Industry and globalisation

Amsterdam 1999: OECD Work on Measuring Intangible Investment


There is a growing perception in the OECD Member countries that a substantial and increasing part of total investment in the business enterprise sector is directed towards intangible investments such as research and experimental development, training, organisational change, marketing and software. The lack of reliable statistical information on intangible investment makes it impossible to substantiate this phenomenon or to monitor its progress and assess its importance for competitiveness and growth of industries and national economies.

In consequence, there is a need for harmonised data on intangible investment for international comparisons of investment (both international comparisons of intangible investment per se, and comparisons between tangible and intangible investment as a whole) and to analyse the relation between them and indicators of economic performance, preferably by industry.

Intangible investment crosses over a number of different categories of policy interest, statistical responsibilities and expertise and sources of information, which makes it difficult to establish such data, particularly in a climate where there is little possibility of organising special surveys of industry and where in many cases one must make do with compiling data from existing sources. A second problem is that intangible investment activities are very closely linked and it is difficult to find a coherent way of distinguishing between them, identifying cause and effect, and arranging them in logical groups. A third question is how far the need to compare data for intangible investment with that for tangible investment requires the former to be forced into the statistical framework designed for the latter.

The intellectual origins of this type of analysis date back over 30 years. The two main contributions have been human capital theory and the theories of innovation and technical change. A specific theory of intellectual investment emerged, mainly in France, in the 1980s, and more recent work on the "knowledge-based" economy has further enriched the conceptual framework for measuring intangible investment.

The relationship between tangible investment and economic growth was seriously questioned in the light of economic performance after the second oil shock of 1979 and the economic restructuring that it propelled (Vickery and Wurzburg, 1992; see "Selected Bibliography" for references). The topic of intangible investment was reviewed during the preparation of the French Ninth Plan with the aim of setting up an analytical framework which would take into consideration company accounting, financial and legal limitations (Mangematin, 1994). This exercise gave rise not only to a paper (Commissariat Général du Plan, 1982) but to an enduring French interest in all aspects of intangible investment in both economic and company accounts.

This interest spread to other countries and the statistical working party of the Industry Committee (Working Party No. 9, WP9) discussed the topic and commissioned a paper from a French consultant (Kaplan, 1987) which was presented to the Industry Committee in 1987. It was the first effort to establish a general methodology for measuring intangible investment and to use it to make international comparisons. Though it was never officially published, it was extremely influential both in that it popularised the approach of using four "core components" of intangible investment (R&D, software, training and marketing) as proxies for full coverage and in that the results showed that over the period 1974 to 1984 intangible investment had grown more rapidly than Gross Fixed Capital Formation.

Study of the topic continued within the OECD in the context of the Technology Economy Programme (TEP) and a whole chapter of its final report (OECD, 1992a) dealt with the growth and management of intangible investment. This analysis had to draw on existing data, notably the Kaplan study and one of the conclusions of the TEP was that the OECD should work towards developing international standards and data.

In the meantime a number of countries, notably in the Nordic area and the United Kingdom, had joined France in setting out to collect data on intangible investment either via special surveys or by assembling statistics from existing sources. Their results were presented to the Voorburg Group on service statistics who were also working for the United Nations on preparing a model survey of computer services.

Intangible investment was discussed during the revision of the System of National Accounts (the SNA, see CEC et al., 1994) and also in the context of company accounts (for example at a Roundtable on Intangible Assets at OECD in 1991). In France, interest extended to the trade unions (CFDT, 1991). There were also developments in the methodologies for training statistics and for S&T data.

By 1992 the time was ripe to gain from the experience outlined above by bringing together experts from these different areas with analysts who had undertaken quantitative studies of intangible investment since 1987, to exchange ideas with a view to producing a set of international guidelines on the collection and interpretation of data on intangible investment.

A Workshop on the Measurement of Intangible Investment was held at OECD in December 1992, organised by the Directorate for Science Technology and Industry (DSTI) in co-operation with the Directorate for Education, Employment Labour and Social Affairs (DEELSA), the Directorate for Financial Fiscal and Enterprise Affairs (DAFFE), the Statistics Directorate (STD) and also Eurostat. Participants included experts on industrial statistics, on company accounts, on national accounts, on service statistics, on science and technology statistics and on training statistics, plus economists and representatives of industry. In all, 27 experts attended from 15 Member countries and the European Commission.

Two main papers were commissioned for the Workshop: one by Louis-Marc Ducharme (Statistics Canada) reviewing the intellectual origins of intangible investment and its coverage, and the other by Wim Vosselman (Netherlands Central Bureau of Statistics), providing a draft set of practical guidelines for collecting, comparing and issuing data making maximum use of existing sources. A major conceptual contribution was made by Professor Werner Clement (Austria). Six countries, Finland, France, the Netherlands, Norway, Sweden and the United Kingdom, contributed national studies. In all, 24 papers were circulated. Most of the remainder were either prepared as background reports by the Secretariat or carried forward from meetings of other groups, notably the SNA experts, the experts on training statistics (DEELSA) and the DAFFE group of accountants.

The Workshop concluded that the work ought to continue on three parallel tracks with rather different time schedules: improving the conceptual framework (medium term), establishing a manual of practical guidelines for data compilation and comparison using existing sources (short term), and working towards the development or revision of source surveys (medium to long term).

It was initially intended to prepare a set of practical guidelines for the measurement of intangible investment to be presented to the statistical working party of the Industry Committee (WP9) and other statistical bodies, and subsequently to the Industry Committee and other relevant Committees. This would have comprised the two papers commissioned for the Workshop combined and revised in the light of the discussions at the Workshop and subsequent written comments, supported by several annexes on individual topics. However, it was felt in some quarters that the Workshop had not taken into consideration all the relevant work in progress and that more work and co-ordination was needed across the wide range of intangibles before such guidelines could be issued.

Work continued on improving the data for the components of intangible investment, notably in the Group of National Experts on Science and Technology Indicators (revision of standards for R&D statistics, new standards for innovation surveys), the DEELSA work on training statistics, and the Group of National Accounts Experts (application of the revised SNA). The Working Group on Innovation and Technology Policy has further examined possible measures of key aspects of national innovation systems and the knowledge-based economy (KBE), with the Netherlands particularly active on linking intangible investment and the KBE.

In consequence, a number of papers on intangibles were presented at OECD conferences, including at the Conference on New S&T Indicators for a Knowledge-based Economy in 1996, and further papers on measuring and accounting for various aspects of intangibles and human resources were presented at a series of meetings devoted in whole or in part to the measurement of intangibles and human resources in 1996 (on Human Resource Accounting in Enterprises: Recent Practices and New Developments, Helsinki, Finland; and Accounting for Intangibles, Hull, Quebec) and 1997 (Industrial Competitiveness in the Knowledge-based Economy: The New Role of Governments, Stockholm, Sweden). The corresponding policy developments are examined in Chapter 11 of Technology, Productivity and Job Creation -- Best Policy Practices (OECD, 1998).

Thus, there has been continuing interest in intangibles following the 1992 Workshop, and this interest is now at a high level -- in government, the private sector and academic circles -- in numerous OECD countries, as well as in various directorates of the European Commission. The OECD has received many requests for the Workshop papers (which were out of print). It has been therefore decided to make the main papers from the Workshop available on the Internet to assist persons who are setting out to collect data on intangible investment. Some of the papers have been updated either by their authors or by the OECD Secretariat.

A number of more recent papers have been added, mainly to complete the coverage of methodologies for individual components. Though some tidying up has been done to prevent unnecessary repetition, the papers continue to diverge in some respects, notably on the precise coverage of intangible investment, as the views of the individual authors continue to differ as they did at the Workshop. The set has been completed with a number of relevant papers presented at the conference on New S&T Indicators for a Knowledge-based Economy held in June 1996 and other meetings held in 1996 and 1997 and listed above. A set of summaries and keywords and a consolidated bibliography have been prepared by the Netherlands Central Bureau of Statistics working as a consultant for the OECD Secretariat.

The first two papers deal with the conceptual framework for intangible investment. Paper 1 prepared originally by Ducharme gives a rapid overview of the literature concerned, concentrating on the theory of human resources and the theory of technology and innovation. It is far from exhaustive of all theoretical and empirical studies in this area and is intended more to provide a broad picture of the main approaches for the reader who is mainly interested in practical matters. Paper 2 , by Clement, Hammerer and Schwarz, gives a more extensive treatment of how economic theory can be adapted to give a conceptual framework for the analysis of intangible investment.

Moving from a complex conceptual framework to a set of practical standards for the development of indicators of intangible investment is not easy. The next two papers deal with the statistical framework for measuring intangible investment and more particularly for assembling data from existing sources. There is still debate about which of a number of possible components should be treated as intangible investments, although there is some consensus about the main topics to be included. Paper 3 reviews possible components of intangible investment in the light of a number of theoretical and practical criteria for their inclusion and concludes with a revised list of "core components". Prepared by Young since the Workshop, it replaces the corresponding section of Ducharme's original paper.

Paper 4 proposes some standard approaches for assembling data on intangible investment and treats the practical problems of compiling, comparing and publishing sets of data for the six core components, closing with some reflections on how one might measure stocks of intangibles. It is the Vosselman paper revised by the author in line with comments during and after the Workshop.

Paper 5 , compiled by the Secretariat, summarises the six national exercises presented to the 1992 Workshop with additional material for Austria and the Netherlands presented at later conferences. Though the discussion there concentrated on the methods used, it is interesting to note that these national reports suggested that intangible investment was not growing faster than GFCF in the late 1980s and early 1990s.

There follow five papers dealing with the treatment of intangible investment and/or its core components in international standards: the System of National Accounts 1993 ( Paper 6 ); the Provisional Central Product Classification and the International Standard Industrial Classification (ISIC Rev 3) ( Paper 7 ); the OECD "Frascati Family" of manuals for the measurement of scientific and technological activities and associated surveys ( Paper 8 ); the UN model survey of computer services ( Paper 9 ); and the OECD manual on training ( Paper 10 ).

Most of these papers have been prepared by the OECD Secretariat. Several have been added or revised since the 1992 Workshop. The remaining five papers have been selected from the series of more recent meetings, and are designed to illustrate some of the many recent initiatives to analyse intangibles or to suggest where improvements in measurement and reporting of intangibles are necessary and how they may be achieved.

The first of these papers discusses investors' needs for indicators that more fully reflect the intangible assets that underpin firms' growth and productivity gains. Paper 11 was prepared by Lev and Zarowin to trace the shortcomings in current financial reporting and how it increasingly fails to report critical information to investors. It makes two proposals that may enhance the usefulness of financial information -- extended capitalisation of intangible investments and a systematic restatement of past financial reports. Paper 12 by Mavrinac and Siesfeld suggests that non-financial measures of quality and strategic achievement have a profound effect on investment and valuation, and shows investors' appreciation of investments in employee development, process quality and corporate innovations. Both studies suggest that current financial accounting is falling short in providing an accurate picture of enterprise assets and potential performance.

The collection closes with three papers dealing with different aspects of intangibles not covered elsewhere in the collection: the challenges and progress made in measuring organisational change in enterprises ( Paper 13 by Vickery and Wurzburg); a new workplace and employee survey being undertaken regularly in Canada to plot changes in the Canadian workplace and the outcomes for firms and workers ( Paper 14 by Picot and Wannell); and finally an ambitious attempt in France to survey the complexities of innovation capabilities within industrial firms ( Paper 15 by François, Goux, Guellec, Kabla and Templé). These last three papers were presented at the OECD Conference on New S&T Indicators for a Knowledge-based Economy (Paris, 19-21 June 1996).

The consolidated bibliography has been drawn from a number of sources, notably the papers mentioned above and a report by Victor Mangematin (Mangematin; 1994).

It is hoped that this collection of papers will be of particular use to those collecting new data on intangibles and interpreting these data, as well as to those interested in furthering their understanding of intangibles and the role they play in fostering firm growth and competitiveness in contemporary economies.

For further information on this subject, please contact Graham Vickery.