THE ROLE OF INTANGIBLE, KNOWLEDGE-BASED CAPITAL IN ECONOMIC GROWTH

THE ROLE OF INTANGIBLE, KNOWLEDGE-BASED CAPITAL IN ECONOMIC GROWTH Alistair Nolan OECD Directorate for Science, Technology and Industry Washington DC, January 2014

What is knowledge-based capital (KBC)? Computerised information Innovative property Economic competencies 2

What is knowledge-based capital (KBC)? Computerised information Software and databases Innovative property Economic competencies 3

What is knowledge-based capital (KBC)? Computerised information Innovative property Copyrights, patents, trademarks, designs Economic competencies T M 4

What is knowledge-based capital (KBC)? (brand equity, firm-specific human capital, business networks, organisational know-how that increases enterprise efficiency, etc.) Computerised information Innovative property Economic competencies 5

Investment in KBC is growing in importance Business investment in KBC and tangible assets in the United States (% GDP, 1972-2011) 18% 16% Investment in KBC Investment (% of adjusted GDP) 14% 12% 10% 8% Investment in tangibles 6% 4% 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 6

...and growing in importance elsewhere too.. Australia, France, Japan: Investment in KBC as a percentage of GDP (1981-2010) KBC investment as a percentage of value added 16% 14% 12% 10% 8% 6% 4% 2% 0% 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Australia France Japan

KBC accounts for near to or over half of all business investment in several countries Business investment in KBC and tangible assets (% adjusted GDP, 2010) 35% 30% 25% 20% 15% 10% 5% 0% Tangible capital Computerised information Innovative Property Economic Competencies Source: OECD calculations based on INTAN-Invest, Eurostat and multiple national sources. 8

35% 30% KBC accounts for near to or over half of all business investment in several countries But big differences exist across countries with implications for innovation, advanced manufacturing and trade. Business investment in KBC and tangible assets (% adjusted GDP, 2010) 25% 20% 15% 10% 5% 0% Tangible capital Computerised information Innovative Property Economic Competencies Source: OECD calculations based on INTAN-Invest, Eurostat and multiple national sources. 9

35% 30% KBC accounts for near to or over half of all business investment in several countries But big differences exist across countries with implications for innovation, advanced manufacturing and trade. Business investment in KBC and tangible assets (% adjusted GDP, 2010) 25% 20% 15% 10% 5% Our clothes are Italian, French and German, so the profits are all leaving China We need to create brands, and fast. SG, China Industrial Overseas Development and Planning Assoc. 0% Tangible capital Computerised information Innovative Property Economic Competencies Source: OECD calculations based on INTAN-Invest, Eurostat and multiple national sources. 10

Percentage point change in investment intensity 2.0 1.0 0.0-1.0-2.0-3.0-4.0-5.0-6.0 KBC relatively resilient during the crisis (change by type of business investment, 2008-2010, % points of value added) KBC intensity Tangible intensity Source: Source: OECD National Accounts Main Aggregates, INTAN-Invest, Eurostat and multiple national sources. 11

And the value of many companies is largely KBC At the start of 2009, physical assets accounted for only about 5% of Google s worth. Nestle s value (2011) = CHF 186 bn ********* KBC = 87% Tangible assets = 13% Microsoft: physical assets about 4% of total assets (2006).

KBC positively associated with GDP per capita (2000-10) KBC Investment (% of value added) 14% 12% 10% 8% 6% 4% Portugal Greece Sweden United Kingdom Japan* France Denmark Belgium Finland Netherlands Italy Spain Germany Austria Australia Ireland United States 2% 10000 15000 20000 25000 30000 35000 40000 45000 50000 GDP per capita (PPP$) Source: Source: OECD National Accounts Main Aggregates, INTAN-Invest, Eurostat and multiple national sources. 13

And KBC has spillover effects (selected OECD countries, 1995-2007) MFP growth (% change) MFP growth (% change) 3.0 2.5 2.0 SVN IRL FIN 3.0 2.5 2.0 FIN IRL SVN 1.5 1.0 0.5 DEU CZE AUT NLD BEL FRA GBR SWE USA 1.5 1.0 0.5 AUT NLD BEL FRA GBR USA DEU SWE CZE 0.0-0.5-1.0 DNK ITA ESP Correlation coefficient: 0.46* 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 KBC deepening contribution 0.0-0.5-1.0 DNK ITA ESP Correlation coefficient: 0.21 0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 Tangible capital deepening contribution Source: Corrado et al (2012) 14

Many products becoming more knowledgeintensive Chevrolet Volt has 10,000,000 lines of code. Automotive manufacturers view leadership in control software as vital

KBC relevant to a wide array of policy issues Tax Personal data Competition Corporate reporting Knowledge- Based Capital Intellectual property rights Skills Measurement Global value chains

Selected Policy Implications Innovation: Adopt an enlarged concept of innovation beyond the view in which R&D is preeminent. Data, new business processes and design also drive innovation and may be affected by specific barriers and policies. A renewed emphasis on programmes such as technical extension services that aid the diffusion of KBC to firms? Redesign of some long-standing innovation programmes - a move from STEM to STEAM (in innovation vouchers, know-how funds and technical extension services).

Selected Policy Implications Innovation: Adopt an enlarged concept of innovation beyond the view in which R&D is preeminent. Entrepreneurship and business development: Countries that invest more in KBC are more effective in reallocating resources to innovative firms. As a share of GDP, the USA and Sweden invest about twice as much in KBC as Italy and Spain and patenting firms in the USA and Sweden can attract four times as much capital as firms in Italy and Spain.

Selected Policy Implications Innovation: Adopt an enlarged concept of innovation beyond the view in which R&D is preeminent. Entrepreneurship and business development: Countries that invest more in KBC are more effective in reallocating resources to innovative firms. As a share of GDP, the USA and Sweden invest about twice as much in KBC as Italy and Spain and patenting firms in the USA and Sweden can attract four times as much capital as firms in Italy and Spain. -Make it easy for firms to experiment with growth opportunities. -Countries with more stringent regulations in product and labour markets invest less in KBC. -Need well-functioning systems of debt and early-stage equity finance : Investment in KBC positively correlated with debtor-friendly bankruptcy codes and the size of the VC industry.

% Big differences in access to risk capital (VC investment, 2012, % GDP). Early stage Later stage Breakdown not available 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 Source: OECD Science, Technology and Industry Scoreboard 2013

Selected Policy Implications Intellectual Property Rights (IPR): An increasingly important framework condition. Aspects of IPR systems have not kept up with technological change. -Are copyright laws best suited to a world of paper and pencil? Might they constitute a drag on the digital economy? -Are aspects of some patent systems retarding innovation? -Evidence of declining patent quality over the last decade (i.e. the accuracy of the patent claim and whether patents reflect genuinely novel innovations).

Selected Policy Implications Intellectual Property Rights (IPR): An increasingly important framework condition. Aspects of IPR systems have not kept up with technological change. Tax policy: Overall tax relief for R&D by multi-national enterprises (MNEs) could be greater than governments foresaw when R&D tax incentives were designed. Potential annual revenue cost from income shifting by US-based MNEs may be as high as USD 60 billion, with possibly half of this founded due to aggressive on KBC, transfer particularly pricing in the of KBC-related digital economy, transactions. where: never before have leading firms grown so large so quickly, and the nature of competition may differ from other sectors. Competition Policy: Faces new challenges in industries

Selected Policy Implications Measurement: Governments should do more to properly measure investments in KBC and agree common measurement guidelines.

Selected Policy Implications Measurement: Governments should do more to properly measure investments in KBC and agree common measurement guidelines. 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 16, 2011,

Selected Policy Implications Measurement: Governments should do more to properly measure investments in KBC and agree common measurement guidelines. Creating economic value from data: Data has become a new input to production. Global data creation projected to grow by 40% a year, compared with 5% yearly growth in worldwide IT expenditure. Big data: things you can see at a large scale that you cannot see at a small scale. More isn t just more, more is different Chris Andersen.

Selected Policy Implications Measurement: Governments should do more to properly measure investments in KBC and agree common measurement guidelines. Creating economic value from data: -In the US, firms that base significant decisions on data analytics have l output and productivity 5-6% higher than would be expected given thei investments and use of information technology. -Large public sector benefits.

Selected Policy Implications Measurement: Governments should do more to properly measure investments in KBC and agree common measurement guidelines. Creating economic value from data: -In the US, firms that base significant decisions on data analytics have levels of and productivity 5-6% higher than would be expected given their other investmen use of information technology. Not clear what optimal policy is yet: but many governments could do more in the fields of privacy protection, open data access, ICT infrastructure and skills. -Global data creation is projected to grow by 40% a year, compared with 5% growth in worldwide IT expenditure. -Large public sector benefits.

Selected Policy Implications Measurement: Governments should do more to properly measure investments in KBC and agree common measurement guidelines. Creating economic value from data: -In the US, firms that base significant decisions on data analytics have levels of and productivity 5-6% higher than would be expected given their other investmen use of information technology. Not clear what optimal policy is yet: but many governments could do more in the fields of privacy protection, open data access, ICT infrastructure and skills. -Global data creation is projected to grow by 40% a year, compared with 5% growth in worldwide IT expenditure. McKinsey Global Institute, May 2011, estimates US to lack 140-190,000 people -Large with public analytical sector expertise benefits. and 1.5 million managers with skills to make decisions based on big data.

Selected Policy Implications Education and training: Growing business investment in KBC amplifies the importance of getting human capital policies right. And the rise of KBC has profound implications for employment and for earnings inequality.

Numeracy Proficiency Among Adults Percentage of 16-65 year-olds scoring at each proficiency level in numeracy Source: OECD Survey of Adult Skills, 2013

Problem-solving proficiency among younger and older adults Percentage of adults aged 16-24 and 55-65 scoring at Level 2 or 3 in problem solving in Level 2 Level 3 16-24 year-olds technology-rich environments Korea Finland Sweden Netherlands Flanders (Belgium) Norway Czech Republic Germany Canada Average Austria Australia Estonia Denmark Japan England/N. Ireland (UK) Slovak Republic Ireland Poland United States Level 2 Level 3 55-65 year-olds 80 Percent 60 40 20 0 0 20 40 60 80 Percent Source: OECD Survey of Adult Skills, 2013

Selected Policy Implications Competition Policy: Faces new challenges in industries founded on KBC, particularly in the digital economy, where: never before have leading firms grown so large so quickly, and the nature of competition may differ from other sectors. Corporate Reporting: Benefits could be had from better corporate disclosure of investments in KBC.

Supporting Investment in Knowledge Capital, Growth and Innovation http://oe.cd/kbc