Investments in Intangible Assets and Australia's Productivity Growth

Investment in capital is important for economic growth. But capital is not just physical assets; firms also invest in 'soft' capital such as knowledge, firm-specific skills, and better ways of doing business. This investment results in accumulation of 'intangible assets'. Intangible assets have been categorised as computerised information, innovative property (including R&D) and economic competencies (including firm-specific human capital and organisational capital), and most are difficult to measure. These assets can depreciate more rapidly than physical capital, but they are investments nonetheless, delivering benefits over time, not just in the period the expenditure was made. Many elements of spending on intangibles are treated as a current expense in the national accounts rather than as an investment. This leads to an understatement of investment in the economy. It also may affect measures of multifactor productivity (MFP) growth. Applying the methodology of Corrado, Hulten and Sichel (2006) found that intangible investment currently is almost half the size of tangible investment in the market sector of the Australian economy. While experimental in nature, the estimates suggest that - market sector investment in intangibles was $57 billion in 2005-06, 80 per cent of which is currently not treated as investment in the national accounts; average annual growth in intangible investment has been about 1.3 times that of tangibles since 1974-75; including intangible investment in total investment largely removes the past downward trend in the market sector ratio of investment to output (gross value added); investments in organisational capital (strategic planning, adaptation and reorganisation) and computerised information have grown at relatively high rates — making up 27 and 13 per cent of intangible investment in 2005-06. Treating investment in intangible assets as capital raises measured final output and measured capital inputs and alters the capital-labour ratio, hence the effect on measured MFP growth is complex. However, in Australia, adjusting for intangible investment not currently included in the national accounts does not have a large direct effect on the level or pattern of conventionally-measured MFP growth. The views expressed in this paper are those of the staff involved and do not necessarily reflect those of the Productivity Commission.