What happened to the knowledge economy? ICT, intangible investment and Britain's productivity record revisited

A major puzzle is that despite the apparent importance of innovation around the "knowledge economy", UK macro performance appears unaffected: investment rates are flat, and productivity has slowed down. We investigate whether measurement issues might account for the puzzle. The standard National Accounts treatment of most spending on "knowledge" or "intangible" assets is as intermediate consumption. Thus they do not count as either GDP or investment. We ask how treating such spending as investment affects some key macro variables, namely, market sector gross value added (MGVA), business investment, capital and labour shares, growth in labour and total factor productivity, and capital deepening. We find (a) MGVA was understated by about 6% in 1970 and 13% in 2004 (b) instead of the nominal business investment/MGVA ratio falling since 1970 it is has been rising (c) instead of the labour compensation/MGVA ratio being flat since 1970 it has been falling (d) growth in labour productivity and capital deepening has been understated and growth in total factor productivity overstated (e) total factor productivity growth has not slowed since 1990 but has been accelerating

Intangible assets and national income accounting

In this paper I focus on three related and difficult areas of the measurement of national income. I argue that the economic theory underlying measurement of these items is currently controversial and incomplete.National income

What Happened to the Knowledge Economy? ICT, Intangible Investment and Britain's Productivity Record Revisited

A major puzzle is that despite the apparent importance of innovation around the "knowledge economy", UK macro performance appears unaffected: investment rates are flat, and productivity has slowed down. We investigate whether measurement issues might account for the puzzle. The standard National Accounts treatment of most spending on "knowledge" or "intangible" assets is as intermediate consumption. Thus they do not count as either GDP or investment. We ask how treating such spending as investment affects some key macro variables, namely, market sector gross value added (MGVA), business investment, capital and labour shares, growth in labour and total factor productivity, and capital deepening. We find (a) MGVA was understated by about 6% in 1970 and 13% in 2004 (b) instead of the nominal business investment/MGVA ratio falling since 1970 it is has been rising (c) instead of the labour compensation/MGVA ratio being flat since 1970 it has been falling (d) growth in labour productivity and capital deepening has been understated and growth in total factor productivity overstated (e) total factor productivity growth has not slowed since 1990 but has been accelerating.Intangible assets, Productivity, R&D, Training, Organisational capital, Investment

Investment–uncertainty relationship: differences between intangible and physical capital

This paper disentangles the effects of uncertainty in explaining the heterogeneity of firms’ investments. In particular, following Bloom [2007. “Uncertainty and the Dynamics of R&D.” American Economic Review 97 (2): 250–255], we test the role of uncertainty and liquidity constraints extending the model to include R&D, non-R&D intangibles, as well as physical capital. The analysis is performed on a large data set of Italian firms, covering both manufacturing and services sectors, as well as large and small firms. We show that non-convex adjustment costs affect different capital inputs in different ways, depending on their degree of firm-specificity. The results confirm the Bloom model: flow adjustment costs explain investment in R&D and, to a lesser extent, in non-R&D intangibles. However, it struggles to explain tangible investment plans because of the ambiguous effect of the stock adjustment costs

When Are Capitalization Exceptions Justified?

It is a widely accepted general principle that a taxpayer should capitalize an expenditure that produces a benefit lasting beyond the current tax period. Yet rules putting this principle into practice are among the most controversial in all of federal income taxation. Many argue that a retreat from the general principle is warranted when designing capitalization rules, and even those who argue that capitalization rules ought to be sweeping usually conclude that exceptions are necessary or desirable. For instance, most commentators accept uncritically that expenses incurred to procure certain intangible capital should be expensed, as under current law, without exploring whether expensing of intangibles costs is inevitable, although some have considered the implications of excepting intangibles costs from capitalization. Although the arguments with respect to exceptions to capitalization for tangible assets have received more attention, no consensus view has emerged regarding whether many of the exceptions are desirable as a matter of policy. This Article is a systematic analysis of the arguments in favor of departing from the normative or first-best capitalization rule

Intangibles: Can They Explain the Unexplained, revised version

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A mixed methods study investigating intangibles in the banking sector

Despite increasing attention paid to intangibles research since the end of the 20th century, there is a dearth of empirical evidence on the interactions among different intangible elements and their performance implications due to the lack of appropriate intangible measurements and the low level of intangible disclosure in the public domain. From a resource-based view (RBV), this thesis seeks to investigate the role of intangibles in the European banking sector using mixed methods. A quantitative approach is adopted to test the relationships among different intangible elements and between them and bank performance for a sample of 63 banks from 2005 to 2007. The empirical results show that top management human capital (HC) has a positive impact on either customer relationships or bank financial performance, and the combination of different intangible elements tends to better explain the variation in banks’ return on assets than they do individually. Meanwhile, a qualitative approach is employed to assess intangible measurement, disclosure, and modelling by conducting semi-structured interviews with 11 bank managers and 12 bank analysts. A grounded theory model of intangibles is developed, which reveals how intangibles and tangible/financial resources interact in the bank value creation process. In addition, it explores the communication gaps between bank managers and bank analysts regarding the concept of intangibles, intangible measurement and intangible disclosure. More importantly, the adoption of mixed methods research allows this thesis to achieve evidence triangulation and complementarity. Both approaches produce evidence in support of the resource integration of the RBV theory and the importance of top management HC. Besides, the qualitative study provides the means to explore the way of improving the specified models and intangible proxies used in the quantitative study. This thesis makes a contribution to the development of mixed methods research in the fields of finance, accounting and management by providing an example of how quantitative and qualitative approaches can be integrated to investigate a research question. It also contributes to the intangible literature and banking literature in terms of improving our understanding of the role of intangibles in the bank business model

Intangible assets and national income accounting: measuring a scientific revolution

In this paper the author relates the measurement of intangibles to the project of measuring the sources of growth. He focuses on three related and difficult areas of the measurement of national income: the measurement of new goods, the deflation of intangible investment, and the divergence between the social and private valuations of intangible assets. The author argues that the economic theory and practice underlying measurement of these items is currently controversial and incomplete, and he points toward how concretely to move forward.

Treating Intangible Inputs as Investment Goods: the Impact on Canadian GDP

National income accounts view most business expenditures on intangible goods as acquisitions of intermediate inputs that get entirely used up in the production of final output. After arguing against this convention, I construct a data set to document firms’ expenditures on an identifiable list of intangible items for which there is now wide agreement among national accountants. I then examine the implications of treating intangible spending as an acquisition of final (investment) goods on GDP growth for Canada. I find that investment in intangible capital by 2002 is almost as large as the investment in physical capital. This result is in line with similar findings for the U.S. and the U.K. Furthermore, the growth in GDP and labor productivity may be underestimated by as much as 0.1 percentage point per year during this same period. The discussion on the need to capitalize intangibles and the magnitude of the findings demonstrate the necessity to report such expenditures as investments and to collect this data as an integral part of the Canadian system of national income accounts.Intangible Capital Goods, Intangible Investment