Intangible Assets: Computers and Organizational Capital

IN DEVELOPED ECONOMIES, production requires not only such traditional factors as capital and labor but also skills, organizational structures and processes, culture, and other factors collectively referred to as "intangible assets. " Detailed investigation of some of these types of assets has found that they are often large in magnitude and have important productivity benefits. For example, Dale Jorgenson and Barbara Fraumeni found that the stock of human capital in the U.S. economy dwarfs that of physical capital and has grown over time. (1) Bronwyn Hall, Zvi Griliches, and Baruch Lev and Theodore Sougiannis found evidence that research and development (R&D) assets bring benefits in the form of positive marginal product and market valuation. (2) Timothy Bresnahan, Brynjolfsson, and Hitt have found that certain organizational practices, when combined with investments in information technology (IT), were associated with significant increases in productivity in the late 1980s and early 1990s. (3) Investors also attempt to incorporate intangible assets into their valuation of firms, and this is one reason that the market value of a firm may differ markedly from the value of its tangible assets alone. In particular, stock market valuations of firms have increasingly diverged from their measured book value in the past decade or so. (4) Part of the explanation may be the growing use of IT and the associated investments in intangible assets. (5) Whereas early applications of computers were primarily directed at factor substitution (particularly of low-skill clerical workers), modern uses of computers have both enabled and necessitated substantial organizational redesign and changes in the skill mix of employees. (6) Collectively, this research argues for a complementarity between computer investment and organizational investment, and specifically a relationship between use of IT and increased demand for skilled workers, greater decentralization of certain decision rights, and team-oriented production. Moreover, case studies and a growing body of statistical analyses suggest that these complementary investments are large. (7) This paper analytically explores the hypothesis that new, intangible organizational assets complement IT capital just as new production processes and factory redesign complemented the adoption of electric motors over 100 years ago. (8) To realize the potential benefits of computerization, investments in additional "assets" such as new organizational processes and structures, worker knowledge, and redesigned monitoring, reporting, and incentive systems may be needed. We study how the financial markets can be used to help identify such assets. In some cases the costs of implementing the new processes, training, and incentive systems may be many times greater than the costs of the computer technology itself. However, the managers who decide to incur these costs presumably expect the present value of the resulting benefits to be no less than these costs, even if they accrue over a period of years and are uncertain. In this sense managers' behavior reflects their belief that they are investing in an economic asset. Assets that are intangible need not be invisible. On the contrary, the presence of intangible organizational assets can be observed in at least three ways. First, some of the specific changes that firms make may be directly observable. In particular, previous work has used survey methods to document a relationship between technology and some aspects of organizational change, such as new business processes, greater demand for skills, and increased employee decisionmaking authority. (9) Firms sometimes try to highlight their investments in these areas, offering tours to customers, investors, and researchers who express an interest in them. A visit to the manufacturing operations of Dell Computer or of a steel mini-mill provides some insight into the effort these firms put into creating various kinds of organizational assets and the resulting productivity implications. …