Getting a grip on intangibles

One of the main goals of the EU's 2020 Strategy is to achieve ‘smart’ growth, generally understood to mean through innovation. But what exactly constitutes innovation in a contemporary economic sense? How do you measure it? Is it possible to compare innovation levels in different countries? So far, economists have had no standard method for measuring innovation. But now a group of European researchers are providing some welcome help. The COINVEST research project has spent the past three years getting a grip on how intangible investments contribute to innovation, competitiveness, growth and productivity in Europe. The project's findings are helping to reshape our understanding of intangible assets and influencing important economic indices.

When COINVEST was launched in early 2008, many intangible investments were either not measured or treated as an intermediate input into production. Some ‘knowledge investments’, such as software, were factored into economic indicators like GDP, but most were assumed to produce no durable assets for firms or economies. Investment in research and development (R&D), for example, was considered merely as an expense. So were other knowledge-related outlays such as investment in human capital (training), reputational capital (branding) and organisational capital. Classifying those investments as day-to-day expenses, however, seems increasingly out of step with the realities of a knowledge-based economy.

Jonathan Haskel, Imperial College, London, who coordinated the COINVEST research project, notes that the drivers of growth and innovation have changed radically since the early twentieth century. While tangible capital (machines) drove development in manufacturing-based economies, contemporary service-based economies are driven by intangible capital (knowledge). Professor Haskel points to the ubiquitous iPhone as emblematic of how intangible capital is driving growth today. Design, software, marketing and business organisation - along with classic R&D - have contributed significantly to the iPhone's phenomenal success. Current economic developments suggest that Europe's economic future could hinge on exactly these kinds of investments.

The COINVEST research consortium set out to measure intangible assets in the market sector for six EU Member States (Portugal, Sweden, France, Germany, the UK and Bulgaria). Taking some industry-level data and integrating it with national accounts, the project calculated the effects of intangible investment on productivity and growth, backing up its calculations with micro level studies. Their results have been getting a lot of attention. COINVEST has earned high-level recognition for its methodological achievements and produced some fascinating comparative findings. For example, the research has identified significant differences in the ratio of intangible to tangible investments in a range of key economies – see Figure 1.

Figure 1 - Intangible/tangible investment in COINVEST and selected other countries

(% of market sector GDP, 2006)

COINVEST has also revealed major differences between the various kinds of intangible assets that countries invest in as a share of GDP. Germany and Sweden, for instance, tend to invest heavily in R&D, while the US and the UK focus more on ‘competencies’ such as brand equity, firm training and organisational capital. The researchers have used their methodology to shed new light on critical areas of economic activity, identifying intangible capital's importance as a component of labour productivity and providing sector-specific breakdowns of intangible investment as a share of value added.

The researchers acknowledge that more work needs to be done to enhance the comparability and robustness of their findings, for instance by, among others things, comparing their findings with those resulting from their sister project, INNODRIVE1. But work done under COINVEST is already having an impact in policy making circles. Professor Haskel notes that the OECD is using some of the project's data and the data and approach are being used as the organising framework for their innovation strategy. They are also pushing statistical agencies to use the project’s innovation survey design. COINVEST indicators now form the centrepiece of the UK's revised innovation index. And, at EU level, the consortium's approach has been adopted by a high-level committee on the measurement of innovation in Europe.

1 See: http://www.innodrive.org/

COINVEST - Competitiveness, innovation and intangible investment in Europe (duration: 1/4/2008 – 31/3/2010). FP7 Socio-economic Sciences and Humanities, Activity 1 “Growth, employment and competitiveness in a knowledge society", Research area 1.1 "Changing role of knowledge throughout the economy". Collaborative project (small and medium scale focused research project).

See: http://www.coinvest.org.uk/

 

Contact: Jonathan Haskel, j.haskel@imperial.ac.uk