1. DRAFT – NOT TO BE QUOTED Measuring Investment in Intangible Asset in the UK: results from a unique survey Presentation by Gaganan Awano, UK Office for National Statistics, to COINVEST Conference, Lisbon, 19 March 2010 This work is a component of NESTA’s innovation index project and carried out by a team at Imperial College Business School and ONS. The team are (ONS) Gaganan Awano, Mark Franklin, Andrew Thomas and (Imperial) Jonathan Haskel, Zafeira Kastrinaki. This work contains statistical data from ONS which is Crown copyright and reproduced with the permission of the controller of HMSO and Queen's Printer for Scotland. The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. This work uses research datasets which may not exactly reproduce National Statistics aggregates.

2. DRAFT – NOT TO BE QUOTED Intangible Asset Survey- Pilot Part of Imperial/ONS initiative and sponsored by NESTA- Autumn 2008 Telephone and Face to Face interview of 40 firms with the aim of: Obtaining data on spending through cognitive interview techniques Seek answers to the service life of intangible assets Important findings of pilot survey: Most important conclusion was that firms could generally provide the information required. The concept of “projects” was more easily understood by respondents Some large firms Have logs of innovation “projects” with time spend and payoffs Have functional organisation related to intangible headings e.g. marketing dept, HR dept, design dept. They can get information more easily if questions aligned to these functions Organisational capital very hard for them and us to measure Life lengths seems to be something they can recognise

3. DRAFT – NOT TO BE QUOTED IIA Survey- Phase II Conducted by the ONS in October 2009 Voluntary postal survey of 2000 UK companies Objectives are to measure: –Firms’ spending on main intangible assets: R&D, software, training, branding, design, organisation or business process improvement –Extra mural –Intra mural –Life lengths Linkable via business register Minimum burden on respondents, i.e. short as possible

4. DRAFT – NOT TO BE QUOTED Layout of questionnaire Assets divided into sections

5. DRAFT – NOT TO BE QUOTED Each section has a filter question which defines the asset with examples

6. DRAFT – NOT TO BE QUOTED Then asks purchased and own-account

7. DRAFT – NOT TO BE QUOTED Finally life lengths

8. DRAFT – NOT TO BE QUOTED Sampling Sample 2000 firms drawn from the Business Register Market sector - consistent with intangibles growth accounting framework Stratified by industry and employment Mild bias informed by pilot and UK Innovation Survey results: Over-sample Under-sample EngineeringConstruction ICTUtilities Financial ServicesDistribution Transport Accommodation

9. DRAFT – NOT TO BE QUOTED Survey findings: response rates Response Rate: by firm size Firm Size Usable Response Rate (%) % Positive Response* 10-994750 100-4994868 500-49993380 5000+2176 Total4258 * Percentage of usable responses reporting positive spending in one or more category of intangible asset More large firms answered affirmative to investing in at least one intangible asset than small firms Sample size: 2000 Total response: ~ 1400 Usable response: 838

10. DRAFT – NOT TO BE QUOTED Incidence Intangible Asset CategoryFirms’ Propensity Training35% Software30% Reputation & Branding22% R&D8% Design10% Business Process Improvement13% Most firms do not invest in intangible assets Of those that do, most firms invest in training and least in R&D % of respondent firms conducting intangible investment by asset category

11. DRAFT – NOT TO BE QUOTED Incidence: by size bands Firm SizeIncidence of Intangible Asset Spending (%) TrainingSoftware Reputation & Branding R&DDesignBPI 10-9932292171012 100-499644330111219 500-499970573819 33 5000+666440141824 The propensity for investing in intangible assets generally increases with firm size By contrast, response rates are higher for smaller firms

12. DRAFT – NOT TO BE QUOTED Average Expenditure Intangible Asset Category Mean Expenditure (£,k) Training94* Software191 Reputation & Branding 192 R&D579 Design53 Business Process Improvement 48 Data were weighted to reflect the characteristics of the population from which the sample was drawn and the pattern of responses received. Average of firms conducting the activity R&D has the highest mean expenditure A small number of very large firms make huge spending on R&D * Note includes imputed value of employee time while undertaking training

13. DRAFT – NOT TO BE QUOTED Purchased vs own-account expenditure Mean Expenditure (£,k) Intangible Asset CategoryExtraIntra Training3268 Software56192 Reputation & Branding14364 R&D325300 Design1543 Business Process Improvement2730 R&D has the highest extramural and intramural spending among the assets Average intramural spending is higher in all intangible assets except reputation & branding and R&D

14. DRAFT – NOT TO BE QUOTED Mean Expenditure by broad sector AssetManufacturing (£,k)Services (£,k) Training10492 Software81215 Reputation & Branding289175 R&D1280234 Design12230 BPI9038 Except for Software, the manufacturing sector has higher average spending for all other assets Average spending on R&D by the manufacturing sector is exceptionally high

15. DRAFT – NOT TO BE QUOTED Life length Asset Category Meal benefit life (yrs) CHS(2006) estimates (yrs) Training2.72.5 Software3.23 Reputation & Branding2.72 R&D4.65 Design4.05 Business Process Improvement 4.22.5 Using single declining balance, life length is the reciprocal of depreciation Our life lengths although varied are not that far off from literature estimates, and are distributed around CHS estimates

16. DRAFT – NOT TO BE QUOTED Life lengths by broad sector AssetManufacturing (yr)Services (yr) Training2.92.7 Software3.43.2 Reputation & Branding 4.12.5 R&D5.54.3 Design4.63.7 BPI5.44.0 Manufacturing sector has longer life lengths for investments in intangible assets than the services on all asset categories

17. DRAFT – NOT TO BE QUOTED Expenditure Levels (£,Million)

18. DRAFT – NOT TO BE QUOTED Some comparison with other sources Software Chamberlin et al (2007) valued own-account software investment in the UK at £10b and contributes about 50% of total. IIA survey total for own-account software expenditure is £7b and contributes 70% of total R&D UK Business Enterprise Research & Development (BERD) survey (2008) states the total R&D expenditure in the UK at £15.9b Total R&D expenditure in IIA survey stood at £8.1b Innovation Survey (2009) shows the manufacturing sector generally more innovative than the services sector. The manufacturing sector in the IIA survey has higher mean spending and life lengths than the services sector. Any links?

19. DRAFT – NOT TO BE QUOTED Conclusions Most firms are small and do not invest in intangible assets Most firms engage in staff training and fewer in R&D, albeit mean spending is highest on R&D Spending on 4 out of 6 assets is more on in-house than purchasedassets Asset life lengths although varied are not too far from literature estimates A larger survey may help clarify the variations of data with other sources and provide lower confidence intervals around estimates

20. DRAFT – NOT TO BE QUOTED Next Steps Present results to NESTA Analyse data against 2009 Innovation Survey Detailed analysis against software estimates Expanded survey- subject to funding

21. DRAFT – NOT TO BE QUOTED Thank you! Andrew D Thomas: Andrew.D.Thomas@ons.gov.uk Gaganan Awano: Gaganan.Awano@ons.gov.uk Mark Franklin: Mark.Franklin@ons.gov.uk Jonathan Haskel: Jonathan.Haskel@imperial.ac.uk Zafeira Kastrinaki: Zafeira.Kastrinaki@imperial.ac.ukAndrew.D.Thomas@ons.gov.ukGaganan.Awano@ons.gov.ukMark.Franklin@ons.gov.ukJonathan.Haskel@imperial.ac.ukZafeira.Kastrinaki@imperial.ac.uk