Broad-based intangibles as generators of growth in Europe

ABSTRACT

This paper analyzes broad performance-based measures of intangibles in European Union countries to find new sources of growth and shows that intangible capital (IC)-driven growth was halted in European industries during the 2008–2013 financial crisis period. Much of this IC, such as purchased organizational, research and development (R&D) and information and communication technology capital, is unaccounted for in systems of national accounts, so that total IC investment is 29.6% of value added, with R&D having the lowest gross domestic product share at 5.0%. On average, deteriorating IC growth has decreased labor productivity by −2.9% annually. Policies fostering multifactor productivity growth have been strongly biased and have ignored the loss of those skills necessary for long-term growth. During 2008–2013, innovation thus failed to compensate for Europe’s dwindling fixed-capital-intensive manufacturing and job losses, but broad-based IC offers a roadmap for recovery by relying on an increasing role for IC-producing services.

KEYWORDS:

• Intangible capital
• R&D
• European competitiveness
• productivity

JEL CLASSIFICATION:

• O32
• O30
• J30
• J42
• M12

Acknowledgements

I thank Cecilia Jona-Lasinio for encouraging the use of Eurostat data, Olavi Lehtoranta for consultancy services related to the measurement of intangibles and two anonymous referees for their valuable comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Organizational innovation is defined as the implementation of a new organizational method in the firm's business practices, workplace organization or external relations. Marketing innovation is defined as the implementation of a new marketing method that involves significant changes in product design or packaging, product placement, product promotion or pricing.

2. For a survey of the literature on ICT investments on the firm, industry and country levels, see Cardona, Kretschmer, and Strobel (2013).

3. See EU Framework Research Projects such as INNODRIVE, COINVEST, INDICER and IAREG or the research initiated by the Community Innovation Survey (CIS).

4. In Piekkola (2016a), OC is determined from management work that aims to establish efficient organizational structures, strategies, employee compensation systems, and working practices within firms. Moreover, marketing and sales personnel are included to create and strengthen firm brands and customer relationships.

5. The regions include (i) Northern Europe (the Nordic countries (Denmark, Finland, Norway, and Sweden), the Baltic countries (Estonia, Latvia, and Lithuania), the Netherlands, and the UK); (ii) Central Europe (Austria, Belgium, the Czech Republic, France, Germany, and Slovakia); and (iii) Southern Europe (Greece, Hungary, Italy, Romania, Slovenia, and Spain).

6. Recent estimates of depreciation from a survey by Awano et al. (2010) indicate that the R&D depreciation rate is closer to 15% than to the 20% figure used in CHS. The higher depreciation rate for OC in services is used because the life cycle of an organizational investment is shorter in services (2.6–4 years) than in production (2.9–5.4 years), because branding and reputational efforts are higher in services and are relatively short-lived.

7. It must be acknowledged that – and therefore the factor multiplier A^IC – is also dependent on specification and measurement errors.

8. In some countries, IC figures are extreme (such as close to zero) and in factor multipliers are limited to between the 90th and 10th deciles of overall figures.

9. Additional robustness checks could have included controlling for the strictness of employment protection legislation on temporary and permanent contracts weighted by the sectoral intensity of the use of these types of workers, as devised by Bassanini, Nunziata, and Venn (2009).

10. The output elasticities would be higher 18.6% for OC, 14.0% for ICT and lower 7.4% for R&D if the dependent variable value added would also include the user cost of unaccounted ICs.

11. In comparing columns 2 and 3, the magnitude of output elasticity is fairly similar, although the significance appears higher in column 2 without the liquidity controls.

12. Equation (8) is used to derive investment if the user cost of capital equals investment in balanced growth. User cost is recalculated based on the level of performance-based ICs.

Additional information

Funding

This work was supported by the INNOMITTA II project financed by the Finnish Funding Agency for Innovation (Tekes).