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Annex 3-2 Identifying Intangible Assets A widely used framework for studying intangible investment is summarized in Annex Table 3-2- 1. Column 1 of the table lists the types of spending that are included as investments under this framework. This framework is used to study the productivity and growth impacts of innovation, typically in conjunction with the empirical neoclassical theoryâbased âgrowth-accountingâ approach to measuring and studying the drivers of economic growth, including in macro-policy and international comparative settings. 45 In the United States, business intangible investment overtook business tangible investment in the 1990s, suggesting that intangibles have been a driver of U.S. economic growth since that time (see Figure 3-2-1). By this metric, major economies in Asia (China, Japan) and most European economies are behind the U.S. economy. 46 ANNEX TABLE 3-2-1 Categories and Types of Intangible Investment Category Types of Intangible Investment Examples of Intangible Assets Computerized â¢ Software â¢ Digital capabilities, tools Information â¢ Databases â¢ Trade secrets, contracts Innovative Property â¢ Research and development (R&D) â¢ Patents â¢ Mineral exploration â¢ Mineral rights â¢ Entertainment, artistic, and literary originals â¢ Licenses (E&AO) â¢ Copyrights â¢ Other new product development (e.g., design â¢ Attributed designs originals, new financial products) â¢ Trademarks Economic â¢ Employee training â¢ Firm-specific human capital Competencies â¢ Branding â¢ Brand equity â¢ Marketing research â¢ Market insights, customer lists â¢ Organizational structure/business process â¢ Operating models, processes and systems investment SOURCES: Corrado and Hulten, 2010, based on Corrado et al., 2005. 45 See, e.g., Corrado et al. (2013, 2018); OECD (2013); and Thum-Thysen et al. (2017) for the European Commission, and discussions in the 2006, 2007, and 2008 issues of the Economic Report of the President of the United States. Note that the framework is aligned with national accounts estimates consistent with the System of National Accounts 2008 (European Commission et al., 2009) to the extent that gross fixed capital formation includes computer software (which is believed to capture private databases), R&D, mineral exploration, and entertainment, artistic, and literary originals (i.e., the first five items listed in column 2 of Table 1). 46 The comparison is based on updated estimates of intangible investment in market sector industries for the European Union, Japan, and the United States as reported in Corrado et al. (2013) and OECD (2013); estimates for China cover all sectors of its economy (Hulten and Hao, 2012). For further information see www.intaninvest.net. 98 Prepublication Copy
Frameworks for Measuring the Value of the U.S. Bioeconomy Nonresidential business investment as a 18% 16% Sector gross value added percent of business 14% 12% 10% 8% 6% 1977 1982 1987 1992 1997 2002 2007 2012 2017 Intangible investment rate Tangible investment rate ANNEX FIGURE 3-2-1 U.S. investment rates, 1977â2017. SOURCE: Unpublished update to Corrado and Hulten (2010) at www.intaninvest.net. There are, of course, other frameworks for studying innovation and growth (e.g., endogenous growth theory and Schumpeterian growth theory). 47 These frameworks and the intangible capital approach rooted in neoclassical theory are, in fact, closely related and not mutually exclusive. Endogenous growth theory focuses on the impacts of scientific knowledge and suggests that the long-run growth rate of an economy reflects its propensity to invest in new ideas. Although the notion that taxes, research subsidies, researcher supply, and intellectual property (IP) rights can influence economic growth via their impacts on investments in R&D predates endogenous growth theory, the emergence of that theory firmly grounded these tools as supporting long-run macroeconomic growth. Schumpeterian approaches emphasize that innovation is associated with âcreative destruction,â in which the profit stream of a previous innovator is destroyed by the creation of a new innovator; this phenomenon suggests that policies aiming to balance IP protection against the profit-driven benefits of competition are warranted (and that there is much going on behind the macro-oriented approaches). The intangible framework tracks specific investments and mechanisms that drive commercial innovations based on breakthroughs in science (or other novelties), emphasizing the context-driven aspects of growth dividends to specific investments in specific industries. VALUING INTANGIBLE ASSETS Intangible assets are commonly regarded as company assets that are not physical. 48 Knowledge creation underlies the value of intangible assets (i.e., the types of spending listed in column 2 of Table 3-2 produce knowledge of commercial [or public] value, examples of which are shown in column 3). As 47 Endogenous growth theory stems from the contribution of Romer (1990); Schumpeterian theory was set out in a formal economic model by Aghion and Howitt (1992). 48 This is the view in financial accounting under U.S. generally accepted accounting principles (GAAP); the definition there is simply âassets (not including financial assets) that lack physical substance.â Prepublication Copy 99
Safeguarding the Bioeconomy indicated in the main chapter text, replacement cost estimates are developed from time-series data on real investment using the âperpetual inventory method.â That method cumulates real investments, period by period, after subtracting an estimate of economic depreciation during the period (the loss in the assetâs value due to aging, holding time used in production constant). This calculation produces an estimate of the volume of the stock; the value of the stock at replacement cost is obtained by multiplying the volume estimate by todayâs price. 49 Note that in companion wealth accounts, the national accountsâ estimates of corporate assets at replacement cost are reconciled with the valuation of corporations in capital markets, connecting national accounting valuations to market valuations. 50 Some of the earliest studies of intangibles were motivated by the observation that firmsâ market valuations were systematically higher than both the value of the capital reported on corporate balance sheets and the tally of corporate assets at replacement cost in national accounts (e.g., Hall, 2001; Lev, 2001). The replacement cost method for obtaining estimates of intangible assets depends on identifying consistent time series on investment in each asset and estimating a depreciation rate for the asset. Purchases of assets are relatively easy to track because a market transaction takes place; however, many intangible assets are developed within organizations. Estimates of this type of investmentâcalled own- account investmentâare based on the cost of the internal operation used to produce the asset. Regular surveys reveal the costs of the conduct of R&D within organizations. National accounts and the empirical literature on measuring intangibles (e.g., Corrado et al., 2009, 2013) exploit data on employee compensation by occupation (e.g., software engineers) to develop estimates of own-account investment in other intangible assets for industries or subsectors of the economy. 51 Regarding depreciation rates, the notion that an assetâs value will decline over time as a result of wear and tear or technological obsolescence is easy to understand, but estimating the rate at which this process takes place for a specific asset or class of assets is highly data demanding, and such estimates are few in number. Studies that consider estimation of depreciation for intangibles have shown that rates of depreciation for these assets vary by country, by industry, by firms within an industry, and over time. 52 And studies comparing rates of depreciation by asset type generally have found that R&D, design, and artistic assets are relatively long-lasting compared with software, organizational capital, and other economic competencies (training and brand). In the context of a depreciation rate for an intangible asset, the idea is to capture the expected period of time for which the investment will yield returns. Based on a review of the literature and the conduct of new work (Li and Hall, 2019), the Bureau of Economic Analysis (BEA) concluded that it would hold the depreciation rate for business R&D for the national accounts fixed over time but allow it to vary by industry. On this basis, the rate of depreciation is estimated to be relatively rapid for R&D conducted by the computer equipment, computer system design, instruments, and software industries (22 to 40 percent per year). For pharmaceutical R&D, BEA uses a depreciation rate of 10 percent per year. For the scientific R&D industry (which includes a large share of biotech firms), BEA uses an R&D depreciation rate of 16 percent. A lower estimated rate of R&D depreciation in one industry compared with another is generally thought to be due to either a slower pace of technological change or a lesser degree of market competition (see Li and Hall  for further discussion). 49 Note that a simple accumulation and correction for economic depreciation assumes that there no natural disasters or noneconomic events that diminish the volume of net stocks; in practice, these âother changes in volumeâ are accounted for when such events destruct capital (e.g., a hurricane). Note also that replacement cost differs from both the historical cost approach used in U.S. GAAP-consistent company financial accounts and the mark-to-market, or fair value, method that the International Financial Reporting Standards (IFRS) allows. 50 âCompanion wealth accountsâ refers to the Integrated Macroeconomic Accounts (IMAs) jointly produced by the Bureau of Economic Analysis and the Federal Reserve Board. The IMAs present a sequence of accounts that relate income, saving, investment in real and financial assets, and asset revaluations to changes in wealth. 51 The wage costs are converted to estimates of total costs based on statistics for market production of similar activities/products. 52 See the review and summary in Li and Hall (2018) (especially Table 1). 100 Prepublication Copy
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