Definition of Research and Development
"Research and experimental development (R&D) comprise creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society and the use of this stock of knowledge to devise new applications" (Frascati Manual, 2002 edition, § 63)

3. Distinguishing R&D from other activities
Despite the precise definition of R&D, distinguishing R&D from other activities such as e.g. education, training or market research may pose problems.
This problem already exists in the current system, but whereas a confusion between two activities (e.g. research and training) does not have any impact on GDP in the current system, it will have in the future system since R&D expenditure will be considered as an investment, i.e. a GDP component.

4. Capitalisation of market R&D (1)
Example with two activities: R&D and manufacturing.

5. Capitalisation of market R&D (2)

6. Capitalisation of market R&D (3)

7. Capitalisation of market R&D (4)

8. Assets of intellectual property
“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.”
R&D services generate assets of intellectual property.
A consumption of fixed capital must be estimated for these assets.

9. Capitalisation of non-market R&D (1)
Example with activities of defence and R&D for the GG:

10. Capitalisation of non-market R&D (2)

11. Consequences of the new treatment of R&D for National Accounts (1)
Consequences of the change for market producers:
R&D services are reclassified from intermediate consumption to gross fixed capital formation - this increases value added and GDP
value of the output for own final use includes a mark-up for profit - this increases value added and GDP

12. Consequences of the new treatment of R&D for National Accounts (2)
Consequences of the change for non-market producers (General Government, NPISH)
new consumption of fixed capital (taking into account depreciation of R&D assets) is included in output for non-market producers that is calculated as a sum of costs – this increases value added and GDP
on the expenditure side: GFCF increases; however, there is no impact on GDP because the increase of GFCF is compensated by decrease of final consumption expenditure of government and NPISH

13. The main difficulties in the capitalisation of R&D: conceptual issues
Treatment of freely available non-market R&D
should it be capitalised?
can it be considered as an asset?
does it bring economic benefits to the owner?
is all freely available non-market R&D used for the production of public services?

14. Possible double counting of own-account software
The main difficulties in the capitalisation of R&D: practical issues (1)
Possible double counting of own-account software
a problem can arise with the output for own final use of these services when the output is estimated by the sum of costs and when data concerning these costs are collected by independent surveys
Valuation of R&D services, especially when they are not sold (non-market output)
inclusion of the R&D assets in the calculation of consumption of fixed capital
estimation of the net return to fixed capital

15. The main difficulties in the capitalisation of R&D: practical issues (2)
Compilation of R&D assets and consumption of fixed capital
life times of various categories of R&D assets
the lack of availability of long series of gross fixed capital formation in R&D services
depreciation and mortality functions used
Price index to arrive at estimates in volume terms
R&D services cannot be standardised so it is very difficult do define both prices and quantities
input methods can appear as a solution but they exclude the possibility of measuring productivity progress

16. Eurostat Task Force on capitalisation of R&D
The main objective of the Task Force on R&D was to prepare templates for R&D bridge tables (from R&D expenditure data based on the so called Frascati surveys to R&D output and gross fixed capital formation concepts).
The tables make it possible to test the reliability of the data in a satellite R&D account before the ultimate implementation of the capitalisation of R&D, as foreseen by ESA2010.
The Task Force met 5 times in 2008 and 2009.
Most Member States, EFTA countries, OECD were represented
Task Force cooperated with the OECD Task Force on R&D and Other Intellectual Property Products in order to avoid duplication of efforts.

17. Eurostat Task Force on capitalisation of R&D (2)
The vast majority of Task Force members concluded that they see no major obstacles against implementing the capitalisation of R&D in National Accounts.
They supported the recommendations of the Task Force.

18. Task Force on R&D – Templates
Two templates for the calculation of output of R&D, based on:
Frascati Surveys
Other data sources
Templates for:
Gross fixed Capital Formation,
R&D assets, Consumption of fixed Capital
Impact of reclassification of R&D on the value added by industries
Impact of reclassification of R&D on GDP

19. Calculation of output of R&D based on FS

20. Calculation of GFCF of R&D based on FS

21. Task Force on R&D – Recommendations (1)
Full consistency between the data in the agreed compulsory R&D tables and the national accounts should be ensured in the course of the capitalisation of R&D services;
until the R&D stocks are available, the consumption of the R&D assets used in the production of R&D services does not have to be taken into account in the estimates of the R&D output (as a part of the consumption of fixed capital);
the input method is recommended in the calculation of R&D in volume terms;

22. Task Force on R&D – Recommendations (2)
geometric depreciation function is recommended as a reference method in the calculation of the consumption of fixed capital of R&D; however, countries that have developed alternative methods may continue to use them;
the R&D services subcontracted by one R&D company to another R&D company should be recorded as intermediate consumption. However, the possibility of recording the output of R&D companies net of subcontracted R&D or on a gross basis would be left open to countries that encounter problems in obtaining data needed to adjust the Frascati intramural expenditures on R&D to gross recording;

23. Task Force on R&D – Recommendations (3)
all expenditures by government on Intellectual Property Products (IPPs), including freely available R&D, should be recorded as GFCF, if they satisfy the requirement that IPPs is intended for use in the production of more than one year;
the net operating surplus of market producers of R&D is derived as mark-up including unsuccessful R&D. The mark-up may be calculated as industry specific or as a single mark-up for all industries. To ensure stability of the mark-up time series, an average or a weighted moving average of several years should be used;

24. Task Force on R&D – Recommendations (4)
service Life estimates used in the calculations of R&D should be based on dedicated surveys or other relevant research information, including information of other countries with comparable market/industry characteristics. Where such information is not available, a single average service life of 10 years should be retained. It is also recommended that the above mentioned Service Life estimates should be investigated regularly, e.g. every 10 years.

25. Thank you for your kind attention