1. Research and Development

2. Research and Development at the heart of a modern economy
R&D expenditure – a major driver of economic growth
Investing 3% of GDP in R&D is headline target in the European Union
SNA 2008 and ESA 2010 treat R&D as capital formation resulting in intellectual property products

3. Definition of Research and Development – Frascati manual
"Research and experimental development (R&D) is 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"

4. Distinguishing R&D from other activities
Distinguishing R&D from other activities such as education, training or market research poses problems.
This problem has an impact on GDP as only R&D is considered capital formation and so directly contributing to GDP.

5. ESA 95 production account for manufacturing
Uses
Resources
Intermediate consumption
Output
800
R & D
100
Other
200
GVA:
500
Comp of employment
300
Operating surplus

6.  ESA 95 Capital account
Uses
Resources
Capital formation
 Savings
200
Financial surplus

7. ESA 2010 production account for manufacturing
Uses
Resources
Intermediate consumption
Output
800
R & D
100
 R & D
 100
Other
200
GVA:
600
Comp of employment
300
Operating surplus

8.  ESA 2010 Capital account
Uses
Resources
Capital formation
100
 Savings
300
Financial surplus
200

9. R&D generates Intellectual Property
The performance of Research and Development generates assets of intellectual property
These assets will lose value over time through capital consumption.

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

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

12. Consequences of the new treatment of R&D for National Accounts (1)
Consequences of the change for market producers:
the performance of R&D is 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

13. 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

14. 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?

15. 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

16. 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 to define both prices and quantities
input methods can appear as a solution but they exclude the possibility of measuring productivity progress

17. Thank you for your attention
CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION