The New Investment Paradigm?
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The New Investment Paradigm?
By John R. Baldwin, Wulong Gu and Ryan Macdonald
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This article in the Economic Insights series summarizes results from current Statistics Canada research on investment and capital stock accumulation. It reports on the study, Intangible Capital and Productivity Growth in Canada.
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Compiling information on wealth accumulation has been central to Statistics Canada's activities since its inception. The wealth of the nation is a measure of its financial strength, international standing, and economic power. In 1915, Canada's first Chief Statistician, Robert H. Coats, compiled Canada's initial estimate of national wealth at the behest of the Borden Conservatives. He set the value of Canada at $16.3 billion. Since then, the practice of compiling national wealth estimates has continued, with current national balance sheet estimates placing Canada's 2011 wealth at $6.9 trillion.
Over time, the accuracy with which national wealth is estimated has improved, and the scope of assets examined has expanded. This process involved debate about which assets should be included, and how they should be measured.
Chart 1 Share of investment in business-sector GDP
At the moment, discussion has focused on how to deal with investments in areas like scientific knowledge, firm organization, and advertising, which create assets in the form of patents, trade secrets, computer codes, organizational structures, and brands. Such expenditures are referred to as intangible investment because the assets they create are not concrete physical objects such as machinery or buildings, but rather, knowledge and capabilities embedded in firms.
In the 1990s, the range of capital expenditures under consideration was widened when the computer revolution highlighted the importance of software investments. In 1997, the statistical system was revised to include investments in intangible assets tied to software and to all mineral exploration. More recently, estimates of intangible investments have tended to focus on research and development (R&D) expenditures made to find new products and processes.
But it is recognized that a comprehensive estimate of intangible investments needs to include any expenditure made by a firm which creates an asset that can be used in production for more than one year. However, moving beyond R&D, software and mineral exploration leads to difficulties in measurement.
Recently, several experimental estimates that are more inclusive have been produced for Canada that build on work taking place across a number of countries. In this work, intangibles are divided into three categories: computerized information (software and databases, which are already treated as investment); innovative property (R&D; mineral exploration, which is already treated as investment; development costs in the financial industry; architecture and engineering design); and economic competencies (advertising, employee and management training, organizational capital).
These estimates show that intangible investments have become relatively more important through time (Chart 1). In the late 1970s, intangible investments made up around 5.2 percentage points of the share of investment in business sector GDP. Tangible investments constituted 20.9 percentage points. By the mid-2000s, intangibles share had increased to around 12.9 percentage points of the share of investment in business sector GDP, while 19.4 percentage points were accounted for by tangibles.
The inclusion of intangibles changes the trajectory of the share of total investment in business-sector GDP. The share of tangible investments fluctuates with the business cycle, declines from the mid-1970s to the early 1980s and remains stable thereafter with an average of 19.1% between 1983 and 2008. The share accounted for by intangibles, however, increases from 4.8% in 1976 to 13.1% in 2008.
Effect on the balance sheet
The growing importance of intangibles in investment also affects the composition of assets on the national balance sheet. Without intangibles, the estimate of national wealth for 2008 is $6.1 trillion, split roughly evenly among persons (33.9%), businesses and governments (36.1%), and land (30%) (Table 1). Including these experimental estimates of intangible investment increases national wealth by $0.4 trillion or 6.6%. As well, this increase is solely attributable to businesses and governments, which raises the relative share of business and government capital and reduces the relative share of national wealth held by persons or tied to land. Thus, as the importance of intangible investments increased over the 1976-to-2008 period, so did the share of national wealth in businesses.
Table 1 National wealth including and excluding intangible assets, selected years, 1976 to 2008
The innovative shift
In order to assess the importance of innovation in Canada and the extensive range of expenditures that support it, the full set of intangible investments should be considered. Many firms' innovative expenditures do not consist exclusively of wages paid to traditional R&D scientists. They also focus on a range of other science and engineering costs. These expenditures in 2008 are just as large as R&D alone.
In 2008, scientific and engineering R&D made up 10.6% of intangible innovation, while architecture, design, engineering, own-account science and purchased science accounted for just as much, some 10.5%. The expenditures delineating geological deposits, another form of investments in intangible knowledge that is particularly large in the Canadian economy were 12%. The latter are often ignored in cross-country comparisons of the adequacy of innovation expenditure in Canada.
But the largest component of intangible investments occurred in areas of economic competencies, which accounted for 56% to 58% of the total intangible investment (Table 2). These consist of advertising and investments made in organizational capital including scientific managerial capabilities needed to run modern organizations. These expenditures improve firms' ability to compete or modify production processes in order to improve efficiency and contribute greatly to the knowledge that firms possess.
Table 2 Composition of intangible assets investment, 1976, 1990, 2000 and 2008
This Economic Insights article is based on Economic Analysis Division research on economic growth. For more information, please see:
Armstrong, P., T. Harchaoui, C. Jackson and F. Tarkhani. 2002. A Comparison of Canada–U.S. Economic Growth in the Information Age, 1981-2000: The Importance of Investment in Information and Communication Technologies. Statistics Canada Catalogue no.11F0027M. Ottawa, Ontario. Economic Analysis (EA) Research Paper Series. No. 1.
Baldwin, J.R., and G. Gellatly. 1998. Are There High-Tech Industries or Only High-Tech Firms? Evidence from New Technology-based Firms. Statistics Canada Catalogue no. 11F0019M. Ottawa, Ontario. Analytical Studies Branch Research Paper Series. No. 120.
Baldwin, J.R., and G. Gellatly. 1999. "Developing high-tech classification schemes: A competency-based approach." New Technology-Based Firms in the 1990s. Volume VI. R. Oakey, W. During and S. Mukhtar (eds.). Oxford. Elsevier Science.
Baldwin, J.R., and G. Gellatly. 2001. "A firm-based approach to industry classification: Identifying the knowledge-based economy." Doing Business in the Knowledge-Based Economy. L. Lefebvre, E. Lefebvre and P. Mohnen (eds.). Boston. Kluwer Academic Publishers.
Baldwin, J.R., and G. Gellatly. 2003. Innovation Strategies and Performance in Small Firms. Northampton, Massachusetts. Edward Elgar Publishing.
Baldwin, J.R., W. Gu, A. Lafrance and R. Macdonald. 2009. Investment in Intangible Assets in Canada: R&D, Innovation, Brand, Mining, Oil and Gas Exploration Expenditures. Statistics Canada Catalogue no.15-206-X. Ottawa, Ontario. The Canadian Productivity Review. No. 26.
Baldwin, J.R., W. Gu and R. Macdonald. 2012. Intangible Capital and Productivity Growth in Canada. Statistics Canada Catalogue No.15-206-X. The Canadian Productivity Review. No. 29
Baldwin, J.R., and P. Hanel. 2003. Knowledge Creation and Innovation in an Open Economy. Cambridge, New York. Cambridge University Press.
Baldwin, J.R., and D. Sabourin. 2001. Impact of the Adoption of Advanced Information and Communication Technologies on Firm Performance in the Canadian Manufacturing Sector. Statistics Canada Catalogue no.11F0019M. Ottawa, Ontario. Analytical Studies Branch Research Paper Series. No. 174.
Baldwin, J.R., and D. Sabourin. 2004. The Effect of Changing Technology Use on Plant Performance in the Canadian Manufacturing Sector. Statistics Canada Catalogue no.11F0027M. Ottawa, Ontario. Economic Analysis (EA) Research Paper Series. No. 20.
Barber-Dueck, C. 2008. The Canadian research and development satellite account, 1997 to 2004. Statistics Canada Catalogue no.13-604-M. Ottawa, Ontario. Income and Expenditure Accounts Technical Series. No. 56.
Beckstead, D., and G. Gellatly. 2006. Innovation Capabilities: Science and Engineering Employment in Canada and the United States. Statistics Canada Catalogue no.11-622-M. Ottawa, Ontario. The Canadian Economy in Transition. No. 11.
Beckstead, D., and T. Vinodrai. 2003. Dimensions of Occupational Changes in Canada's Knowledge Economy, 1971-1996. Statistics Canada Catalogue no.11-622-M. Ottawa, Ontario. The Canadian Economy in Transition. No. 4.
Gu, W., and S. Gera. 2004. The Effect of Organisational Innovation and Information Technology on Firm Performance. Statistics Canada Catalogue no.11-622-M. Ottawa, Ontario. The Canadian Economy in Transition. No. 7.
Gu, W., and W. Wang. 2004. "Information technology and productivity growth: evidence from Canadian industries". Economic Growth in Canada and the United States in the Information Age. D. Jorgenson (ed.). Ottawa, Ontario. Industry Canada.
Jackson, C. 2001. Capitalization of Software in the National Accounts. Statistics Canada Catalogue no.13-604-M. Ottawa, Ontario. Income and Expenditure Accounts Technical Series. No. 37.
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