Private and Public Intangible Capital Productivity Growth and New Policy Challenges

1. Private and Public Intangible Capital:
Productivity Growth and New Policy Challenges
C. Jona-Lasinio, (LUISS Lab and ISTAT), Rome
joint with
C. Corrado, (The Conference Board), New York
J. Haskel, (Imperial College, CEPR and IZA), London
M.Iommi, (LUISS Lab and ISTAT), Rome
Innovation & Growth,
a process entangling public and private sectors
17-18 September 2015, Como
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 612774
C. Jona-Lasinio SPINTAN 1 / 21

2. Motivation I
"We will be more likely to promote
innovative activity if we are able to
measure it more effectively and document
its role in economic growth"
Ben Bernanke, May 2011
Speech in Washington DC at Athena Alliance/OECD Conference
C. Jona-Lasinio SPINTAN 2 / 21

3. Defining intangible assets
Computerized
Information
Innovative
Property
Economic
Competencies
• Software
• Databases
• R&D
• Mineral exploration
• Entertainment and artistic originals
• Design and other new product development costs
• Branding (mkt. research and long-lived advertising)
• Firm-specific human capital (training)
• Organizational capital (business process investment)
Broad&category&&&&&Type&of&Investment&&&&&&&&&&&&&&&&&
The$CHS$framework$
Non-R&D intangibles: what are they?
Source: Corrado, Hulten and Sichel (2005)
C. Jona-Lasinio SPINTAN 3 / 21

4. Intangibles vs tangibles
0.0#
2.0#
4.0#
6.0#
8.0#
10.0#
12.0#
14.0#
EU15# US# Scandinavian#(DK,#
FI,#SE)#
Anglosaxon#(IE,UK)# ConAnental#(AT,#BE,#
FR,#DE,#LU,#NL)#
Mediterranean#(GR,#
IT,#PT,#ES)#
Tangibles# 10.6# 9.0# 11.2# 9.4# 9.9# 12.5#
Intangibles# 6.6# 10.62# 7.86# 8.71# 6.89# 4.21#
Tangible#vs#Intangible#GDP#shares:#1995R2009!
(average!values)!
Source: Corrado, Haskel, Jona-Lasinio, Iommi(2012)
C. Jona-Lasinio SPINTAN 4 / 21

5. Intangibles vs tangibles
Longer-term, intangible capital will gradually overtake
tangible capital, fundamentally changing our perspective
on growth
.04
.06
.08
.10
.12
.14
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Investment, Private industries, 1977 to 2011
(ratio to existing GDP)
Intangible Tangible
Excludes real estate/housing.
Source—Corrado and Hulten (2010, 2012).Source: Corrado and Hulten (2010, 2012)
C. Jona-Lasinio SPINTAN 5 / 21

6. The economic view of intangibles ("knowledge based capital")
drastically changes view of growth and productivity
• Traditional capital estimates are understated because many costs
of innovation are not counted as investment
• Empirical evidence shows that once intangible capital is included
in a sources-of-growth analysis it accounts for 20-33% of labour
productivity growth in the market sector of the US and EU
economies.
• The inclusion of different types of capital (and labour) inputs into
a sources-of-growth model is a relevant improvement in the
understanding of the drivers of productivity changes due to
composition shifts to higher-performing types.
• Implementation of this view drastically changes our view of how
the rise of the knowledge economy impacts on growth and
productivity
C. Jona-Lasinio SPINTAN 6 / 21

7. Aim
Complete the coverage of intangible investment by industry making
possible analysis of productivity for the total economy based on a
complete accounting of intangible capital inputs.
• Existing measures of intangible investment, INTAN-Invest
(www.intan-invest.net), cover a subset of industries:
the market sector
• SPINTAN (www.spintan.net) covers the nonmarket sector
Investigate behavioural link public to private and vice versa
(e.g. role of public sector intangibles on private sector)
C. Jona-Lasinio SPINTAN 7 / 21

8. Investment slowdown: a common trend?
0%#
2%#
4%#
6%#
8%#
1970# 1975# 1980# 1985# 1990# 1995# 2000# 2005# 2010# 2015#
United#States## Japan## EU812#
EU#Core#9# EU#Cohesion#4#
forecast#period#201482016#
10%#
15%#
20%#
25%#
30%#
35%#
1970# 1975# 1980# 1985# 1990# 1995# 2000# 2005# 2010# 2015#
United#States## Japan##
EU812# EU#Core#9#
EU#Cohesion#4#
forecast#period#201482016#
Note: EU Core 9 is Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, and the United
Kingdom. EU Cohesion 4 is Greece, Ireland, Spain and Portugal. EU-12 are the 12 member states that
joined the EU between 2004 and 2007.
Data sources: AMECO,
OECD.stat
GFCF % of GDP, 1970-2016
General government Private sector (includes SOEs)
C. Jona-Lasinio SPINTAN 8 / 21

9. Our contribution
Some education and health is a mix of private and public, market and
non-market. So to do market sector analysis, one should really break
education and health into market and nonmarket.
• And one should really do this for all other industries too.
• What do we do?
• We focus on a number of industries that potentially have
significant non-market involvement.
• We break those industries into market and non-market.
C. Jona-Lasinio SPINTAN 9 / 21

10. The scope of intangible assets used by the public sector:
industries of interest
laboratories, public parks and museums) in many countries; see table 1 below. The use of “mar-
ket” vs. “nonmarket” groupings of industries is thus not precise because an industry can reflect
activity carried out by a mix of producers, as is evident with NACE Section R and the larger
section of which NACE Section MB is a part.4
Table 1: SPINTAN Industries of Interest
nace nace
section Industry title number
MB Scientific research and development 72
O Public administration and defence; compulsory social security 84
P Education 85
QA Human health activities 86
QB Residential care and social work activities 87-88
R Creative, arts and entertainment activities;
libraries, archives, museums and other cultural activities 90-91
Gambling and betting activities;
sports activities and amusement and recreation activities 92-93
Note—NACE Rev. 2.
Before we leave the subject of NACE-defined industries, it must be said that in some countries
there are industries with significant government or nonmarket production besides those listed
in table 1. These tend to be industries that engage in activities not germane to our topic areas,
Besides Public administration and defence, other industries in the
table contain a mix of market and nonmarket producers.
C. Jona-Lasinio SPINTAN 10 / 21

11. Intangible investment in the total economy:
measures developed so far
Two sets of intangible measures by industry and institutional sector:
CHS type assets (Data and Trends)
(Organizational capital (purchased and own account),
Brands, Design, Training)
• Geographical coverage:
(AT, BE, DE, ES, FI, FR, IT, NL, SE, UK , US )
• Time coverage: 1995-2010
CHS type assets and NA intangibles (SOG analysis)
• Geographical coverage: (DE, ES, FI, IT, UK)
• Time coverage: 1995-2009
C. Jona-Lasinio SPINTAN 11 / 21

12. Intangible shares of Total value added
Overall selected intangible investment accounts for 8% to 3% of total value added with
private and public sectors accounting on average for 5% and 0.8% respectively.
C. Jona-Lasinio SPINTAN 12 / 21

13. Intangible shares of Non-Market and Market value added
In most advanced countries, US, UK and FI, nonmarket sector is more intangible
intensive than the market sector. In the remaining countries it is the opposite (for these
assets). But there is also interesting variation between countries.
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14. Composition of intangible investment expenditure
Organizational capital accounts for the largest share of intangible
investment both in the nonmarket (45%) and market (35%) sector.
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15. Sources of growth analysis
• Adding national accounts intangibles (R&D, software, and artistic
and entertainment originals plus mineral exploration) to the
SPINTAN and INTAN-Invest measures of intangibles we are able
to look at a fairly complete picture of intangible inputs to total
production across a sample of advanced countries:
• Finland, Germany, Italy, Spain, and the United Kingdom
• Data sources: SPINTAN, INTAN-Invest and EUKLEMS
• Contributions to labour productivity growth of market and
nonmarket sectors.
C. Jona-Lasinio SPINTAN 15 / 21

16. Contributions to Labour Productivity Growth:1995-2009
The performance of advanced economies differs widely according to market versus
nonmarket sector. In Germany, UK and Finland intangible capital is an important source
of growth for the public sector.
C. Jona-Lasinio SPINTAN 16 / 21

17. Contributions to Labour Productivity Growth:
1995-2007 vs 2007-2009
At the very beginning of the financial crisis, intangible capital
positively supported labour productivity growth of both market and
non-market sectors in the advanced economies.
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18. Total Factor Productivity Growth (1995-2007) and market and
non-market intangible capital deepending contributions
Fi NonM
Fi Mkt
UK NonM
UK Mkt
It NonM
It Mkt
De NonM
DE Mkt
Es NonM
Es Mkt
01234
DlnTFP
0 .2 .4 .6 .8
Contrib DlnK(intang)/H
Market and non-market DlnTFP
De
Es
Fi
It
UK
01234
DlnTFP
.2 .3 .4 .5 .6 .7
Contrib DlnK(intang)/H, Mkt
Market DlnTFP
De
Es
Fi
It
UK
01234
DlnTFP
0 .2 .4 .6
Contrib DlnK(intang)/H, Non-Mkt
Market DlnTFP
C. Jona-Lasinio SPINTAN 18 / 21

19. Policy challenges
• A primary characteristic of intangible capital, widely supported by
growth accounting exercises and macroeconomic studies, is to be
growth-promoting.
• The non-rival nature of intangible capital implies a theoretical link
to MFP growth via diffusion, suggesting that spillovers from
intangibles likely exist beyond the well-researched effects from
R&D. Such spillovers, if they exist, might be within the private
sector and/or between the public and private sector.
• In the light in particular of the claim and counter-claim around
public sector austerity and fiscal policy in Europe, it would be
vital to know which, if any, public sector intangibles had positive
spillovers to the rest of the economy.
C. Jona-Lasinio SPINTAN 19 / 21

20. Policy challenges
But, despite progress on research, why is there caution on embracing
the policy implications?
• Some forms of intangible assets are pretty exotic as they have no
physical form, making valuation, depreciation, etc. all difficult so
that national accounts integration goes slowly
• Integrating the impact of intangibles on growth is tricky:
• Spillovers and complementarities are difficult to measure and hard to convey.
• Causality is probably a bigger issue with intangibles than with tangibles
• If intangibles is the main story, the focus is long-term, not
short-term requiring bigger policy commitments.
• Public-private "partnerships" is probably a bigger deal than for
tangible investments
• Promoting core intangible investment is consistent with goal of
attaining a higher level of productivity and therefore a higher
living standard.
C. Jona-Lasinio SPINTAN 20 / 21

21. Thank you
C. Jona-Lasinio SPINTAN 21 / 21