Knowledge-based capital and intangible assets

The OECD economies are more strongly dependent on the production, distribution and use of knowledge than ever before. This knowledge-based capital (KBC) involves intangible assets (e.g. R&D, software, human capital and organisational structures) that are also essential for fully realising productivity gains and efficiencies from new technologies. Investment in intangible assets is rising and even exceeds investment in physical capital (machinery and equipment) in several OECD countries. Yet, there are important differences across OECD economies in the investment in and returns from these intangible assets that cannot solely be explained by differences in specialisation patterns.
What are knowledge-based capital and intangible assets?
The OECD economies are more strongly dependent on the production, distribution and use of knowledge than ever before. Sustained competitive advantage is increasingly based on innovation, which in turn is driven in large part by investments in different forms of knowledge-based capital (KBC). For instance, it is estimated that between 1995 and 2007 investments in KBC have accounted on average for 23% of labour productivity growth (Corrado et al, 2012). In addition, many products are themselves becoming more knowledge-intensive. Business investment in knowledge-based capital also has been rising rapidly (e.g. in Australia, since 1974–75, average annual growth of investment in KBC has been around 1.3 times that of investments in physical assets such as machinery, equipment and buildings) (Barnes and McClure, 2009), and business investment in KBC has become a priority in many emerging economies.
 
Intangible or knowledge-based assets. 
Such assets do not have a physical or financial embodiment. Much of the focus on intangibles has been on R&D, key personnel and software. But the range of intangible assets is considerably broader. One classification groups intangibles into three types: computerised information (such as software and databases); innovative property (such as scientific and non-scientific R&D, copyrights, designs, trademarks); and economic competencies (including brand equity, firm-specific human capital, networks joining people and institutions, organisational know-how that increases enterprise efficiency, and aspects of advertising and marketing). Investment in such intangible assets is rising and even exceeds investment in physical capital (machinery and equipment) in several OECD countries (OECD, 2011).
How do knowledge-based capital and intangibles affect innovation?
Innovation involves the production of new knowledge from complementary assets—not only R&D but also software, human capital and organisational structures—many of which are essential for fully realising productivity gains and efficiencies from new technologies. As such, intangible assets are a strategic factor in a firm’s value creation.
 
The role of KBC in the economy has become as important as that of tangible assets, accounting for up to 12% of GDP in some countries (Figure 1). In Finland, Sweden, the United Kingdom and the United States, investment in intangibles is now equal to or even superior to investment in tangibles such as machinery and equipment and structures. Over the past decade, investment in intangibles has grown as a share of GDP in many OECD countries, while investment in tangibles has stayed the same or declined. The relative importance of intangibles in the investment strategies of the business sector has therefore increased (Figure 2). Investment in intangibles leads to creating and applying knowledge, and it is here that firms in OECD countries find their greatest comparative advantage.
Figure 1. Investment in fixed and intangible assets as share of GDP, 2006
 
Note: These estimates are based on national studies. They do not yet reflect standardised methods and definitions.
Source: OECD, data on intangible investment are based on COINVEST, www.coinvest.org.uk, and national estimates by researchers. Data for fixed investment are OECD calculations based on EU KLEMS Database and OECD, Annual National Accounts Database, March 2010. See chapter notes.  StatLink:  Measuring Innovation: A New Perspective - OECD © 2010. http://dx.doi.org/10.1787/834532612432
 
Figure 2. The evolution of investment in KBC relative to tangible capital; 1995-2009 (unless otherwise noted)
 
Notes: The estimates refer to the market sector and include each of the types of KBC outlined in Table 1 and mineral exploration. *Data for Canada in Panel B refer to 1998 and 2005.
Source: Corrado et al., (2012). “Knowledge-based capital, innovation and resource allocation”, OECD Economic Policy Paper No. 4, © OECD 2013. 
StatLink: http://dx.doi.org/10.1787/888932824783
 
Investment in knowledge-based capital varies significantly across countries. Estimates show that intangible investment accounts for up to one percentage point of labour productivity growth in Sweden, and just below that in Denmark, Finland, the United Kingdom and the United States. In these countries, intangible investment accounts for up to 25% of total labour productivity growth (OECD, 2010). Investment in intangibles is not the only part of labour productivity growth that is associated with innovation, however. Much multi-factor productivity growth, e.g. improvements in the joint productivity of capital and labour, is due to spillovers from investments in innovation and from a range of efficiency improvements made by firms.
 
Yet important differences exist across OECD economies in the investment in and returns from intangible assets associated to knowledge. This phenomenon cannot solely be explained by differences in specialisation patterns (OECD, 2013). These differences at the country level are associated with diverging patterns of firm performance within countries, with some countries being more successful at channelling resources to innovative and high growth firms than others.
What are the implications for innovation policy?
To understand the role of innovation in the economy and its contribution to economic growth, it is important to properly account for this “intangible” capital. Traditionally, both national and firm accounting practices treated investment in non-market intangibles, such as internal R&D, as current expenditure rather than as investment. National accounts have now started to capitalise, even if only partially, investments in intangibles such as software and R&D. However, most intangible investment is still excluded from the national accounts.
 
Policies can affect the returns to investing in intangible assets, such as knowledge-based capital (KBC), and the ability of national economies to reallocate scarce resources to firms that invest in those assets. In this regard, well-functioning product, labour and venture capital markets and bankruptcy laws that do not overly penalise failure can raise the expected returns to investing in intangible assets by improving the efficiency of resource allocation.
 
While structural reforms offer the most cost-effective approach to raising investment in intangible assets, there is a role for innovation policies to raise private investment in intangible assets towards socially optimal levels. Indeed, R&D tax incentives and, as a finding that contrasts with previous research, direct support measures can be effective, but design features are crucial in order to minimise the fiscal cost and unintended consequences of such policies.
 
Well-defined intellectual property rights (IPR) are also important to provide firms with the incentive to innovate and to promote knowledge diffusion via the public disclosure of ideas. However, such IPR regimes need to be coupled with pro-competition policies to ensure maximum effect while the rising costs of the patent system in emerging sectors may have altered the trade-off inherent to IPR between the incentives to innovate and the broad diffusion of knowledge.
References
  • Andrews, D. and C. Criscuolo (2013), "Knowledge-based capital, innovation and resource allocation: A going for growth report", OECD Economic Policy Papers No. 4, OECD Publishing. doi: 10.1787/5k46bh92lr35-en
  • Barnes, P. and A. McClure, (2009), “Investments in intangible assets and Australia’s productivity growth”, Australian Government Productivity Commission Staff Working Paper, Canberra, Australia.
  • Corrado, C., J. Haskel, C. Jona-Lasinio, and M. Iommi, (2012), “Intangible capital and growth in advanced economies: Measurement methods and comparative results”, IZA discussion paper No. 6733, Institute for the Study of Labor (IZA), Bonn. http://ftp.iza.org/dp6733.pdf
  • Corrado, C., C. Hulten and D. Sichel, (2009), “Intangible capital and U.S. economic growth”, Review of Income and Wealth, 55/3, pp. 661–85.
  • OECD (2013), Supporting Investment in Knowledge Capital, Growth and Innovation, OECD, Paris.
  • OECD (2010), The OECD Innovation Strategy: Getting a Head Start on Tomorrow, OECD Publishing. doi: 10.1787/9789264083479-en
  • OECD (2005), “The Measurement of Scientific and Technological Activities: Guidelines for Collecting and Interpreting Innovation Data: Oslo Manual, Third Edition”, prepared by the Working Party of National Experts on Scientific and Technology Indicators, OECD, Paris, para. 71.
Image description here.

What Countries are Doing