Investments in Intangible Assets and Australia's Productivity Growth: Sectoral Estimates
Staff working paper
This paper by Paula Barnes was released on 14 October 2010.
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- Key points
- In addition to tangible assets, such as plant and equipment, intangible assets, such as knowledge, firm-specific skills, and better ways of doing business, are important for economic growth.
- Most spending on intangibles is treated as a current expense in the national accounts rather than as an investment. This understates total investment and value added (production less intermediate inputs) in any period. The effect on measured productivity growth will vary by industry sector.
- Australian investment in intangibles in 2005-06 was estimated to be almost 65 per cent of tangible investment in the manufacturing sector, but only 50 per cent of tangible investment in the service sector.
- Manufacturing invested almost $14 billion in intangible assets, while the service sector invested $35 billion.
- By not fully capitalising intangibles, value added was understated by almost 13 per cent in manufacturing, and by almost 8 per cent in services.
- Since 1993-94 average annual growth in total intangible investment in manufacturing has been somewhat less than in services; with relatively high growth rates in organisational capital (strategic planning, adaptation and reorganisation) and computerised information in both sectors.
- Manufacturing invests a larger share of its total intangible investment in innovative property than does the service sector, as a result of the concentration of 'traditional' R&D in manufacturing. The service sector has a larger share in computerised information, while economic competencies account for around 50 per cent in each sector.
- Treating intangibles as investment increases both the capital stock and capital income. Hence the average rate of return on all capital can rise or fall. In practice, in each sector, capitalising the new intangibles increases the rate of return in about half the years and decreases it in the other half. Unmeasured intangibles do not appear to be the main factor behind rate of return differences between these sectors.
- Treating investment in intangible assets as capital, raises measured final output and measured capital inputs and alters the capital-labour ratio. Hence the effect on measured multifactor productivity (MFP) growth is complex. While adjusting for the 'new' intangibles does not have a large direct effect on conventionally-measured MFP growth for the Australian market sector as a whole, this conceals considerable sectoral differences.
- In the 1998-99 to 2003-04 productivity cycle, the contribution of these intangibles to conventionally-measured MFP growth was -0.03 of a percentage point in manufacturing but 0.15 of a percentage point in services.
- In the period of the market sector productivity surge (1993-94 to 1998-99), the contribution was 0.09 of a percentage point in manufacturing but only 0.04 of a percentage point in services.
- However, capitalising intangibles did not change the pattern of MFP growth between cycles in either sector in Australia — in contrast with Japan, where it changed in both sectors. Prior to capitalising intangibles, Australian service sector MFP growth in the early 2000s was higher than the Japanese rate, but after capitalising intangibles the rate was lower in Australia than in Japan.
Cover, Copyright, Contents, Preface, Abbreviations and explanations
- Overview - including key points
- Chapter 1 Introduction
1.1 Definition and classification of intangibles
1.2 Objectives and scope of the paper
1.3 The rest of the paper
- Chapter 2 Measures of intangible assets
2.1 Measurement of intangibles
2.2 Current intangible investment
2.3 Growth in intangible investment
2.4 Intangible capital stocks
2.5 Intangible capital services
2.6 Effect on the rate of return on capital
- Chapter 3 Sectoral growth accounting results
3.2 Growth accounting components
3.3 Growth accounting results
- Chapter 4 International comparisons
4.1 Intangible investment as a share of output
4.2 Growth accounting results compared
- Appendix A Data sources and methodology for sectoral estimates of intangibles
- Appendix B Growth accounting model with intangibles
- Appendix C Sensitivity testing