INTANGIBLE ASSETS

Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth

Board on Science, Technology, and Economic Policy Policy and Global Affairs

Committee on National Statistics

Division of Behavioral and Social Sciences and Education

Christopher Mackie, Rapporteur

NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES

THE NATIONAL ACADEMIES PRESS

Washington, D.C.
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INTANGIBLE ASSETS Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth A WORKSHOP SUMMA RY Board on Science, Technology, and Economic Policy Policy and Global Affairs Committee on National Statistics Division of Behavioral and Social Sciences and Education Christopher Mackie, Rapporteur

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THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. Support of the work of the Committee on National Statistics is provided by a consortium of federal agencies through a grant from the National Science Foundation (award number SES-0453930). Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number-13: 978-0-309-14414-8 International Standard Book Number-10: 0-309-14414-0 Additional copies of this report are available from National Academies Press, 500 Fifth Street, N.W., Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu. Copyright 2009 by the National Academy of Sciences. All rights reserved. Printed in the United States of America Cover credit: Images from ©iStockphoto/alengo. The National Academies are grateful to the Bureau of Economic Analysis of the U.S. Department of Commerce and the Science Resources Statistics Division of the National Science Foundation for their support of this activity. Suggested citation: National Research Council. (2009). Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth: Summary of a Workshop. Board on Science, Technology, and Economic Policy, Policy and Global Affairs, and Committee on National Statistics, Division of Behavioral and Social Sci - ences and Education. Christopher Mackie, Rapporteur. Washington, DC: The National Academies Press.

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The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Charles M. Vest is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examina - tion of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering com- munities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M. Vest are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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COMMITTEE FOR A CONFERENCE ON INTANGIBLE INVESTMENTS Kenneth S. Flamm (Chair), Lyndon B. Johnson School of Public Affairs, University of Texas at Austin Carol a. Corrado, Conference Board, New York martin Fleming, IBM Corporation, Armonk, NY Kenan Jarboe, Athena Alliance, Washington, DC riChard manning, Pfizer Inc., New York F.m. SCherer, John F. Kennedy School of Government, Harvard University Katherine SChipper, Fuqua School of Business, Duke University v

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BOARD ON SCIENCE, TECHNOLOGY, AND ECONOMIC POLICY edward e. penhoet (Chair), Alta Partners, San Francisco lewiS w. Coleman, DreamWorks Animation, Glendale, CA Kenneth S. Flamm, Lyndon B. Johnson School of Public Affairs, University of Texas at Austin ralph e. gomory, Stern School of Business, New York University, New York mary l. good, Donaghey College of Information Science and Systems Engineering, University of Arkansas at Little Rock amory “amo” houghton, Jr., Former Member of Congress, Cohasset, MA david t. morgenthaler, Morgenthaler Ventures, Cleveland, OH JoSeph p. newhouSe, Division of Health Policy Research and Education, Harvard University arati prabhaKar, U.S. Venture Partners, Menlo Park, CA william J. raduChel, Opera Software ASA, Great Falls, VA JaCK w. SChuler, Crabtree Partners, Chicago, IL alan wm. wolFF, Dewey & LeBoeuf, LLP, Washington, DC Stephen a. merrill, Executive Director vi

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COMMITTEE ON NATIONAL STATISTICS william F. eddy (Chair), Department of Statistics, Carnegie Mellon University Katharine g. abraham, Department of Economics and Joint Program in Survey Methodology, University of Maryland aliCia Carriquiry, Department of Statistics, Iowa State University william dumouChel, Phase Forward, Inc., Waltham, MA John C. haltiwanger, Department of Economics, University of Maryland v. JoSeph hotz, Department of Economics, Duke University Karen KaFadar, Department of Statistics, Indiana University, Bloomington douglaS S. maSSey, Department of Sociology, Princeton University Sally morton, Statistics and Epidemiology, RTI International, Research Triangle Park, NC JoSeph newhouSe, Division of Health Policy Research and Education, Harvard University Samuel h. preSton, Population Studies Center, University of Pennsylvania hal Stern, Department of Statistics, University of California, Irvine roger tourangeau, Joint Program in Survey Methodology, University of Maryland, and Survey Research Center, University of Michigan alan zaSlavSKy, Department of Health Care Policy, Harvard Medical School ConStanCe F. Citro, Director vii

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Contents Preface xi 1. Overview 1 1.1. Macroeconomic Measurement Implications, 3 1.2. The Role of Intangibles in the Firm and in Financial Markets, 6 1.3. Government Measurement, 7 1.4. Government Policy, 8 2. Intangible Assets in a Knowledge Economy 10 2.1. Transition from the Industrial to the Knowledge Economy, 10 2.2. Defining Intangibles for Measurement Purposes, 14 3. Macroeconomic Implications of Intangible Assets 21 3.1. Empirical Implications of Capitalizing Intangibles in U.S. Economic Accounts, 21 3.2. Evidence from the United Kingdom, 25 3.3. Measuring Intangible Investment in Japan, 31 4. Intangibles in the Firm and in Financial Markets 39 4.1. Information Deficiencies Regarding Intangibles— Consequences and Remedies, 39 4.2. Human Capital and Skill Investment, 46 4.3. Intellectual Property and Capital, 49 4.4. Insuring the Value of Intangibles, 53 ix

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x CONTENTS 4.5. Reporting Intangible Assets to Enhance Their Contribution to Corporate Value and Economic Growth, 56 5. Intangibles and Government Measurement 60 5.1. The Role of Government Statistics, 61 5.2. The U.S. Research and Development Satellite Account, 67 5.3. R&D and Related Data Collections of the National Science Foundation, 73 5.4. Advisory Committee on Measuring Innovation in the 21st Century, 81 6. Intangibles and Government Policy 85 6.1. Intangibles and Intellectual Capital from a Community Perspective, 85 6.2. Intellectual Assets and Value Creation, 90 6.3. U.S. Policies for Fostering Intangibles, 94 References 100 Appendix: Workshop Agenda 103

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Preface I n 2004, the U.S. Commerce Department’s Bureau of Economic Analysis (BEA), the agency responsible for the National Income and Product Accounts (NIPAs), began an effort to convert the NIPA treatment of research and development (R&D) expenditures from an annual business expense to an invest - ment. The latter allows future returns, which contribute substantially to economic growth, to be considered. The first step, supported by the National Science Foun - dation, was to develop a Research and Development Satellite Account that would, with further refinements, eventually be incorporated into the NIPAs. With the completion of the first R&D satellite account in 2006, the lead BEA economist on the project, Sumiye Okubo, approached the National Academies’ Science, Technology, and Economic Policy (STEP) Board for assistance in organizing a workshop to evaluate the satellite account’s progress, and the National Academies agreed. At roughly the same time, an influential study by Federal Reserve Board staff economists Carol Corrado and Daniel Sichel and University of Maryland econo - mist Charles Hulten (CSH)1 estimated the nation’s investment in all intangibles (not limited just to scientific R&D) to exceed total investment in tangible assets (plant and equipment) and to account for a large share of economic growth. The CSH analysis included other categories such as expenditures on software, brand identification, employee training, and “nonscientific” R&D. The study was later closely replicated by analysts studying Japan and the United Kingdom, with similar findings. 1 Corrado, Hulten, and Sichel (2006a). Intangible Capital and Economic Growth. Working paper as part of the Finance and Economics Discussion Series, Divisions of Research and Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC, April. xi

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xii pREFACE Briefed on the CSH study, Senator Jeff Bingaman (D-NM), chairman of the Senate Energy Committee and a member of the Senate Finance Committee, encouraged BEA and STEP to broaden the meeting’s agenda to address intangible investments beyond R&D. The STEP Board, in consultation with the National Academies’ Committee on National Statistics (CNSTAT), readily agreed. A steering committee was formed to plan the workshop, composed of Carol Corrado, now with the Conference Board; Martin Fleming, IBM; Kenan Jarboe, Athena Alliance; Richard Manning, Pfizer; F.M. (Mike) Scherer, Kennedy School of Government, Harvard University; Katherine Schipper, Fuqua School of Busi - ness, Duke University; and myself as chair. Stephen Merrill, STEP executive director, assumed the lead staff role, in consultation with Connie Citro, CNSTAT director. In addition to adopting a broad conception of intangible investments, the steering committee and staff adjusted the scope of the meeting agenda to include topics beyond measurement and accounting issues, which would promote discus- sion in several other directions: 1. To compare the national studies of intangible assets to identify geographi- cal differences in the composition and importance of intangible assets. 2. To probe corporate views of and practices with respect to intangibles, especially the development of human capital. 3. To examine and estimate the magnitude of the federal government’s intan- gible investments and how they can be better exploited. 4. To draw on U.S. experience and multinational, national, regional initia- tives elsewhere in the world to identify a range of public policy instru - ments that could promote private sector investment in, and better utiliza- tion of, intangible assets. Once the workshop was scheduled, four of the steering committee members— Corrado, Flamm, Fleming, and Jarboe—assumed roles as speakers or moderators; three other members—Manning, Scherer, and Schipper—were unfortunately unable to attend. However, all were helpful in identifying participants, framing the questions, and attracting an international contingent of participants to the conference. We are grateful to them and to Stephen Merrill for assembling an outstanding program and an engaged audience. The cooperation of BEA staff and Jonathan Epstein of Senator Bingaman’s staff was indispensable; and we are also indebted to Chris Mackie of the CNSTAT staff for preparing this summary of the proceedings. This workshop summary was reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with pro - cedures approved by the Report Review Committee of the National Research Council (NRC). The purpose of this independent review is to provide candid and critical comments that assist the institution in making its report as sound as

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xiii pREFACE possible, and to ensure that the report meets institutional standards for objectiv - ity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. The panel thanks the following individuals for their review of this report: Martin Fleming, Corporate Strategy, IBM Corporation; Bronwyn H. Hall, Depart- ment of Economics, University of California, Berkeley; and E.J. Reedy, Entre - preneurship Division, Ewing Marion Kauffman Foundation. Although the reviewers listed above have provided many constructive com- ments and suggestions, they were not asked to endorse the conclusions or recom- mendations, nor did they see the final draft of the report before its release. The review of this report was overseen by Mark B. Myers, Senior Vice President for Corporate Research and Technology, Xerox Corporation (retired). Appointed by the NRC, he was responsible for making certain that the independent examina - tion of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of the report rests entirely with the author and the NRC. Kenneth S. Flamm, Chair Committee for a Conference on Intangible Investments

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