Investments in Intangible
Assets and Australia’s
Productivity Growth

Productivity Commission
Staff Working Paper
March 2009

Paula Barnes
Andrew McClure

The views expressed inthis paper are those of thestaff involved and do notreflect those of the
Productivity Commission.

© COMMONWEALTH OF AUSTRALIA 2009
ISBN

978-1-74037-274-9

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JEL code: O

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Contents

PrefaceVII

Abbreviations and explanations

VIII

Key points

XII

Overview

XIII

1

Background
1.1 Definition of intangibles
1.2 Objectives and scope of the paper
1.3 The rest of the paper

1
3
3
4

2

Methodology
2.1 Previous studies
2.2 Model
2.3 Classification of intangibles

5
5
10
13

3

Measurement of investment in intangibles
3.1 Nominal expenditure series
3.2 How much of expenditure is investment
3.3 Deflators
3.4 Real investment series

17
19
31
32
33

4

Services from intangible capital
4.1 Intangible capital stocks
4.2 Capital services

41
41
47

5

Growth accounting results
5.1 Growth accounting components
5.2 Growth accounting results

55
55
62

6

International comparisons
6.1 Intangible investment as a share of output
6.2 Growth accounting results compared
6.3 Summary

71
73
85
97
CONTENTS

III

A

Data sources for investment in intangibles

101

B

Specification of model

151

C

Growth accounting

155

D

Sensitivity testing

167

References
Boxes
1
Measurement of intangibles
2
Standard growth accounting framework3
Growth accounting with intangibles treated as capital
Figures
1Market sector investment
2
Shares of nominal total intangible investment, by asset type3
Decomposition of average annual labour productivity growth,
1974-75 to 2005-06
4
Composition of intangible investment
3.1
Real investment, tangibles and intangibles, market sector, 1974-75 to
2005-06
3.2
Total investment shares of gross value added, 1974-75 to 2005-06
3.3
Real investment, by asset type, market sector, 1974-75 to 2005-06
3.4
Shares of nominal total intangible investment, by asset type
4.1
Total intangibles capital stock, market sector, 1974-75 to 2005-06
4.2
Composition of total nominal intangible stock, 1974-75 to 2005-06
4.3
Rental prices by intangible asset type, 1974-75 to 2005-06
4.4
Capital services index, tangibles and intangibles, market sector,
1974-75 to 2005-06
4.5
Composition of total intangible capital services, 1974-75 to 2005-06
5.1
Market sector gross value added, 1974-75 to 2005-06
5.2
Capital services, market sector, 1974-75 to 2005-06
5.3
Multifactor productivity, market sector, 1974-75 to 2005-06
5.4
Contributions to labour productivity growth over MFP growth
cycles, market sector
6.1
Composition of intangible investment, by country
6.2
Intangible investment shares of output, by country

IV

CONTENTS

183

XV
XVIII
XIX

XVI
XVII
XXI
XXIV

36
36
39
40
46
47
49
50
53
59
61
67
68
77
82

6.3
6.4
6.5
C.1
D.1
D.2
D.3
D.4
D.5
D.6
D.7

Contributions of individual intangibles to total intangible capital
deepening, by country
Contributions of new and ‘traditional’ intangibles to total intangible
capital deepening, by country
Decomposition of labour productivity growth, by country, by
definition of capital, mid-1990s to early 2000s
Internal rate of return for the market sector, all intangibles treated ascapitalComparison of endogenous and exogenous rates of return
Capital services, alternative internal rates of return, all intangibles
treated as capital
MFP using alternate rates of return, all intangibles treated as capital
Real investment, alternative estimates for new intangibles, market
sector, 1974-75 to 2005-06
Shares of nominal total intangible investment, by asset type,alternative estimates for new intangibles, 2005-06
Total intangibles capital stock, alternative estimates for new
intangibles, market sector, 1974-75 to 2005-06
Composition of total intangible capital services, alternative estimatesfor new intangibles, 2005-06

Tables1
Intangible investment as a share of adjusted output
3.1
Summary of data sources and assumptions used to constructinvestment of intangibles
3.2
Nominal intangible investment, market sector, 2005-06
3.3
Growth in real intangible investment, market sector
4.1
Depreciation rate assumptions
4.2
Value of intangible capital stock, market sector, 2005-06
4.3
Growth rate of intangible capital services, market sector
5.1
Growth in market sector gross value added
5.2
Capital and labour income shares, market sector
5.3
Contributions to labour productivity growth, market sector
5.4
Contributions to capital deepening, market sector
5.5
Productivity growth cycle analysis, market sector
6.1
Intangible investment as a share of GDP, by country
6.2
Intangible investment as a share of adjusted output, by country
CONTENTS

89
90
94
162
168
169
170
175
176
177
178

XXIII

18
34
38
43
45
51
60
62
64
65
69
74
75
V

6.3
6.4
A.1
A.2
A.3
C.1
D.1
D.2
D.3
D.4
D.5
D.6

VI

Productivity growth after accounting for all intangibles, by country
Effect of intangibles on productivity growth, by country andintangible group
Industries included in the market sector
Summary of data sources and assumptions used to construct stocks
of intangibles
Comparison of data sources across countries
Rental price components for intangible assets
Comparison of MFP growth rates using alternative rates of return
International comparisons using endogenous rate of return
Comparison of parameter sensitivity testing results, all intangibles
treated as capitalComparison of investment and capital size sensitivity testing results,
all intangibles treated as capitalComparison of MFP and capital services growth rates using lower
bound intangible estimates
Contributions to capital deepening, all intangibles treated as capital,
1974-75 to 2005-06

CONTENTS

87
92
101
103
137
159
171
172
174
179
181
182

Preface

This staff working paper examines investment in intangible assets in Australia andhighlights some significant issues relating to the measurement of intangibles andtheir contribution to productivity.
Helpful comments on the paper were received from Elizabeth Webster (Melbourne
Institute of Applied Economic and Social Research), Derick Cullen (Australian
Bureau of Statistics) and Myriam van Rooijen-Horsten (Statistics Netherlands). The
Australian Bureau of Statistics provided vital assistance through the provision of
unpublished data. Paul Roberts and Bertram Antioch of the Australian Bureau of
Statistics and Ben Dolman of the Productivity Commission provided helpful advice
on data issues and productivity measurement. Tracey Horsfall from the Productivity
Commission assisted in the preparation of the paper.
The views expressed in this paper are those of the authors and are not necessarily
those of the Productivity Commission.

PREFACEVII

Abbreviations and explanations

Abbreviations
ABS

Australian Bureau of Statistics

ANZSIC

Australian and New Zealand Standard Industrial
Classification

ASCO

Australian Standard Classification of Occupations

ASIC

Australian Standard Industrial Classification

BERD

Business expenditure on research and development

BEA

Bureau of Economic Analysis (US)BLS

Bureau of Labor Statistics (US)CCLOClassification and Classified List of Occupations

CEASA

Commercial Economic Advisory Service of Australia

CEO

Chief Executive Officer

CHS

Corrado, Hulten and Sichel

COE

compensation of employees

CPI

consumer price index

CVM

chain volume measure

EEBTUM

Employee Earnings, Benefits and Trade Union MembershipsurveyGDP

gross domestic product

GFCF

gross fixed capital formation

GMI

gross mixed income

GOS

gross operating surplus

GPI

Genuine Progress Indicator

GVA

gross value added

ICT

information and communication technology

IO

input-output

VIII

ABBREVIATIONS AND
EXPLANATIONS

IPD

implicit price deflator

IRR

internal rate of returnIT

information technology

JAA

Jalava, Aulin-Ahmavaara and Alanen

JIP

Japanese Industry Productivity databaseLPlabour productivity

MFP

multifactor productivity

MH

Marrano and Haskel

MHW

Marrano, Haskel and Wallis

NCETS

National Centre for Education and Training Statistics

NIPA

National Income and Product Accounts (US)OECD

Organisation for Economic Cooperation and Development

ONS

Office of National Statistics (UK)PC

Productivity Commission

PIM

perpetual inventory method

PKS

productive capital stock

QALI

quality adjusted labour input

R&D

research and development

RBT

van Rooijen-Horsten, van den Bergen and Tanriseven

SNA

System of National Accounts

SOG

sources of growth

STAN

Structural Analysis

SUsupply-use

SUIC

supply-use industry code

SUPC

supply-use product code

VA

value added

Explanations
BillionThe convention used for a billion is a thousand million (109).

ABBREVIATIONS AND
EXPLANATIONSIXOVERVIEWKey points•

Investment in capital is important for economic growth. But capital is not just physicalassets; firms also invest in ‘soft’ capital such as knowledge, firm-specific skills, andbetter 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 humancapital 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 thenational accounts rather than as an investment. This leads to an understatement ofinvestment 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 estimatessuggest 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 oftangibles 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 andreorganisation) 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 andmeasured 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 contribution of these intangibles was 8 per cent of conventionally-measured
MFP growth (0.09 of a percentage point) in the last productivity cycle (1998-99 to
2003-04) and 5 per cent (0.13 of a percentage point) in the period of the
productivity surge (1993-94 to 1998-99). (This does not include any indirect
effects, such as those arising from complementarities between intangibles andother inputs.)– This contrasts with the United States, where intangibles accounted for a large
share of the productivity acceleration from the mid-1990s, and the United
Kingdom, where a slowdown in MFP growth in the 1990s became an acceleration
after adjusting for intangible investment.

XII

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Overview

Investment in capital is important for economic growth. But capital is not justphysical assets — firms also invest in ‘intangible assets’, such as knowledge, firmspecific skills and better ways of doing business. Some commentators havesuggested that structural and technological changes in economies have increased theimportance of investment in intangibles as a source of economic growth. It has also
been suggested that the observed diversity in productivity improvements (acrossfirms, industries and countries) is linked to investment in intangibles and its
complementarities with other assets, such as information and communication
technologies (ICTs).
Despite this increase in prominence, intangibles are relatively poorly measured andunderstood. Focus has been on a small number of intangibles, such as computer
software and scientific R&D. And only a few intangibles are measured as
investment in national accounts. Excluding investment in intangibles means
investment is underreported, and this may distort measures of growth in capital
services and consequently productivity.
Measuring intangibles is not easy. However, Corrado, Hulten and Sichel(CHS 2005, 2006) developed an experimental methodology for measuring
investment in a wide range of intangibles. They then used this in a growthaccounting framework to explicitly identify the contribution of intangibles toconventional productivity measures. Originally applied to US data, it has now been
applied to a number of countries with a range of results.
This paper continues this work by applying the approach to Australia. The paper
addresses two questions. Has the composition of investment (including intangibles)changed over time? And does excluding intangible investment result in a distorted
view of the dynamic changes in economic growth and productivity? The paper
applies the CHS methodology to data for the market sector of the Australianeconomy to estimate the level and growth of investment in a range of intangibles. It
also examines the direct contribution to conventionally-measured productivity
growth of those intangibles not currently treated as investment.
Given the experimental nature of the methodology, the assumptions required,measurement challenges and data limitations, the estimates should be interpreted as
only indicative. With this caveat, the paper finds that Australia has large and
OVERVIEW

XIII

growing levels of investment in intangibles. Notably, the inclusion of intangibles
investment largely flattens the declining trend in the ratio of investment to grossvalue added for the market sector, and is a growing share of total investment.
Nevertheless, only a small amount of conventionally-measured multifactor
productivity (MFP) growth in recent periods is accounted for by the directcontribution of services from intangible assets. And unlike the results for someother countries, accounting for intangibles does not have a large effect on thepattern of productivity growth in Australia.

Measuring intangibles is not easy
‘Intangible assets’ have been variously defined but the common thread of thedefinitions is that these assets provide future benefits but do not have a physicalembodiment. This lack of ‘visibility’ makes many intangibles difficult to measure.
This is part of the reason for the treatment of many elements of spending on
intangibles as current expenses, rather than investments, in conventional measuresof output and productivity.
There are two main ways in which researchers have tried to quantify intangibles —financial market valuation (the difference between market values of firms and thevalue of tangible assets of firms) and direct expenditure-based measures ofindividual types of intangibles. CHS take the latter approach, defining andquantifying three main categories of intangibles (made up of a variety of specificintangibles).
•Computerised information is the knowledge embedded in computer programsand databases.

•

Innovative property includes the relatively familiar scientific R&D (reflecting
scientific knowledge embedded in patents, licences and general know-how) but
is much broader — including non-scientific R&D or creative property(innovative and artistic content in commercial copyrights, licences and designs).

•

Economic competencies include brand equity (for example, investment to retain
or gain market share and investment in brand names), firm-specific humancapital (employee skill building) and organisational capital (investments instrategic planning, adaptation and reorganisation).

The research used the CHS categorisation, to collate a range of data to create a setof experimental estimates for intangibles in Australia (box 1). For some intangibles,such as firm-specific human capital, it has been very difficult to construct reliablemeasures over time. It has also been necessary to make a number of assumptions
based on limited available information. There is much scope for improvement and
XIV

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

refinement of the measures. However, these estimates provide a starting point andthe first attempt (as far as can be ascertained) to apply the CHS methodology tomeasure the range of intangibles for Australia.
Box 1

Measurement of intangibles

CHS (2006) identified 3 main groups of intangibles, covering 13 individual intangibles.
The measures and data sources used for the Australian estimates are listed below.
The percentages of expenditure assumed to be investment are based on CHS (2006)— the extent to which some of these assumptions are somewhat arbitrary, given
limited available evidence, is discussed in chapter 3 and appendix A.
Type of intangible

Investment measure and main data source

Computerised information
Computer software;
Computer databases

Investment from ABS national accounts

Innovative property
Scientific R&D; Social
sciences R&D (Business
R&D)

Expenditure on R&D from ABS business R&D survey

Mineral exploration

Investment from ABS national accounts

Copyright and licence costs(Artistic originals)

Investment from ABS national accounts

Other product development, design and research
New product development
in financial industry

20 per cent of all intermediate purchases by Finance industry— from ABS supply-use tables

New architectural andengineering designs

50 per cent of sales of architectural and consulting
engineering services — from ABS industry surveys

Economic competencies
Brand equity
Advertising

60 per cent of advertising expenditure — from advertisingindustry survey

Market research

60 per cent of sales of market research services (doubled toaccount for own-account research) — from ABS industry
surveyFirm-specific human capital

Direct costs and wage costs of employee time in training —from ABS training surveys

Organisational capital
Purchased

80 per cent of sales of management consulting services —from ABS industry survey

Own account20 per cent of salaries of Managers & administrators — fromABS Labour Force Survey
OVERVIEW

XV

Intangibles are a growing share of total investment
Australian market sector investment in intangibles is large and has grownconsiderably over time. In 2005-06, market sector nominal investment inintangibles is estimated to have been $57 billion — almost half the size ofinvestment in tangibles (figure 1). Since 1974-75 investment in intangibles as apercentage of market sector gross value added has doubled from about 5 per cent to10 per cent (in nominal terms).
Investment in intangibles ‘flattens’ the trend in investment
Including expenditure on ‘new’ intangibles (that is, those not currently treated as
investment in the national accounts) within total investment largely flattens thedeclining trend in the market sector ratio of total investment to gross value added
seen in the Australian national accounts (figure 1).
Figure 1

Market sector investment
Total investment shares ofmarket sector gross value added

Real investment, market sector ($2005-06)$b
140

Per cent
35
tangibles

120

30

100
80

25

60
40

intangible

200
1974-75

Including investment in
new intangibles

1984-85

1994-95

2004-05

20
15
1974-75

ABS national accountsitt
1984-85

1994-95

2004-05

The composition of intangible investment is changing
Over the last thirty years, there has been a shift towards investment inorganisational capital and computerised information (figure 2). In 2005-06, around50 per cent of intangible investment was in economic competencies, 38 per cent ininnovative property and 13 per cent in computerised information. Around 80 per
cent of total intangible investment was in ‘new’ intangibles.

XVI

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Figure 2

Shares of nominal total intangible investment, by asset type
Per cent

100%

Organisational capital80%

Firm-specific human capital

60%

Brand equity

Economiccompetencies

40%

Innovative
property

Other product development
Artistic originals

20%

Mineral exploration

Computerised
information

Business R&D

0%
1974-75

1979-80

1984-85

1989-90

1994-95

1999-00

2004-05

The intangible capital stock is growing
The intangible capital stock of the market sector has also grown considerably overthe last thirty years (despite the assumption that intangibles are relatively short lived
compared with most tangible assets).
In 2005-06, the nominal intangible capital stock is estimated to have been
$189 billion or around 17 per cent of the tangible capital stock.
•

Of this, around 57 per cent was innovative property, 31 per cent economic
competencies and 12 per cent computerised information. Seventy per cent of theintangibles stock was ‘new’ intangibles not already treated as capital in thenational accounts.

•

Some individual ‘new’ intangibles are now as large as more traditional
intangibles — organisational capital is larger than computerised information andaround the same size as each of mineral exploration and business R&D.

Growth in the real intangible capital stock is estimated to have averaged almost
5.5 per cent a year since 1974-75. In capital services terms, the flow of services
from intangibles grew at an average of almost 6 per cent a year, around twice therate for tangible capital services.

OVERVIEWXVII

Box 2Standard growth accounting framework

This paper uses the growth accounting (or sources of growth) framework, thetheoretical foundations of which were first laid out in Solow (1957). This framework is
an accounting exercise that breaks down output growth into input growth and attributes
the residual to technological change. It examines growth in output rather than the levelof output. It only accounts for the direct effect of inputs, not any indirect or spillover
effects, such as from complementarities between different types of capital.
When output is measured as gross valued added (total production less intermediate
inputs), the growth accounting framework says that value added growth is equal to aweighted average of capital growth and labour growth plus a residual not explained by
growth in combined inputs. The residual is commonly referred to as multifactor
productivity (MFP) growth, rather than technological change.* As MFP growth iscalculated as the residual, it will not only include pure technological change but will
also include the effect of any approximations in measurement of output and inputs andviolations of underlying assumptions.
The assumptions of the growth accounting framework include:•

constant returns to scale in the underlying production function•

output markets are competitive•

inputs markets are competitive (that is, factor inputs are paid their marginal
products)•

inputs are fully divisible•

inputs are fully utilised•

the economy is in long-run equilibrium.

In the ABS official estimates of MFP growth for Australia, output is measured as grossvalue added (total production less intermediate inputs). Whether expenditure on
intangibles is treated as an intermediate input or as an investment will have an effecton both value added and the total capital input, affecting growth accounting estimates(see box 3).
——————————*Growth accounting can also be done in terms of labour productivity growth (growth in output per hour
worked) rather than output growth, in which case labour productivity growth is equal to income shareweighted growth in the capital labour ratio (capital deepening) plus MFP growth.

XVIII

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Accounting for intangibles as investment affects thesources of measured growth
Ignoring intangible assets as a source of capital services can result in bias in theestimates of MFP growth. For example, a slowdown in MFP growth in the 1990s in
the United Kingdom became an acceleration after adjusting for intangible
investment (Marrano, Haskel and Wallis 2007). For the United States, an importantpart of the productivity acceleration since the mid-1990s has been attributed tointangible assets (CHS 2006). The second half of this paper uses growth accounting
to estimate the effect of treating intangible assets as capital on Australian MFP
measures.
Growth accounting shows the direct contribution of inputs to output
growthGrowth accounting is used to show what proportion of output growth is attributable
to increases in labour and capital inputs, with the residual growth explained by otherfactors (such as technological progress). It is this residual that is considered ameasure of MFP. Conventional growth accounting (box 2) treats expenditure on
intangibles as current expenses, rather than as investments. This can result in biased
measures of MFP (box 3).
Box 3

Growth accounting with intangibles treated as capital

Treating intangibles as capital within the growth accounting framework can have anumber of effects on both the output and input sides of the accounting exercise, with aconsequent effect on measured MFP growth as the residual that depends on therelative changes in output and input growth.
Measured output — treating expenditure on intangibles as an investment, instead of anintermediate input, increases the level of measured output (gross value added) by theamount of intangible investment. But the change in growth in measured total output
depends on growth in investment in intangibles relative to growth in other outputs. For
total output growth to be higher, growth in investment in intangibles must be higher
than growth in other outputs.
Measured capital inputs — intangibles investment increases the level of the capitalstock and the services from that capital stock. This is the direct effect and does notmeasure any indirect or spillover effects from that investment. But whether growth intotal capital services is higher (lower) depends on whether intangible capital services is
growing faster (slower) than tangible capital services.
(continued on next page)

OVERVIEW

XIXBox 3(continued)

Capital and labour shares of total inputs — the increase in measured capital increases
the capital share and decreases the labour share of total inputs, although the return tolabour and volume of labour do not change. Combined input growth (the weighted
average of capital growth and labour growth) will rise (fall) if capital growth is higher(lower) than labour growth.
Measured MFP growth — the effect on measured MFP growth can be positive or
negative depending on the relative size of the effects on output and input growth, thatis, the difference caused by intangible investment (part of output not previously
measured) and by intangible capital inputs (the services of the stock of capital notpreviously measured). This effect on MFP growth depends not just on the relative
growth rates of outputs and capital inputs, but also the combined input growth rate
which changes as the capital and labour shares of total inputs change.

The effect on productivity growth for Australia is small
Intangible assets directly account for a small but notable amount of conventionallymeasured MFP growth for the Australian market sector. (This does not account for
any indirect spillovers captured in MFP growth from, for example,
complementarities between ICTs and particular types of intangible capital.)
Growth accounting estimates for the Australian market sector are presented forthree definitions of capital — including all intangibles, only the national accounts
intangibles and no intangibles.1 Labour productivity (LP) growth (growth in grossvalue added per hour worked in the market sector) is decomposed into thecontributions of capital deepening and MFP growth (figure 3).
The effect of treating intangibles as capital is to raise measured labour productivity
growth and to shift the relative importance of the sources of growth — towards
capital deepening and away from MFP growth (the residual). When all intangibles
are capitalised, on average they contribute 37 per cent of total capital deepening and
17 per cent of LP growth between 1974-75 and 2005-06.

1 The estimates in this paper for the ‘national accounts’ case are slightly different from the ABS
official estimates due to differences in methodology necessitated by limited intangibles data. The
national accounts case was re-estimated for comparability with the other estimates in this paper.
XX

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Figure 3

Decomposition of average annual labour productivity growth,
1974-75 to 2005-06
Per cent per year

Per cent
2.5

2.0

Tangibles
Tang bles

1.5

Capitaldeepening

Tangibles

Capitaldeepening

Nat. a/c int.

Capitaldeepening

Nat. a/c int.

New int.

Multifactor
productivity
growthMultifactor
productivity
growthMultifactor
productivity
growthNo intangible capital

Including national accounts
intangible capital

Including all intang ble capital

1.0

0.5

0.0

Compared with the case of no intangibles•

LP growth is 0.16 of a percentage point (or 8 per cent) higher•

capital deepening is 0.32 of a percentage point (or 41 per cent) higher•

MFP growth is 0.16 of a percentage point (or 12 per cent) lower (this is theamount of MFP growth under the no intangibles case that is actually attributable
to unaccounted for intangible capital).

These results are based on experimental estimates for investment in intangibles anda range of assumptions related to the growth accounting parameters (such as
depreciation rates and rates of return). However, sensitivity testing suggests that thefinding that capitalising intangibles increases the importance of capital deepening
relative to MFP growth as a source of growth is robust to a range of changes in theunderlying estimates and assumptions within the reasonable bounds tested.
Accounting for the ‘new’ intangibles does not change the pattern of
MFP growth in Australia
Some intangibles (software, mineral exploration and artistic originals) are alreadycapitalised in the ABS national accounts. Not capitalising the ‘new’ intangibles
affects the national accounts estimates of MFP growth.
OVERVIEW

XXI•

On average, 0.06 of a percentage point or 5 per cent of conventionally-measured
annual average MFP growth is attributable to the new intangibles between
1974-75 and 2005-06.

•

However, looking at the MFP peak-to-peak periods (which control for influencesof the business cycle), the amount attributable to new intangibles ranges from
-1 per cent to 8 per cent of conventionally-measured MFP growth. In the mostrecent cycle, 1998-99 to 2003-04, it is 8 per cent (0.09 of a percentage point).

National accounts intangibles have a larger effect on MFP growth than the new
intangibles. While the new intangibles have a larger effect than national accounts
intangibles on capital deepening and LP growth, these are largely offsetting so theeffect on MFP growth is limited.
Overall, capitalising the new intangibles does not change the length of the MFP
growth cycles or the periods in which acceleration/deceleration occurs (although theextent of the change is affected). And only a small proportion of Australia’s MFP
growth is directly attributable to intangibles.

International comparisonsComparing measures across countries always raises issues of the extent to which thecomparisons are legitimate. Even using measures based on the same methodology,
as is the case in this paper, many differences remain because of variations inunderlying data and data limitations. The extent to which differences between theestimates in this paper and those in the other country studies represent realdifferences rather than measurement differences is not known. Any real differences
between countries should also be interpreted carefully. Country-specificcircumstances will affect their appropriate level and type of intangible investment— the country with the highest ratio of intangibles to output should not be regarded
as a benchmark. And the growth accounting approach does not provide information
about the causal links between intangible investment and productivity growth.
Australian rates of investment in intangibles are mid-range
Although it is not possible to draw strong conclusions from these international
comparisons, there are a number of notable features about the estimates.
Experimental estimates based on the CHS methodology suggest that Australia has aratio of intangible investment to output that is around mid-range of the estimates forother countries (table 1). Australia has a lower ratio than Finland, the United States,
the United Kingdom, France, Japan and Germany but a higher ratio than Canada,
the Netherlands, Italy and Spain.
XXII

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Table 1

Intangible investment as a share of adjusted output
Percentage of output (including intangible investment) for the sector for which
intangibles were measured
Australia

USA- marketsector(2005-06)- non-farmbusiness(1998–00)

Computerised information

1.3

Innovative property
Scientific R&D
Mineral exploration
Copyright and licence costs
Other product development,
design and researchUK- market

Japan

Neth.
- totalFinlandsector(2004)- totaleconomy(2000–05)

economy(2005)- non-fin.
business(2005)

2.0

2.3

2.0

1.3

1.6

3.6
1.3
0.4
0.1
1.7

5.3
2.3
0.2
0.9
1.8

4.2
1.3
0.0
0.3
2.6

5.4
2.6
0.0
1.0
1.8

1.7
0.9
0.0
0.2
0.6

6.4
4.3
0.0
0.2
1.8

Economic competencies
Brand equity
Firm-specific human capital
Organisational capital

4.7
1.4
0.7
2.6

6.2
1.7
1.4
3.1

6.5
1.2
3.1
2.2

3.1
1.0
0.4
1.6

4.9
2.2
1.1
1.7

6.6
2.7
1.9
1.8

Total

9.6
0.44

13.5
1.2

13.0
1.1

10.5
0.6

7.9
0.5

14.6
1.2

France Germany- market- marketItaly- marketSpain- marketCanada- totalIntangible to tangible investment ratio

Australia- marketsector(2005-06)

sector(2004)

sector(2004)

sector(2004)

sector(2004)

economy(2005)

Computerised information

1.3

1.3

1.1

1.0

1.1

0.9

Innovative property
Scientific R&D
Mineral exploration
Copyright and licence costs
Other product development,
design and research

3.6
1.3
0.4
0.1
1.7

4.7
2.0
0.0
0.5
2.2

4.9
2.4
0.0
0.3
2.2

3.2
0.8
0.1
0.1
2.3

3.5
0.8
0.1
0.3
2.4

4.6
1.8
1.0
0.1
1.8

Economic competencies
Brand equity
Firm-specific human capital
Organisational capital

4.7
1.4
0.7
2.6

6.6
1.5
2.3
2.8

4.1
0.8
1.9
1.4

3.2
1.2
1.4
0.6

2.7
0.6
1.2
0.9

3.5
0.5
2.0
1.0

Total

9.6
0.44

12.6
0.9

10.1
0.8

7.4
0.3

7.3
0.4

9.1
0.9

Intangible to tangible investment ratio

Australia has a very similar composition of intangible investment (in terms of thethree main categories) to the United States and United Kingdom and France — witheconomic competencies the dominant type of intangible (figure 4). Actual levels ofAustralian investment are less in each of these categories of intangibles by similar
amounts, rather than investment in any one type being relatively low.

OVERVIEWXXIII

Figure 4

Composition of intangible investment
Percentage share

100%
80%
Economiccompetencies

60%
40%

Innovative
property

20%

Computerised
information

0%
AUST(2005-06)

USA(1998–2000)

UK(2004)FRANCE(2004)FINLAND(2005)

NETH(2005)

100%
Economiccompetencies

80%
60%

Innovative
property

40%
20%

Computerised
information

0%
AUST(2005-06)

ITALY(2004)GERMANY(2004)CANADA(2005)

SPAIN(2004)

JAPAN(2000–2005)

Computerised information

Scientific R&D

Mineral exploration

Copyright and licence costs

Other product R&D

Brand equity

Firm-specific human capital

Organisational capital

Adjusting for intangibles affects the pattern of MFP for some othercountries
The nature of the effect of capitalising intangibles in the growth accounting is thesame across most countries for which estimates are available — an increase in LP
growth and capital deepening and a decrease in MFP growth. However, the size ofthe effect varied across countries. For the period of the mid-1990s to the early
2000s, including all intangible capital (compared with the case of no intangible
capital) lowered average annual MFP growth by 0.3 of a percentage point in the
United States and Australia, 0.2 for France, and 0.1 for Germany, Finland (for new
intangibles only) and the United Kingdom. The exceptions were the Netherlands
XXIV INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

and Italy, for which there was no change in MFP growth, and Japan and Spain, forwhich MFP growth rose after capitalising intangibles.
Treating intangibles as capital does not have a large effect on the pattern of growthover productivity cycles for Australia. This contrasts with the United Kingdom, forwhich a deceleration in MFP growth between the early and late 1990s cycles
became an acceleration after capitalising intangibles (Marrano, Haskel andWallis 2007). For the Netherlands, the reverse was found — an acceleration in
average MFP growth between 1996–2000 and 2001–2005 became a deceleration
after capitalising intangibles (van Rooijen-Horsten et al. 2008).
While this paper does not explore or provide any measures of the indirect effects, itdoes add to the scope for international comparisons of the size of intangibles withpotential complementarities. Fukao et al. (2008b) note that differences in theaccumulation of intangible assets that play a complementary role to ICT capitalmight explain differences in productivity growth — and the results for Japan,
particularly in terms of lower organisational capital, provide some support to this asa potential explanation. It is also the case that Australia (like the United States) has
higher levels of organisational capital and higher levels of productivity growth thanJapan.

Further research
Estimates in this paper are exploratory and, as is acknowledged by the authors of
the other country studies, much work could be done to improve them. There are also
alternative methodologies for the measurement of intangibles that could be
explored. The development of improved measures (and data collections to supportthem), in conjunction with national statistics agencies, would be required before
such intangibles could be considered for formal identification into the national
accounts or even inclusion in a separate dataset focused on growth accounting.
However, beyond these direct measurement issues there is a range of other possible
areas for further research.
•

Organisational capital. The experimental estimates suggest that investment inorganisational capital in Australia is now larger than business R&D, which the
ABS intends to capitalise in the Australian national accounts. There are currently
no plans to capitalise organisational capital — and this would be difficult since itis relatively poorly measured. However, the size of the estimates indicate that themeasurement and effects of organisational capital (including complementarities
with ICTs) warrant further investigation.

OVERVIEWXXV•Industry level estimates. Intangibles are likely to be relatively more important insome industries than others. For example, a relatively high rate of intangible
investment was found in the financial services industry in the Netherlands(van Rooijen-Horsten et al. 2008). For Japan, the services sector had a lower rateof intangible investment relative to the manufacturing sector(Fukao et al. 2008b). Subject to data limitations, estimates for selected
Australian industries or sectors would enable a closer examination of the links
between intangibles and growth.

•

Econometric analysis of intangibles. As the number of country studies using the
CHS methodology increases it may be possible to undertake some econometricanalysis of intangibles by pooling the data. This may enable the indirect
spillovers from intangible assets to be examined.

XXVI INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

1

Background

The rise of the ‘knowledge economy’ has brought productivity gains. But the extent
of diversity in performance improvement across firms, industries and somecountries has increased attention on the role of investments in certain intangible
assets — such as computerised information (for example, databases), innovative
property (for example, patents and designs) and economic competencies (forexample, ‘organisational capital’). Most of the focus on intangibles has been on
computer software and R&D. But the other intangibles also warrant investigation —for example, it has been suggested that organisational capital facilitates adaptation
to change and has complementarities with ICT capital.
Lev (2001) suggests that intangibles, while not new1, have come to prominence
because of intensified competition, due to globalisation of trade and deregulation in
key economic sectors, and ICTs. These factors have changed the structure of firms
and elevated the role of intangibles. However, despite this elevated role, intangibles
are not well understood.
•

Lev (2001, p. v) suggests that, despite their importance, intangibles are poorly
measured, if at all, and their implications for public policy are not understood.

•

Corrado, Hulten and Sichel (2005, p. 37) suggest that the conventionalframework and current data used in growth analysis are “not telling us all weneed to know about the role of knowledge capital in economic growth.”•

Nakamura (1999, p. 13) traces the exclusion of intangibles from the capital stockin the national accounts to long-standing statistical conventions that assets had to
be material and states that “… we need to recognize the increasing importance ofintangible investment for our economy. Otherwise, statistical conventions cancause us to misread the fundamental forces propelling economic activity.”

It has been argued that there are several areas of potential distortion of resource
allocation and policy that arise from the fact that intangibles are only incompletely
revealed in available statistical data and company accounting and reporting. There

1 There is also a considerable history of research into intangibles — see Webster (1999) for an
overview of the earlier roots of this literature.
BACKGROUND

1

are four main issues (see Mortenson 2000, Vickery 2000 and Lev 2001 for further
details):•

capital markets, partly due to regulation, emphasise tangible rather thanintangible capital, with an effect on access to and cost of capital•mandatory expensing of intangibles leads to asymmetric information available tomanagers and shareholders and potentially distorts market transactions•

within companies, insufficient information about intangibles may distortmanagement decisions and the formulation of business strategies•

within public policy, insufficient information about intangibles may distortparticular policies (for example, industry policy, taxation, R&D and intellectual
property protection).

There is an important measurement issue — treating expenditure on intangibles as acurrent expense, rather than as an investment, has an impact on the magnitude ofmeasured value added and hence also on productivity measured. Morefundamentally, intangible assets can be seen as a necessary pre-condition for
optimising productivity gains. Specifically, investment in intangibles, such as neworganisational structures, is needed in order to tap fully the productivity potentialthat information and communications technology presents.
Conventionally-measured GDP treats much of intangible expenditure as anintermediate input rather than an investment. This means that expenditure on
intangibles is not included as investment in GDP and the flow of services from
intangible capital is not included as an input. This will affect the measurement ofmultifactor productivity (MFP) and can affect the pattern of growth.
The rationale for treating intangibles as capital, put forward by Corrado, Hulten andSichel (2006), is that any use of resources that reduces current consumption in order
to increase it in the future qualifies as an investment. While computer software is
now treated as capital in the national accounts of many countries, many otherintangibles, including R&D, are currently not.
Recent studies have investigated the puzzle as to why knowledge activities are notas ‘visible’ in the economic statistics as expected. These studies have attributed:•

an important part of the US productivity acceleration since the mid-1990s to
growth in intangible assets (Corrado, Hulten and Sichel 2006)•

a lack of productivity uplift in the United Kingdom to mismeasurement (a periodof seemingly-low growth was actually a period of more rapid build-up of
intangible assets) (Marrano, Haskel and Wallis 2007)

2

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

•a lack of productivity uplift in Japan to the lack of investment in intangibles(Fukao et al. 2007).

1.1

Definition of intangibles

Intangible capital — as well as being known by different names, such as knowledge
assets and intellectual capital — is variously defined:•

a nonphysical claim to future benefits
Assets are claims to future benefits, such as the rents generated by commercial
property, interest payments derived from a bond, and cash flows from a production
facility. An intangible asset is a claim to future benefits that does not have a physical or
financial (a stock or a bond) embodiment. (Lev 2001, p. 5)•

private expenditure on assets that are not tangible but are necessary to thecreation and sale of new or improved products and processes (Nakamura 2001)•

the ‘glue’ that creates value from the usual factor inputs (Cummins 2005)•

all assets that are neither natural or produced — a very broad measure that
includes raw labour, human capital, social capital and institutional infrastructure,such as the judicial system (World Bank 2006).

The focus of this paper is narrower than that used by the World Bank, concentrating
on intangibles invested in by businesses. Intangibles have been categorised (andquantified) by Corrado, Hulten and Sichel (2006) as:•

computerised information (software and computerised databases)•

innovative property (scientific and non-scientific R&D and design)•

economic competencies (brand equity, firm-specific human capital andorganisational capital).

This paper uses this categorisation of intangibles.

1.2

Objectives and scope of the paper

The overall objective of this study is to gain a better understanding of the nature,role and importance of intangible assets in Australia’s productivity performance.
More specifically the objectives are to:•develop quantitative measures of intangible assets and provide time series
estimates of intangible asset investment and stocks
BACKGROUND

3

•

assess the contribution to conventionally-measured MFP growth in Australia•

provide an international perspective on the types and magnitudes of intangible
assets in Australia compared with other countries.

Measuring intangibles contributes to:•a better understanding of the importance of intangibles for Australianproductivity growth•a better understanding of the international differences in the mix of drivers of
productivity growth (for example, does Australia have lower R&D but higherorganisational capital than other countries?)•

a better understanding of the potential for interactions between intangible andother capital (for example, complementarities between ICT and organisational
capital).

This study is a continuation of the Commission’s stream of research that has‘parcelled out’ elements of MFP growth and also builds on previous Commission
research on some aspects of intangible assets, such as R&D.

1.3

The rest of the paper

The remainder of this paper is organised as follows.
•

Chapter 2 outlines the methodology for identifying the contribution of
intangibles in the measurement of MFP — covering previous studies and thecurrent treatment of intangibles in the Australian national accounts. Appendix B
provides details of the model specification.

•

Chapter 3 outlines the way in which investment in each of the intangibles has
been measured. Appendix A provides details of the data sources and method of
construction of these estimates.

•

Chapter 4 describes the construction of the capital stocks for each of theintangibles. Appendix A provides details of the assumptions used in theirconstruction.

•

Chapter 5 reports the results of explicitly identifying the contribution of
intangibles in growth accounting in the Australian context. Related appendixes
provide details of the construction of the capital services indexes for intangibles
and the steps taken to adjust the growth accounting framework to treat
intangibles as capital (appendix C) and the sensitivity testing of results(appendix D).

•

Chapter 6 compares the Australian results with those from other country studies.

4

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

2

Methodology

This chapter outlines the methodology used to estimate the effect on multifactor
productivity (MFP) of capitalising intangibles. A brief summary of related studies isprovided, followed by the model and the classification of intangibles used in thispaper.

2.1

Previous studies

There is an extensive literature on some elements of intangible investment/capital(for example, R&D capital), while other elements (for example, organisational
capital) have received less attention.1 This section provides a few examples ofrecent approaches to measuring intangibles in the economics literature.
Sichel (2008) identifies three broad approaches to measuring intangible capital ingeneral — financial market valuation; other performance measures; and direct
expenditure data.
The first approach, financial market valuation, infers the value of intangible capitalas the difference between the market value of firms and the value of tangible assets.
•

Brynjolfsson, Hitt and Yang used this approach in a number of papers examining
the link between intangible investments and investment in computers in the
United States (Brynjolfsson and Yang 1999, Brynjolfsson, Hitt and Yang 2000
and 2002). These papers used firm-level data and found that each dollar of
installed computer capital in a firm was associated with between five and ten
dollars of market value. They interpreted this difference as revealing theexistence of a large stock of intangible assets that are complementary withcomputer investment. They also identified particular organisational practices at
the firm level that represent at least part of these intangible assets (related to thetypes of decision making authority, use of self-managing teams and the breadthof job responsibilities).

•

Webster (2000) used a similar approach with Australian data, assuming that any
residual market value of the firm (stock market value plus liabilities) not
explained by the balance sheet value of tangible assets must be due to intangible

1 A review of this literature is beyond the scope of this paper.
METHODOLOGY

5

assets. The results implied that the ratio of intangible to all enterprise capital roseby 1.25 per cent a year over the 50 years to 1998.
•

World Bank (2006) measured intangible capital at the country rather than firmlevel. The value of intangible capital was derived as the residual after deducting
natural capital and produced capital from total wealth (measured as the netpresent value of future sustainable consumption). For Australia this measure was
US$288 686 of intangible capital per person or around US$5600 billion in total
in 2000.

The second approach uses other performance measures, such as productivity or
earnings, to estimate the value of intangible capital.
•

McGrattan and Prescott (2005) inferred the value of intangible capital from
corporate profits, the returns to tangible assets, and the assumption of equal
after-tax returns to tangible and intangible assets. They estimated the value of
intangible capital at 31 to 76 per cent of US GDP.

•

Cummins (2005) defined intangible capital in terms of adjustment costs andestimated these costs econometrically from US firm-level panel data. His
estimates were based on creating a proxy for the intrinsic value of the firm fromdiscounted value of expected profits from analysts’ forecasts (which hesuggested reflect the analysts’ valuation of intangibles) and estimating the returnon each type of capital (tangible and intangible). He found no appreciableintangibles associated with R&D and advertising but sizable intangibles(organisational capital) created by IT.

•

Webster (2000) measured growth in the rate of intangible investment using the
proportion of the labour force in jobs that produce intangible capital. For
Australia, growth in the ratio of intangible investment to all production was
estimated to be around 2.8 per cent per year for the 25 years to 1996.

•

Lev and Radhakrishnan (2005) developed a firm-specific measure oforganisational capital, modelling the effect on sales of organisational capital(proxied by reported ‘sales, general and administrative expenses’, as thisincludes expenditures that generate organisational capital). They estimated themarginal productivity of organisational capital to be between 0.4 and 0.6, andmean organisational capital of 4 per cent of average sales of their sample of US
firms.

It has been suggested that the first two approaches may be subject to considerable
measurement error — for example, stock market values may reflect a
mismeasurement to the extent that asset prices depart from their intrinsic values andanalysts’ measures of earnings can be subject to mistakes and biases(Cummins 2005).
6

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITYThe third approach uses expenditure data to develop more direct measures ofintangible capital. This approach is not without measurement error and data
limitations — including whether the list of measures of intangibles iscomprehensive and able to capture changes in the nature of intangibles over time.
•

Nakamura (1999, 2001) was the first to employ this approach. He measured
gross investment in intangible assets using a range of measures including R&D
expenditure, software, advertising and marketing expenditure, and wages andsalaries of managers and creative professionals. He estimated that in 2000 US
investment in intangibles was US$1 trillion (roughly equal to that in nonresidential tangible assets), with an intangible capital stock of at least
US$5 trillion.

•

Corrado, Hulten and Sichel (CHS) (2005) expanded Nakamura’s work todevelop expenditure-based measures of a larger range of intangibles for theUnited States (see section 2.3). They estimated investment in intangibles
averaged US$1.1 trillion between 1998 and 2000 (1.2 times tangible capital
investment) or 12 per cent of GDP.

•CHS (2006) built on this work to develop a methodology for explicitly
identifying the contribution of intangibles in the national accounts and growthaccounting. They estimated that previously unmeasured intangible capital
contributed 0.24 of a percentage point (18 per cent) to conventionally-measured
MFP growth in the United States between the mid-1990s and early 2000s. The
CHS methodology has been applied in a number of other country studies — withestimates of the contribution of previously unmeasured intangible capital to MFP
growth of 14 per cent (United Kingdom in Marrano, Haskel and Wallis 2007),
3 per cent (Finland in Jalava, Aulin-Ahmavaara and Alanen 2007) and 0 per cent(the Netherlands in van Rooijen-Horsten et al. 2008), over a similar period.
Other country studies estimated only the contribution of all intangibles to MFP
growth — -19 per cent in Japan (Fukao et al. 2008b), 19 per cent in France,
18 per cent in Germany, 9 per cent in Spain and 0 per cent in Italy (Hao, Manoleand van Ark 2008).2•

Hulten and Hao (2008) applied a methodology similar to CHS to the financial
data of a group of US R&D intensive companies to construct estimates of R&D
and organisational capital. They found that this explained a significant portion of
the difference between market value and book value.

2 Belhocine (2008) estimated intangible investment for Canada but did not estimate the effect on
MFP growth. The findings of all these studies are discussed in more detail, and compared with
Australian estimates derived in this paper, in chapter 6.
METHODOLOGY

7

Schreyer (2007, p. 79) notes that the CHS approach appears more practical for
regular measurement of intangibles.
The Corrado-Hulten-Sichel approach does not require explicit econometric techniques
and would appear more practical from the perspective of monitoring intangibles as partof a periodic measurement program carried out by a statistical office.

This quote highlights one of the reasons for the considerable ongoing debate about
appropriate measures of intangibles in the broader literature — the desirability of aparticular measure depends on the perspective taken and the use to which themeasure is to be put. The literature on intangibles is from economic, accounting,legal and management perspectives (Bosworth and Webster 2006 provides a useful
discussion of intangibles from each of these perspectives). One particular issue of
debate is whether the measurement should be expenditure-based or value-based.
The characteristics of a measure to be included in the accounts of an individual firm
for accounting purposes may be different to those used for internal business
management purposes (for example, past objective expenditures may be preferred
for accounting purposes rather than estimates of future profits that may be useful for
management purposes). An examination and assessment of this debate is beyond thescope of this paper and has been well canvassed elsewhere (see, for example,
Lev 2001, Hunter, Webster and Wyatt 2005 and Bosworth and Webster 2006).
It is the CHS (expenditure-based) methodology that has been applied in this paper
because it focuses on the examination of the relationship between intangibles and
MFP growth and data for international comparisons are available. The CHS
approach embeds intangibles in the standard growth accounting framework used to
examine productivity growth, and it has already been applied to several OECD
countries. This paper is an (exploratory) step in examining intangibles in Australia
in an international context, using a method for which there are readily available
international estimates on a comparable basis. (No previous applications of thismethodology to Australian data have been identified). The remainder of this chapter
focuses on the CHS methodology.
Justification for capitalisation of intangibles
The adjusted growth accounting in the expenditure-based approach to intangible
measurement is based on capitalising intangibles.3 CHS (2006) suggest that thejustification for capitalising intangibles from the standpoint of consumption is thatany use of resources that reduces current consumption in order to increase it in the

3 ‘Capitalising’ refers to the treatment of expenditure as investment and the accumulation of acapital stock according to the perpetual inventory method.
8

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

future qualifies as an investment. And symmetry of all types of capital should
therefore require that intangibles are treated in the same way as tangibles.4
However, from the production side, the principle of symmetrical treatment has beenused as an argument against the capitalisation of intangibles. CHS (2006, pp. 10–4)
list the characteristics that have been identified as disqualifying intangibles frombeing treated as capital and go on to counter these arguments. In brief, thecharacteristics and counter arguments are as follows.5•

Lack of verifiability of the quantity of intangibles not purchased through market
transactions.
– However, this does not automatically make intangibles intermediate inputs.
Some tangibles lack verifiability (for example, internal construction projects)
and some intangibles do not (for example, purchased management consulting
services). CHS (2006) suggest that the economic character of the good not
the ease of measurement should determine the classification of the good.

•

Lack of visibility (or intangibility) after their acquisition, which complicatesefforts to track past vintages. The lack of a physical embodiment means that interms of national income methodology this creates difficulty in measuring
depreciation rates and obtaining stocks.
– Again, CHS (2006) suggest this measurement concern is not a valid
conceptual reason for not capitalising intangibles.

•

Non-rivalness (for example, knowledge being able to be employed by manyusers simultaneously without decreasing the quantity available to any singleuser) and lack of appropriability of returns from some intangibles (such as
intellectual property).
– CHS (2006, p. 13) argue that the capitalisation issue pivots on whether theprovision of the intangible increases future output and consumption, notwhether it is partly non-appropriable or non-rival. Therefore these two
characteristics do not invalidate the need to capitalise intangibles that havethese characteristics (and not all do).

4 The justification for capitalising intangibles is further explored in Webster and Jensen (2006).
Also, van Rooijen-Horsten et al. (2008, pp. 5–9) provides a useful discussion of the extent towhich different intangibles satisfy the definition of capital from the perspective of the 1993
System of National Accounts (which sets out the international statistical standards for themeasurement of the market economy). These criteria include: having an economic and legal
owner; providing possible economic benefits from being held or used; and being used repeatedly
or continuously in production processes for more than one year.
5 These characteristics are also of concern to accountants. For a detailed discussion of therecognition and definition rules for intangibles, from an accounting perspective, see
Wyatt (2006).
METHODOLOGY

9

2.2

Model

CHS (2006) set out the effect on national account measures of treating intangibles
expenditure as investment rather than as an intermediate input (see appendix B for a
fuller derivation). Their model, outlined below, is based on three goods — aconsumption good with real output volume in period t of Ct with price PC ; atangible investment good It with price PI ; and an intangible good Nt with price PN .
ttt

Intangibles treated as intermediate inputs
When intangibles are regarded as being intermediate inputs, labour L and tangible
capital K are allocated to the production of all three goods, and N is an input to C
and I. The production function and flow account for each of the three sectors is then
Intangible sector

N t = FN (L N t , K N t , t)

PN t N t ≡ PLt L N t + PK t K N t(2.1)

Tangible sector

I t = FI (L I t , K I t , N I t , t)

PIt I t ≡ PLt L It + PK t K It + PN t N It

(2.2)

Consumption sector C t = FC (LC , K C , N C , t) PC C t ≡ PL L C + PK K C + PN N C (2.3)
t

t

t

t

t

t

t

t

t

t

where tangible capital accumulates according to the perpetual inventory modelK t ≡ I t + (1-δ k )K t-1 with depreciation rate δk. The production functions in eachequation are linked to the accounting identities by the assumption that each input ispaid the value of its marginal product. For intangibles, the left-hand side ofequation (2.1) says that the output of intangibles is produced by labour and tangible
capital in that sector. The right-hand side says that the value of the intangibles
produced is identically equal to the returns to labour and tangible capital used inthat sector (assuming factors are paid their marginal products).
The assumption in this model that intangibles N t (= N I + N C ) are an intermediatettinput means that, as both an output and an intermediate input to the production of
the other products, intangibles net out in the aggregate.6 Intangibles therefore do notappear separately in the total output ( Q′t ) identity
PQ′t Q′t ≡ PCt C t + PIt I t ≡ PLt L t + PK t K t(2.4)

where L ≡ L N + L I + LC , and K ≡ K N + K I + K C

6 CHS (2006) adopts the convention that intermediates used by the industry that produced them arenetted out of final output. NN is therefore omitted from the production function of the intangible
sector.
10

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Intangibles treated as capital
If intangibles are treated as capital, a different model applies. The intangible capitalstock accumulates according to R t ≡ N t + (1-δ R )R t-1 , in the same way as tangible
capital. The production function and flow account for each of the three sectors
becomeIntangible sector

N t = FN (L N t , K N t , R N t , t)

PN t N t ≡ PLt L N t + PK t K N t + PR t R N t (2.5)

Tangible sector

I t = FI (L It , K It , R It , t)

PIt I t ≡ PLt L It + PK t K It + PR t R It

Consumption sector C t = FC (LC , K C , R C , t)
t

t

t

(2.6)

PCt C t ≡ PLt L Ct + PK t K Ct + PR t R Ct (2.7)

where PR is the rental price associated with the services of the intangible stock.7tIntangibles now appear on the left-hand side, in the production functions, as acumulative stock (Rt) not as an intermediate input (Nt) as above. On the right-handside payments to that stock ( PR R t ) appear rather than payment for the entire
intermediate input ( PN N t ).
ttAgain, the production functions in each equation are linked to the accounting
identities by the assumption of marginal productivity pricing. The total output ( Q t )identity is expanded to include the value of output of the intangibles on the
production side8 and the payments to the stock of intangibles on the income side:(2.8)

PQt Q t ≡ PCt C t + PIt I t + PN t N t ≡ PLt L t + PK t K t + PR t R twhere N ≡ NN + NI + NC and R ≡ RN + RI + RC
Comparing MFP growth under the two approaches
To see the implications for MFP growth, the following growth accounting equations
can be derived from the production functions above (see appendix B).

7 The rental price of tangible capital ( P ) will also change when intangibles are capitalisedKtbecause of the change in the equalising rate of return. However, the same notation ‘ PK t ’ ismaintained in both cases for simplicity (see appendix B).
8 This is the case whether intangibles are purchased intermediate inputs or own accountproduction. When intangibles are produced on own account, some of the currently measured
primary inputs of that industry are being used to create the additional intangible output. The
expenditure-based approach values this additional output using the primary input costs (seechapter 3).
METHODOLOGY11

As an intermediate input, intangibles expenditure is netted out and does not appear•

in the MFP growth equation ( x denotes the growth rate of x )
•

•

•

•

MFP′ = Q′ - s′L L - s′K K(2.9)

where s′L ≡ [PL L]/[PL L + PK K] and s′K ≡ [PK K]/[PL L + PK K]
As capital, intangibles appear as an input in the MFP equation, which becomes
•

•

•

•

•

(2.10)

MFP = Q - s L L - s K K - s R R

where

s L ≡ [PL L]/[PL L + PK K + PR R] ,s K ≡ [PK K]/[PL L + PK K + PR R]

ands R ≡ [PR R]/[PL L + PK K + PR R] .

Equation (2.10) differs from (2.9) in a number of ways.
•

The level of aggregate output increases because it includes the value of output of
the intangible goods. But whether output growth rises depends on whether thegrowth rate of real intangible investment is higher or lower than the growth rateof other output.

•

The payment to an additional factor of production, the stock of intangibles, isalso included.

•

All the factor income shares are different because both output and the total
payments to capital differ. Output has increased because of the inclusion of
intangible output. And there is a corresponding increase in total factor payments.
Income payments to the additional factor, intangible capital stock, increase total
payments to capital. The labour income share therefore falls (the level of labour
income is unchanged).

•

The effect on MFP growth is ambiguous — it may rise or fall depending on thechange in output growth relative to the change in input growth. For example,
MFP growth will fall if the inclusion of intangibles raises the output growth rateby less than it raises the growth in inputs.

Implementation of the model
The methodology for explicitly identifying the contribution of intangible assets ingrowth accounting is discussed in detail in the following chapters, together with theresults. Implementation requires a number of steps, many of which involve difficult
measurement issues.
•
12

Estimate investment in each intangible asset (see chapter 3)
INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

– find relevant data sources for expenditure on each intangible– compile a time series of nominal expenditure– determine the share of expenditure that is to be treated as investment– select appropriate deflator and deflate to get a real investment series.
•

Build a real capital stock for intangible assets (see chapter 4)– determine the appropriate rate of depreciation for each intangible asset– use the perpetual inventory method to construct a real capital stock from thereal investment series and assumed depreciation rates.

•

Adjust output and income to include intangibles as per equation (2.8) (seechapter 5)– recalculate output (measured as market sector gross value added forAustralia) to include intangibles output– adjust the operating surplus for market sector gross value added by adding
intangibles investment.

•

Construct a volume index of capital services measures of all capital inputs(tangible and intangible) using capital stocks and rental prices (see chapters 4
and 5)– determine the appropriate rental price parameters for each intangible asset– rental prices for each asset (tangible and intangible) are derived from theadjusted operating surplus by solving for an equalising rate of return acrossall assets.

•

Undertake growth accounting as per equation (2.10) (see chapter 5)– using the data for intangibles estimated as outlined above, together with the
published and unpublished Australian Bureau of Statistics (ABS) national
accounts data used in standard growth accounting.

2.3

Classification of intangibles

As noted in chapter 1, CHS (2006) classify intangibles into three main categories —computerised information, innovative property and economic competencies. This
classification is followed in this paper.
The three main categories of intangibles are made up of a variety of specificintangibles (as defined in CHS 2006).
•

Computerised information is the knowledge embedded in computer programsand databases.
METHODOLOGY13

•Innovative property includes the relatively familiar scientific R&D (reflecting
scientific knowledge embedded in patents, licences and general know-how) but
is much broader — including non-scientific R&D or creative property(innovative and artistic content in commercial copyrights, licences and designs).

•

Economic competencies include brand equity (for example, investment to retain
or gain market share and investment in brand names), firm-specific humancapital (employee skill building) and organisational capital (investments instrategic planning, adaptation and reorganisation).

Of these intangibles, organisational capital is perhaps the least well known. It isvariously defined as:•

the body of knowledge in a firm enabling it to combine conventional factors of
production in the production process (for example, business processes built
around computer systems) (Brynjolfsson and Yang 1999)•

business processes, management structures and organisational systems
specifically designed to maximise the value of output given available physicaland human capital (quality management systems, supply chain management
solutions and innovation processes for product development) (De andDutta 2007)•

the organisational architecture and the systems for monitoring activity andcommunicating within the firm (Webster and Jensen 2006)•

the inherent values, relationships and practices of an organisation which
contribute to performance (internal and external networks based on partnershipand trust) (Healy 2005).

The individual types of intangible assets are discussed further in chapter 3 andappendix A.
Current treatment of intangible assets in Australian National Accounts
Intangibles are not easily measured and work has mainly focused on elements suchas human capital and R&D. However, the identification of intangible assets inofficial national accounts, under the UN System of National Accounts (SNA), hasbeen even more limited.9

9 The treatment of intangibles is, of course, only one of a number of national accounting issues
under consideration. However, a discussion of these broader issues is beyond the scope of thispaper.
14

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY•

The decision to capitalise software and databases, mineral exploration andentertainment, literary or artistic originals was taken under SNA93 and has been
implemented in many countries.10•

The decision to capitalise R&D was taken in 2007. According to Pilat (2007)
there are no current plans for brand equity, firm-specific human capital andorganisational capital to be capitalised in the SNA.11

The ABS Australian System of National Accounts12 includes the following
intangibles in investment and capital stock series.
•

computer software (purchase of software, and software developed in-house if
expenditure is large, and large expenditures on the purchase, development or
extension of databases)•

entertainment, literary or artistic originals (the originals of films, soundrecordings, manuscripts, tapes etc on which drama performances, radio andtelevision programming, musical performances, sporting events, literary andartistic output etc., are recorded or embodied)•mineral and petroleum exploration (capitalised value of expenditures on
exploration for petroleum, natural gas and mineral deposits).

The measurement of these ‘national accounts’ intangibles and the ‘new’ intangibles(the other intangibles in the CHS classification) is discussed in chapter 3.

10 Although this has been done in different ways, particularly for software, which affects
international comparability (Aspden 2007).
11 The OECD plans to release a handbook on measuring intellectual property to provide guidanceon how to introduce various intangible fixed assets into national accounts (Pilat 2007).
12 See ABS (2000, chapter 15) for details. Spectrum licences appear as experimental estimates in
the national balance sheet but not the gross fixed capital formation or capital stock estimates(ABS 2000, para. 15.4).
METHODOLOGY

15

3

Measurement of investment inintangibles

This chapter outlines the data sources and development of Australian estimates ofinvestment in the range of intangibles described in chapter 2. The estimates are forthe market sector of the Australian economy, the sector of the economy for which
Australian multifactor productivity (MFP) estimates are available.1
As outlined in chapter 2, a number of steps and measurement challenges are
involved in estimating investment in each intangible:•

find relevant data sources for expenditure on each intangible•

compile a time series of nominal expenditure•

determine the share of expenditure that is to be treated as investment•

select appropriate deflator and deflate to get a real investment series.

These steps, and the difficulties encountered in implementing them, are discussed in
the following sections and the estimated real investment series presented. (A moredetailed description of the method, data limitations and the comparability with otherstudies is provided in appendix A. The sensitivity of the real investment estimates tosome of the assumptions is discussed in appendix D.)
Table 3.1 summarises the data sources and assumptions used to construct the real
investment estimates for each of the intangibles. In most cases, the measures follow
Corrado, Hulten and Sichel (CHS 2005) in order to facilitate international
comparisons, with some improvements as incorporated in Marrano, Haskel andWallis (MHW 2007). The exceptions are where Australian Bureau of Statistics(ABS) measures are available — computer software, artistic originals and mineral
exploration.

1 See table A.1 for a list of the twelve industry Australian and New Zealand Standard Industrial
Classification (ANZSIC) divisions that make up the market sector. The industries excluded are
Property & business services, Government administration & defence, Education, Health &community services, and Personal & other services. These industries are excluded because of the
difficulties of measuring outputs in some service industries. The sector of the economy for which
intangibles and MFP have been estimated varies across countries — this is discussed in chapter 6.
MEASUREMENT OFINVESTMENT IN
INTANGIBLES

17

Table 3.1

Summary of data sources and assumptions used to constructinvestment of intangibles

Type of intangible

Expenditure measure and main data
sourcesa

Computerised information
Computer software
Software investment by market sector
industries
ABS national accounts (Cat. no. 5204.0)

Proportion of
expenditure
treated as
investmentb Deflator
1ABS
computersoftwareimplicit pricedeflator (IPD)

Business R&D expenditure by market
sector industries
ABS BERD survey (Cat. no. 8104.0)

1

Impliedmarket sector
gross value
added (GVA)
deflator

Mineral exploration

ABS national accounts (Cat. no. 5204.0)

1

ABS mineral
exploration
IPD

Artistic originals

ABS national accounts (Cat. no. 5204.0)

1

ABS artistic
originals IPD

1ImpliedFinance &insuranceindustry GVA
deflator

1

Impliedmarket sector
GVA deflator

0.6

Impliedmarket sector
GVA deflator

Computer databases
Innovative property
Business expenditure on
R&D (BERD)

Included in software estimates

Other product development, design and research
20 per cent of all intermediate purchases
New productdevelopment
by Finance industry
in financial industry
ABS Input-Output/Supply-Use (IO/SU)
tables (Cat. no. 5215.0/unpublished)
New architectural andengineering designs

50 per cent of sales of architectural andconsulting engineering services tomarket sector industries
ABS Industry survey (Cat. no. 8155.0)
and ABS IO/SU tables (Cat. no. 5215.0/
unpublished)

R&D in social sciences
and humanities

Included in BERD estimates

Economic competencies
Brand equity
AdvertisingMarket sector share of total advertisingexpenditure less expenditure onclassifieds and directories. Doubled toaccount for production costs.
Commercial Economic Advisory Serviceof Australia advertising expenditure
survey and ABS IO/SU tables(Cat. no. 5215.0/unpublished)(continued on next page)
18

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Table 3.1(continued)

Type of intangible

Expenditure measure and main data
sourcesa

Proportion of
expenditure
treated as
investment
Deflator

Market research

Sales of market research services tomarket sector industries. Doubled toaccount for own-account market
research.
ABS Industry surveys (Cat. nos 8155.0,
8677.0) and ABS IO/SU tables(Cat. no. 5215.0/unpublished)

0.6

Impliedmarket sector
GVA deflator

Firm-specific humancapital

Direct costs and wage costs of employee
time in training for market sector
industries (excluding Agriculture).
ABS Training surveys (Cat. nos 6353.0,
6278.0)

1

Averageweekly fulltime ordinary
earnings
deflator

Sales of management consulting
services to market sector industries.
Assumed to be 77 per cent of sales of all
business management services tomarket sector industries.
ABS Industry survey (Cat. no. 8155.0)
and ABS IO/SU tables (Cat. no. 5215.0/
unpublished)

0.8

Impliedmarket sector
GVA deflator

20 per cent of salaries of Managers &administrators (excluding farm managers
and IT managers) in market sector
industries.
ABS Labour Force Survey(Cat. no. 6310.0)

1

Impliedmarket sector
GVA deflator

Organisational capital
Purchased

Own accounta Full details of data sources are provided in appendix A. b As used in CHS (2005, 2006). Basis forassumptions discussed in appendix A and sensitivity testing of some of these assumptions reported inappendix D.

3.1

Nominal expenditure series

For each of the intangibles an expenditure series was compiled for 1974-75 to
2005-06 — which in most cases required backcasting based on related data.
Computerised information
As noted in chapter 2, computer software is already treated as investment in theAustralian national accounts. This covers both purchased and own-account softwareand database development — although databases and own-account software
MEASUREMENT OFINVESTMENT IN
INTANGIBLES

19

development are only included if the expenditure is ‘large’ (ABS 2000, p. 452). The
ABS estimates for this intangible asset are used in this paper — time series for grossfixed capital formation and capital stock are available for the full period 1974-75 to
2005-06.
This is broadly similar to the combination of the measures of computer software andcomputerised databases used in CHS (2005), although the ABS measure mayunderstate this intangible through the exclusion of some database and own-accountsoftware development (see appendix A).
Innovative property
CHS include six types of innovative property — scientific R&D, mineral
exploration, copyright and licence costs, new product development costs in thefinancial industry, new architectural and engineering designs, and R&D in social
sciences and humanities. Differences in the collection and capitalisation of some ofthese expenditures by the ABS means there are some differences in the
categorisation of these intangibles in this paper.
Business expenditure on R&D

Australian business expenditure on R&D (BERD) is available from ABS Researchand Experimental Development, Businesses (Cat. no. 8104.0). A consistent series
for the market sector (excluding Agriculture, forestry & fishing2) was compiled for
1968-69 to 2002-03 by Shanks and Zheng (2006). For this paper it was updated andextended to 2005-06 using revised and updated data from the ABS Cat. no. 8104.0.3
R&D activity is defined by the ABS as
Creative work undertaken on a systematic basis, in order to increase the stock ofknowledge, including knowledge of man, culture and society, and the use of this stockof knowledge to devise new applications. (ABS Cat. no. 8104.0, 2005-06, p. 30)

Unlike the US survey of industrial R&D, the ABS survey of BERD includes R&D
in fields classed as social sciences and humanities (identified as a separate categoryof intangible in CHS 2005). A separate consistent time series for this subset of R&D
was not readily available for Australia. Therefore, in this paper, the intangible
2 The ABS did not directly survey farms and other businesses in this industry until 2005-06.
Agriculture has been excluded from the 2005-06 data to maintain comparability over time.
3 The series used is total expenditure on R&D, not just current expenditure. This means that there
is some double counting of capital expenditure, as was also the case in the UK study. However,capital expenditure was only 6 per cent of total Australian BERD in 2005-06.
20

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

category ‘business expenditure on R&D’ includes ‘R&D in social sciences andhumanities’ as well as scientific R&D undertaken by market sector industries.
It should also be noted that the ABS BERD data include some R&D related tofinancial services and architectural/engineering services. It appears that the scope ofthese types of R&D as discussed in CHS (2005) is broader than those activities that
may be covered by the BERD survey (although few details are given in CHS 2005).
For comparability, the CHS method was used to estimate these separate types of
R&D and the ABS-based BERD estimates were reduced to avoid double counting,where possible.4 The extent of any remaining duplication is discussed below.
Mineral exploration

Mineral exploration (the use of existing exploration techniques) is alreadycapitalised in the Australian national accounts. The ABS estimates for thisintangible asset are used in this paper — time series for gross fixed capitalformation and capital stock are available for the full period 1974-75 to 2005-06.
This measure does not include mining R&D (the development of new exploration
techniques and associated research) and therefore differs from that used in
CHS (2005). In this paper, mining R&D is included in BERD because a separate
consistent time series for mining R&D was not readily available.
Artistic originals

Artistic originals are already capitalised in the Australian national accounts. The
ABS defines entertainment, literary or artistic originals as:… originals of films, sound recordings, manuscripts, tapes, models, etc., on which
drama performances, radio and television programming, musical performances,
sporting events, literary and artistic output, etc., are recorded or embodied. (ABS 2000,
p. 454)This appears to be similar coverage to copyright and licence costs in CHS (2005).
The ABS estimates are based on the present value of expected future income flows
generated from the originals. The ABS uses a range of valuation techniques
including the market transactions approach (for example, payment of advances tocomposers and authors) and the production cost approach (for example, theproduction costs of recorded music).5
4 An adjustment was made for financial services R&D but no adjustment was possible forarchitectural and engineering designs (see appendix A for details).
5 See ABS (2000, p. 38) for further details.
MEASUREMENT OFINVESTMENT IN
INTANGIBLES

21

The ABS estimates for this intangible asset are used in this paper — time series forgross fixed capital formation and capital stock are available for the full period
1974-75 to 2005-06.
Other product development, design and research

CHS include ‘non-scientific’ R&D in the areas of new product development in thefinancial industry, new architectural and engineering designs and social sciences
and humanities in this category of intangibles. As already discussed, R&D in social
sciences is included in BERD in this paper.
New product development in the financial industry
CHS use a crude proxy for spending on new product development by the financial
services industry of 20 per cent of total intermediate purchases by that industry.
The financial services industries of interest in the Australian context are a subset of
ANZSIC Division K Finance & insurance — that is, Finance (ANZSIC 73) and ashare of Services to finance and insurance (ANZSIC 75).
For this paper, a series for 20 per cent of total intermediate purchases6 by thefinancial services industries has been constructed from ABS data from input-output(IO) and supply-use (SU) tables. The share of Services to finance, investment andinsurance is based on the output share of Finance in the combined output of Finance& insurance. This series covers the full period 1974-75 to 2005-06 — IO/SU data
were not available for every year and missing years were interpolated/extrapolated(see appendix A for details).
This approach is taken for comparability with overseas studies, but the alternative ofusing only financial R&D expenditure as collected in the ABS BERD survey is
examined as part of sensitivity testing (see appendix D).

6 No attempt has been made to specifically deduct purchases of intermediate inputs counted
elsewhere in intangibles (particularly computer software). In line with CHS (2005), thepercentage of intermediate purchases assumed to be product development (20 per cent) isconservative to account for this overlap.
22

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITYNew architectural and engineering designs
CHS estimate this intangible as half of the revenue of the architectural andengineering industries.
A time series for 50 per cent of the revenue of architectural and engineering
industries was constructed for this paper using a number of data sources. The
relevant industries for new designs are ANZSIC 7821 Architectural services and
ANZSIC 7823 Consulting engineering. Data on revenue for ANZSIC industry
classes are available from Australian Industry (ABS Cat. no. 8155.0) for the period
1998-99 to 2004-05.7
To backcast the aggregate series of architectural and engineering services to
1974-75, the growth rates for a related group of services from the product details of
the ABS Australian National Accounts: Input-Output Tables (Cat. no. 5215.0) andunpublished SU tables were used — Architectural services, surveying andconsulting engineering and Architectural services, surveying, consulting
engineering and quantity surveying, respectively.
The resulting series for sales income for architectural and engineering design
services was for the total economy. It was necessary to scale it down to the share
relevant to the market sector. This was done using the market sector intermediate
usage share of Australian production of Architectural, surveying, consulting
engineering and quantity surveying services from the SU tables from 1994-95 to
2002-03. This share was backcast to 1974-75 (and forecast to 2005-06) using
growth in the market sector share of gross value added.
On the issue of possible double counting with ABS BERD estimates, engineeringand architectural R&D are amongst the fields covered by the ABS BERD survey.
There are few details given in CHS (2005) as to the nature of the new architecturaland engineering designs that make up this intangible asset in their study. However,it appears clear that the activities the authors have in mind fall outside what would‘normally’ be considered architectural and engineering R&D — an example may be
new designs using existing technology and methods — since their data source for‘scientific R&D’ already includes engineering R&D in its scope.8 It is therefore
assumed there is no issue of double counting between a CHS-type measure forAustralia and activities covered above under the ABS BERD survey.
Some architectural and engineering services expenditure is already capitalised by
the ABS — appearing as part of the tangible capital stock. However, these data are
7 The 2005-06 estimate was made assuming that growth rate for sales was the same as in 2004-05.
8 A similar conclusion was drawn in the UK study (see MH 2006, p. 4 for further discussion).
MEASUREMENT OFINVESTMENT IN
INTANGIBLES

23

not available so it is not possible to compare this with the CHS-type estimate forAustralia or make any adjustment for double counting (see appendix A for further
discussion). The alternative of assuming that all relevant expenditure is alreadycapitalised (that is, no additional architectural/engineering services expenditure istreated as investment) is examined as part of sensitivity testing (see appendix D).
Economic competencies
Economic competencies are defined by CHS (2005, p. 28) as the value of brandnames and other knowledge-embedded firm-specific human and structural
resources.
Brand equity

Spending on brand development is proxied by spending on advertising and market
research. CHS suggest this includes the costs of launching new products,
developing customer lists and maintaining brand equity and note that
Although advertising and market research are generally aimed at building a firm’s
market share at the expense of its competitors, such spending is necessary fordeveloping new brands and maintaining the value of existing brands. (2005, p. 28)

Various rationales have been put forward for capitalising advertising and marketing
expenditure — it may result in a positive image of the firm in the market and help tosecure future orders (De and Dutta 2007); and it may establish a reputation for
quality or educate consumers about the existence of new goods (Nakamura 1999,
p. 6). A reputation for reliability may persuade shoppers to try a new item for the
first time.
Advertising
CHS estimate this intangible using expenditure data published by a US advertisingassociation.
Australian advertising expenditure for 1975 to 2006 is available from an annual
survey of the industry conducted by Commercial Economic Advisory Service ofAustralia (CEASA 2003, 2006, 2007). This is a similar type of data source to thatused in CHS (2005), except that it includes only media costs for time and space andexcludes production costs. Based on data for the United States and United Kingdom
about the proportion of production costs in total advertising costs (see appendix A),
the CEASA series has been doubled to account for production costs.

24

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

These estimates for the total Australian economy have been scaled down to market
sector estimates using market sector intermediate usage as a share of Australianproduction of advertising services from the ABS SU tables for 1994-95 to 2003-04.
This share was backcast to 1974-75 (and forecast to 2005-06) using growth in themarket sector share of gross value added.
Market research
CHS estimate this intangible as twice the revenue of the market and consumer
research industry. Industry revenue is doubled to allow for firm’s own accountspending on market research.
A time series of twice the revenue9 of the market research industry was constructed
for this paper using a number of data sources. The relevant industry is ANZSIC
7853 Market research services. Data on revenue for ANZSIC industry classes areavailable from Australian Industry (ABS Cat. no. 8155.0) for 1998-99 to
2004-05.10 An irregular survey, Selected Business Services, 1992-93 (ABS Cat.
no. 8677.0) provided similar data for 1992-93. The estimates for the missing years
were interpolated by simple averages.
This series of market research services was backcast from 1992-93 to 1974-75 using
the growth in Market and business consultancy services from the product details of
the ABS IO tables (Cat. no. 5215.0).
The resulting series was for the total economy. It was necessary to scale it down to
the share relevant to market sector intermediate usage using data on the closest
available group of services (Other business services) from SU tables for 1994-95 to
2003-04. This share was backcast to 1974-75 (and forecast to 2005-06) using
growth in the market sector share of gross value added.
Firm-specific human capital

CHS (2005, p. 29) suggest that spending on firm-specific human capital can bemeasured by the costs of employer-provided workforce training. Spending on
workforce training consists of two types of expenses:•

direct firm expenses (outlays on inhouse and external training courses)•

wage and salary costs of employee time spent in informal and formal training.

9 The CHS approach was followed for comparability purposes and in the absence of readily
available alternative estimates of inhouse market research.
10 The 2005-06 estimate was made assuming that the growth rate for sales was the same as in
2004-05.
MEASUREMENT OFINVESTMENT IN
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25

There are two aspects of the scope of the measure of firm-specific human capitalused in this paper that should be noted.
•

All employer-provided structured training is included.
– There is a question as to how much of this training is firm-specific and nottransferable.11 Richardson (2004, p. 29) notes that it is standard to argue thatin a competitive labour market there will be no benefit to firms fromproviding general training so firms will only provide firm-specific training.12
On that basis it could be assumed that all employer-provided training is firm
specific. However, in practice most training is neither wholly general nor
firm specific. It has not been possible to examine this issue in detail in thispaper or adjust the measure of firm-specific human capital.

•

This is not a measure of total human capital.
– It does not include education and unstructured on-the-job training. However,to some extent these broader elements of human capital are incorporated into
the growth accounting exercise in chapters 5 and 6 through use of the ABS
experimental quality-adjusted labour input series.13– Related to this is an issue of double counting. Fukao et al. (2008a) noteIf workers gain non-firm-specific skills from [employer provided] off-the-job
training, such accumulation of human capital will be reflected in their wage rates.
Since in standard growth accounting wage increases by age are already taken into
account as improvements in labor quality, there is a risk of double counting [incapitalising off-the-job training costs incurred by employers]

Again, it has not been possible to make any adjustment for this potential
double counting.
It has been acknowledged by a number of researchers in this area that employerprovided training in Australia is poorly measured (see, for example, Cully 2005 andRichardson 2004), particularly prior to 1990 (Smith 1999). No single data source
provides a time series of Australian employer-provided training expenditure. To
construct a series, several different sources were used, together with a number of

11 ABS Cat. no. 6278.0 (2005, p. 48) defines skills gained through the completion of a training
course as transferable if they could be used in a similar job with another employer. It estimatedthat 90 per cent of reported work-related training courses completed by employees wereconsidered by the employees as providing skills that were transferable. However, it was also thecase that employees considered that 93 per cent of this training had not helped them gain a pay
rise or promotion.
12 For a discussion of the economics of general versus firm-specific training see Borland (1990).
13 For ABS estimates of the human capital stock based on education and work experience see
Wei (2008).
26

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

assumptions. The resulting series is therefore only broadly indicative and trends in it
should be interpreted with caution.
The ABS Employer Training Expenditure, Australia (Cat. no. 6353.0), an employer
survey, measured both direct costs and wage and salary costs for the total economy(excluding agriculture) for 1989, 1990, 1993 and 1996. The ABS also estimated thismeasure for 2001-02 based on data from Employer Training Expenditure andPractices (Cat. no. 6362.0) and Education and Training Experience(Cat. no. 6278.0) (NCETS 2004). Specifically the measure includes
The sum of employers’ expenditure for employees gross wages and salaries for timereceiving and providing structured training, fees paid to consultants and institutions andother expenditure on structured training. (ABS Cat. no. 6353.0, 1996, p. 46)

where structured training is defined as
all training activities which have a predetermined plan and format designed to develop
employment-related skills and competencies. It consists of periods of instruction, or a
combination of instruction and monitored practical work. (ABS Cat. no. 6353.0, 1996,
p. 45)For 1993-94 and 1996-97 the expenditure data were available by industry, enabling
the construction of a market sector (excluding Agriculture) estimate. For 1989-90
and 1990-91, the market sector estimate was derived by using growth in expenditure
for the whole economy. For 2001-02 the market sector estimate was derived byusing total economy growth in expenditure between 1996-97 and 2001-02, adjusted
for the fall in market sector share of total hours of training from ABS Education andTraining Experience, Australia (Cat. no. 6278.0).
To backcast the expenditure series to 1974-75 it was necessary to use growth in a
related series. No ideal series was available. However, it was possible to construct
an approximate series for total training hours for the market sector (excluding
Agriculture).14 This was combined with an approximate series for real expenditure
per training hour15 to derive total training expenditure for the market sector.
14 This was based on data for training hours per employee from ABS Cat. nos 6353.0 and 6278.0
and the number of employees from the Labour Force Survey (see appendix A). A constantnumber of training hours per employee was assumed from 1974-75 to 1989-90. This is a very
crude assumption. However, this assumption is made for transparency in the absence of sufficient
data to fit a trendline. (During the period for which there are data available there are breaks inseries created by the introduction of the Training Guarantee in 1990-91, its suspension in
1994-95 and abolition in 1996-97.)
15 Expenditure per training hour was available for 1989-90, 1990-91, 1993-94, 1996-97 from ABS
Cat. no. 6353.0 and derived for 2001-02 from NCETS (2004) and ABS Cat. no. 6278.0. These
data were deflated by growth in average weekly earnings to obtain a real cost series. In theabsence of any specific information on changes in real costs, real cost per hour was interpolated
MEASUREMENT OFINVESTMENT IN
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27

No adjustment was made to account for training in the agriculture industry, which
would lead to an understatement of expenditure by the market sector on firmspecific human capital. However, in general, the firm-specific human capital series
should be viewed as being affected by a number of measurement errors that could
lead to understatement or overstatement of the true level. (For example, the use of
constant training hours per employee at either end of the series may have biased theestimates). Additional data and/or more sophisticated estimation techniques would
be required to make more definitive statements about the size and direction ofchange in firm-specific human capital investment. This exercise was beyond thescope of this paper.
Organisational capitalThis intangible, along with firm-specific human capital, is particularly difficult toestimate. However, CHS note that the importance of organisational capital requires
its treatment as an investment for consistency with other assets. They also cite
micro data evidence that firm level differences in organisational practices arestrongly related to productivity (CHS 2006, pp. 18–9).
Marrano and Haskel (MH 2006, p. 11) liken the measurement problem of
establishing a volume of organisational capital from observed expenditure to that ofestablishing the volume of R&D knowledge capital from observed expenditure on
R&D. An additional problem is that expenditure on organisational capital can beunobserved.
CHS (2005, p. 29) suggest that investment in organisational capital is made up of
two components•

purchased — such as management consultant fees•

own account — measured in terms of the value of executive time spent on
improving the effectiveness of business organisations (that is, time spent on
developing business models and corporate cultures).

CHS note that there is some overlap between these measures of organisational
capital and some other intangibles
Consulting expenditure and the estimated value of executive time conceptually overlap
by a small amount (the value of executive time in the management consulting industry).
In addition, some portion of management time arguably overlaps with R&D, so that,for some industries, the line between industry-specific process innovation andorganizational change more generally may not be easily drawn. But, whatever
uncertainty the amount induces in our estimates, it is dwarfed by the use of an arbitrary
between the actual data points and an exponential trend was fitted to estimate growth before
1989-90 and from 2001-02 (see appendix A).
28

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

fraction for the amount of executive time devoted to organizational change anddevelopment. (2005, pp. 29–30)

MH (2006, p. 12) also suggest some overlap with IT consulting and software
investment. They also note that some expenditure on management consultants is todeal with short term problems (for example, closing down businesses anddischarging employees).
Purchased
CHS estimate this intangible from the revenue of the management consulting
industry. Data for the revenue of the Australian management consulting industry isvery limited. A time series was constructed for this paper from the few available
data sources for the closest relevant industry, ANZSIC 7855 Business management
services. This is broader than just management consultancy — for example, it
includes public relations consultancies (which are excluded from the UK and US
studies). Therefore only 77 per cent of this industry revenue was included, as acrude adjustment for some of this difference in scope.16
Data on revenue for ANZSIC industry classes are available from AustralianIndustry (ABS Cat. no. 8155.0) for 1998-99 to 2004-05.17 The series for business
management services was backcast from 1998-99 to 1974-75 using the growth inMarket and business consultancy services from the product details of the ABS IO
tables (Cat. no. 5215.0).
The resulting series for sales income for business management services was for the
total economy. It was necessary to scale it down to the share relevant to market
sector intermediate usage using data on the closest available group of services(Other business services) from SU tables from 1994-95 to 2003-04. This share wasbackcast to 1974-75 (and forecast to 2005-06) using growth in the market sector
share of gross value added.

16 There is very limited information about the size of the public relations segment of this industry
in 1992-93 and it is assumed that the public relation share is constant over the full time series. It
has not been possible to adjust for other differences in scope, such as the inclusion in Australianestimates of environmental consultancies, and this may lead to an overstatement of organisational
capital compared with the studies of other countries (see appendix A for further details). This is
examined as part of sensitivity testing in appendix D.
17 The 2005-06 estimate was made assuming that the growth rate for sales was the same as in
2004-05.
MEASUREMENT OFINVESTMENT IN
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29

Own account
CHS estimate the own-account component of organisational capital as 20 per centof the value of executive time using BLS data on employment and wages in
executive occupations. MH (2006, p. 13) use a similar approach but excludes ICT
managers (to avoid double counting with capitalised software) and the selfemployed (who they indicate do not build organisational capital in the same way as
in other industries). The definition of managers appears to be relatively broad (notjust, for example, CEOs).
The own account portion of organisational capital for Australia was estimated fromaverage earnings of managers and the number of managers in the market sector. The
specific occupation group used is Managers & administrators18 excluding, where
possible, both IT managers and Farmers & farm managers. The exclusion of IT
managers is based on the reasoning used by MH (2006) — avoiding double
counting with IT capital. Farmers & farm managers are excluded because thissubgroup is considerably different from other managers and would not be expected
to build organisational capital in the same way. The self-employed (ownermanagers of unincorporated enterprises) are also excluded, as in MH (2006),
because the relevant ABS survey did not cover this group.
Data on average weekly earnings and number of Managers & administrators wereavailable from the Employee Earnings, Benefits and Trade Union Membership(EEBTUM) survey (ABS Cat. no. 6310.0). The average earnings are calculated
excluding those employees who did not draw a wage or salary, that is, people
working in their own incorporated enterprises.
Annual unpublished data on earnings and employee numbers from the EEBTUM
survey are available for Managers & administrators, excluding IT managers andfarmers, in the market sector from August 1997 to August 2006. The number of
employees obtained includes persons who receive a wage or salary or persons who
operate their own incorporated enterprises. Using this number of employees toobtain the wages bill implicitly assumes the value for own account organisational
capital investment for owner-managers is equal to the average earnings of Managers& administrators drawing a wage or salary.
Prior to 1997 data are only available from the annual publication of the EEBTUM
survey. This included the number of Managers & administrators for the total
economy back to 1986 and average weekly earnings back to 1988. Prior to this, data
18 Australian Standard Classification of Occupations, Second edition, 1997 (ABS Cat. no. 1222.0)
has been used or the closest available occupation from earlier occupational classifications (seeappendix A).
30

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

for full-time Managers & administrators in the total economy were available back to
August 1975. Growth in average weekly earnings for these groups of Managers &administrators were used to backcast the market sector series from 1997 to 1975.
For employee numbers the series for Managers & administrators excluding IT
managers and farmers was backcast from 1997 to 1975 using growth in a market
sector series constructed from Labour Force Survey data for employed Managers
and administrators by industry.
The total wages bill was calculated as the number of employees multiplied byaverage weekly earnings multiplied by 52 weeks. As noted above, this number of
employees excludes owner-managers of unincorporated enterprises. This may leadto an underestimate of own-account organisational capital if this group does invest
in this intangible in the same way as other Managers & administrators.
Twenty per cent of this wages bill was counted as expenditure on own accountorganisational capital. CHS (2005, p. 30) note that the assumption that managers
spend 20 per cent of their time investing in organisational development is arbitrary.
However, for the purposes of comparability, and in the absence of alternative
estimates of time spent, the same percentage is used in this paper.

3.2

How much of expenditure is investment

Column 3 of table 3.1 shows the proportion of current expenditure that is assumed
to be investment, in line with CHS (2005). This approach is followed forinternational comparability and in the absence of estimates of the proportion of
expenditure that should be treated as investment.19 For most intangibles 100 per
cent of the expenditure estimate is included. There are two exceptions — brandequity and purchased organisational capital.
Brand equity
CHS (2005) exclude certain categories of advertising that are not considered to be
reputation building and then assume 60 per cent of the remaining advertisingexpenditure and 60 per cent of market research expenditure is investment. Thisapproach is followed in this paper.
There are two issues — does this expenditure build an asset and how long lived isit?

19 Sensitivity testing of the growth accounting results to investment size is reported in appendix D.
MEASUREMENT OFINVESTMENT IN
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31

•As already noted, the extent to which expenditure on advertising is building an
asset rather than being consumed is a difficult question, which is not examined
in detail in this paper. However, some types of ads are excluded altogether fromother studies because they are not considered to be asset building at all.
– The US study includes only national ads — the ‘local’ ads are considered to
be promoting sales at specific stores rather than being aimed at selling
specific products (CHS 2005, p. 33).
– The UK study excludes classified ads — small personal ads by individuals or
recruiting advertisements for vacancies to be filled in a relatively short time
period (MH 2006, p. 8).
– It was possible to exclude ‘Classifieds and directories’ from the Australianadvertising expenditure series — a similar adjustment to the UK study.

•

Advertising or market research expenditures with a service life of less than one
year are excluded as they are an expense not an investment.
– CHS (2005, p. 32) note that, while the literature finds that the effects ofadvertising are generally short-lived, more than half has a service life of atleast one year. From this they assume that 60 per cent of advertising andmarket research expenditures should be counted as investment.

Purchased organisational capital
CHS assume 80 per cent of spending on management consulting services relate tobuilding organisational capital. The remainder is assumed to be related to be day-today advising on, for example, short-term personnel problems, which is assumed not
to build organisational capital. This approach is followed in this paper, given thevery limited available data about the Australian management consulting industry.

3.3

Deflators

Column 4 of table 3.1 shows the deflators used to convert nominal values forinvestment in intangibles into their real counterparts. As noted by CHS (2005,
p. 36), this conversion is difficult because intangibles are often owner constructed
or difficult to measure services with no available or reliable price deflator. In
CHS (2006), the authors settle on the use of a pure output deflator (non-farmbusiness output) as a proxy for the price of intangibles, while noting that this proxyis a ‘placeholder’ until further research develops deflators for specific intangibles.20
20 For a discussion of the relative merits of an output versus a wage deflator for this purpose see
CHS (2006, pp. 14–5).
32

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITYThe equivalent deflator in the Australian context is the implied market sector grossvalue added (GVA) deflator, derived from the Australian national accounts.21 This
deflator is used for all categories of intangible except for:•computer software, mineral exploration and artistic originals — ABS real grossfixed capital formation series are available for these intangible assets (based on
asset-specific implicit price deflators)22•

financial product development — an implied Finance & insurance GVA deflator(derived from the Australian national accounts) was used. As discussed by
MHW (2007, p. 15), the most relevant output deflator is the one for the output
that presumably embodies the knowledge that the R&D is generating•

firm-specific human capital — in order to compile this series a wage deflator(derived from average weekly ordinary time earnings for full-time adults) wasused to estimate real cost per hour of training. As this intangible mainlycomprises wage costs the resulting estimates of firm-specific human capital inreal terms were used as the real investment series.

3.4

Real investment series

Current intangible investment
Applying the measurement assumptions discussed above, it is estimated that market
sector investment in intangibles was $57 billion in 2005-06 (table 3.2). This wasalmost half the size of market sector investment in tangibles and nearly 10 per centof adjusted market sector gross value added (including the investment in theintangibles).23 Around 80 per cent of this investment was in the newer intangibles(that is, those not already treated as investment in the national accounts).

21 Australian MFP is measured for the market sector rather than the non-farm business sector usedin the United States. The implied market sector GVA deflator is derived from the current priceand chain volume series in the Australian national accounts.
22 See ABS (Australian System of National Accounts, Cat. no. 5204.0) for further details.
MHW (2007) similarly use the software deflator from the UK Office of National Statistics.
23 This is equivalent to about 6 per cent of conventionally-measured GDP (for the total economy
not just the market sector), which includes software, mineral exploration and artistic originals but
not the new intangibles.
MEASUREMENT OFINVESTMENT IN
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33

Table 3.2

Nominal intangible investment, market sector, 2005-06
2005-06

Share ofinvestment

Share of adjusted
market sector GVAa

$m

%

%

Computerised information

7 435

13.1

1.3

Innovative property

21 346

37.6

3.6

BERD

7 904

13.9

1.3

Mineral exploration

2 503

4.4

0.4

698

1.2

0.1

10 24118.1

1.7

Financial product development

5 591

9.9

0.9

New arch./eng. designs

4 650

8.2

0.8

Economic competencies

27 942

49.3

4.7

Brand equity

8 444

14.9

1.4

Advertising

7 337

12.9

1.2

Market research

1 107

2.0

0.2

Firm-specific human capital

4 353

7.7

0.7

Organisational capital

15 14626.7

2.6

Purchased org. capital

10 20818.0

1.7

Own account org. capital

4 938

8.7

0.8

Total intangibles investment

56 724100.0

9.6

New intangibles

46 08825.0

7.8

Artistic originals
Other product development, design
and research

National accounts intangibles

10 6365.8

1.8

Tangibles

127 935

69.3

21.6

Total investment

184 659

100.0

31.2

Ratio intangible to tangible investment

0.44

Ratio of existing to adjusted market GVA

0.92

a Adjusted market sector gross value added is existing market sector GVA at basic prices plus market sector
investment in new intangibles.
Source: Authors’ estimates.

Total investment in intangibles in 2005-06 was made up as follows.
•

The largest component was economic competencies (49 per cent).
– Of this, more than half was organisational capital, about a third brand equity
and about a sixth firm-specific human capital.

34

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

•

Innovative property was the second largest group (38 per cent).
– This was fairly evenly split between non-scientific R&D (other productdevelopment and artistic originals) and other R&D (BERD and mineral
exploration).24•

Investment in computerised information (13 per cent) was around a third the sizeof that in innovative property.

Therefore investment in some of the newer intangibles was as large or larger thanthe more traditional intangibles:•organisational capital was the largest individual component of investment inintangibles and twice the size of investment in computerised information•

investment in brand equity was similar in size to investment in computerised
information and to BERD.

Growth in intangible investment
In real terms, total intangible investment in the market sector grew from just over
$9 billion in 1974-75 to $57 billion in 2005-06 — an average annual growth rate of
6 per cent (figure 3.1). Real tangible investment increased from $33 billion to $128
billion over the same period — an average annual growth rate of 4.5 per cent.
Intangible investment increased in importance relative to tangible investment overthis period — the ratio of intangible to tangible investment rising from 0.20 to 0.44
(in nominal terms)25, having reached 0.54 in 2001-02 prior to the recent period of
rapid growth in tangibles.
Capitalising all intangibles investment virtually removes the declining trend in theratio of total investment to gross value added shown by ABS national accounts data
(figure 3.2). ABS national accounts data (which include only a subset of intangibles
as investment) show a declining trend in nominal total investment as share ofmarket sector gross value added (bottom line). However, after including the ‘new’
intangibles as investment the trend is almost flat (top line). This trend is obviously
sensitive to the assumptions used in estimating investment in the new intangibles(see appendix D for the variability of investment to these assumptions).

24 However, due to data limitations BERD does include R&D in social sciences and humanities.
25 In nominal terms, because of the non-additivity of real (chain volume) measures.
MEASUREMENT OFINVESTMENT IN
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35

Figure 3.1

Real investment, tangibles and intangiblesa, market sector,
1974-75 to 2005-06
2005-06 dollars, chain volume measures$b
140
tangibles

120
100
80
60
40

intangibles
2001974-75

1979-80

1984-85

1989-90

1994-95

1999-00

2004-05a For sensitivity of intangibles investment to some of the assumptions in its compilation, see appendix D.
Data sources: Based on ABS national accounts data and authors’ estimates.

Figure 3.2

Total investment shares of gross value added, 1974-75 to
2005-06
Percentage of market sector gross value addeda

Per cent
35
Including investment in new intangibles
30

25

ABS national accounts investment

20

15
1974-75

1979-80

1984-85

1989-90

1994-95

1999-00

2004-05a For the top line, investment in all assets including ‘new’ intangibles as a share of adjusted market sector
gross value added (existing market sector gross value added at basic prices plus market sector investment in
new intangibles). For the bottom line, investment in all assets included in the ABS national accounts (onlyincludes the intangibles software, mineral exploration and artistic originals) as a share of existing market
sector gross value added at basic prices derived from the ABS national accounts. Both in nominal terms.
Data sources: Based on ABS national accounts data and authors’ estimates.
36

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Total investment in intangibles as a share of adjusted market sector gross value
added is estimated to have risen from 4.5 per cent in 1974-75 to 9.6 per cent in
2005-06. This is an average growth rate in this share of 2.4 per cent a year — which
is similar to the Webster (2000) estimate (derived using different methodology),
although the share is quite different.
•

Webster (2000) estimated that enterprise intangible investment as a ratio of all
production rose by 2.8 per cent a year in the 25 years to 1996. Growth in theinvestment series in this paper over the closest comparable period (1974-75 to
1995-96) is very similar to this at 2.9 per cent a year.

•

Webster (2000) proxied this investment ratio with the share of the labour force
in occupations producing intangible capital — which was 11 per cent in 1971
and 22.1 per cent in 1996. The expenditure-based measures in this paper are lessthan half the size — about 5 per cent in 1974-75 and 8.5 per cent in 1995-96.

Growth in the level of intangibles investment has been fairly steady on average overthe last three decades — 1974-75 to 1984-85, 1984-85 to 1994-95 and 1994-95 to
2005-06 — at 5.6, 6.4 and 6.0 per cent a year, respectively (table 3.3). This
contrasts with tangible assets, for which average growth was around 4, 2, and 8 percent a year in successive decades.
While average growth in total investment in intangibles has been fairly steady over
the three decades, the trends across different types of intangibles have varied(table 3.3). Overall, the average rate of growth of investment in the national
accounts intangibles has declined over successive periods (although thecomputerised information growth rate has remained the highest), while that of the
new intangibles as a group rose between the first period and latter periods.
The fastest growing group within economic competencies shifted from brand equity
in the first decade to organisational capital in subsequent periods. Growth in firmspecific human capital fluctuated but was relatively low in most periods. The
growth rate of investment in BERD fluctuated but reached higher levels in the last
decade than the first. The opposite was the case for other product development.
Average growth in each of the components of innovative property was lower thanthat of organisational capital in the last period.

MEASUREMENT OFINVESTMENT IN
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37

Table 3.3

Growth in real intangible investmenta, market sector
1974-75– 1984-85

1984-85– 1994-95

1994-95– 2005-06

1974-75– 2005-06% per year

% per year

% per year

% per year

Computerised information

28.3

21.4

11.6

20.0

Innovative property
BERD
Mineral exploration
Artistic originals
Other product development,
design and research

5.4
2.0
9.0
11.1

4.9
12.3
-1.2
-3.1

4.3
7.1
1.2
6.4

4.9
7.1
2.8
4.7

4.3

5.4

3.3

4.3

Financial product development
New arch./eng. designs

4.6
3.5

3.9
8.6

0.8
7.4

3.0
6.5

4.4
5.6

4.4
1.5

5.5
2.9

4.8
3.3

5.4
15.8

1.1
12.5

2.1
11.3

2.8
13.1

Firm-specific human capital
Organisational capital

2.8
3.4

4.5
9.9

0.0
10.2

2.3
7.9

Purchased org. capital
Own account org. capital

15.8
1.6

19.3
5.1

13.4
5.9

16.1
4.3

Total intangibles investment

5.6

6.4

6.0

6.0

New intangibles
National accounts intangibles
Tangibles
Total investment

4.2
12.8
3.6
4.0

5.5
9.9
1.7
2.9

5.3
8.8
8.0
7.3

5.0
10.4
4.5
4.8

1974-75– 1984-85

1985-86– 1994-95

1995-96– 2005-06

1974-85– 2005-06

0.23

0.34

0.48

0.35

0.96

0.94

0.93

0.94

Economic competencies
Brand equity
AdvertisingMarket research

Average nominal ratio

Ratio intangible to tangible
investment
Ratio of existing to adjusted
market GVA

a Growth rates are based on chain volume measures (CVMs) — ABS CVMs have been used for mineral
exploration and artistic originals; an aggregate market sector CVM has been calculated for computerised
information using ABS industry data; and CVMs have been calculated for all subtotals and totals.
Source: Authors’ estimates.

38

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

For some intangibles growth in real investment was relatively volatile from year toyear — particularly innovative property intangibles, such as mineral exploration,
artistic originals and financial product development (figure 3.3).
Figure 3.3

Real investment, by asset type, market sector, 1974-75 to
2005-06
Index 2005-06 = 100

Major groups of intangibles and tangiblesa
Index
140
120
100
80
60
40
20
0
1974-75

1979-80

1984-85

1989-90

1994-95

Computerised information
Economic competencies
Total tangibles

1999-00

2004-05

Innovative property
Total intangibles

Innovative property
Index
140
120
100
80
60
40
20
0
1974-75

1979-80

1984-85

BERD
Mineral exploration
New arch./eng design

1989-90

1994-95

1999-00

2004-05

Artistic originals
Financial product development(continued on next page)

MEASUREMENT OFINVESTMENT IN
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39

Figure 3.3(continued)

Economic competencies
140
120
100
80
60
40
20
0
1974-75

1979-80

1984-85

1989-90

1994-95

AdvertisingFirm-specific human capital
Own account org. capital

1999-00

2004-05

Market research
Purchased org. capitala ABS CVMs have been used for mineral exploration and artistic originals; an aggregate market sector CVM
has been calculated for computerised information using ABS industry data; and CVMs have been calculated
for all subtotals and totals.
Data sources: Authors’ estimates; ABS national accounts data.

The varying growth rates across intangibles have obviously led to a change in thecomposition of total intangible investment over time. Figure 3.4 highlights thegrowing importance of organisational capital, computerised information and BERD
relative to the other intangibles.
Shares of nominal total intangible investmenta, by asset typeFigure 3.4

Per cent
100%
80%

Economiccompetencies

60%
40%

Innovative
property

20%

Computerised
information0%
1974-75

1984-85

1994-95

2005-06

Computerised information

BERD

Mineral exploration

Artistic originals

Other product development

Brand equity

Firm-specific human capital

Organisational capitala For sensitivity of the composition of intangibles investment to some of the assumptions in its compilation,
see appendix D.
Data source: Authors’ estimates.
40

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

4

Services from intangible capital

For the purposes of examining the contribution of intangibles to productivity
growth, it is the capital services flowing from the stocks that is the most relevantmeasure. Capital services are estimated by combining data on the size of the capitalstocks and the rental prices of that capital.
As outlined in chapter 2, the estimation of capital services from intangibles involves
a number of steps and measurement challenges:•

build a real capital stock for intangible assets– determine the appropriate rate of depreciation for each intangible asset– use the perpetual inventory method to construct a real capital stock from thereal investment series and assumed depreciation rates•

construct a volume index of capital services of all capital inputs (tangible andintangible) using capital stocks and rental prices– determine the appropriate rental price parameters for each intangible asset– rental prices for each asset (tangible and intangible) are derived from theadjusted operating surplus by solving for an equalising rate of return acrossall assets.

This chapter presents the estimates of both the stocks and services measures ofintangible capital, together with an outline of the methodology used to derive themand the measurement challenges involved. (The methodology is described in moredetail in appendix C. The sensitivity of the capital estimates to some of theunderlying assumptions is discussed in appendix D.)

4.1

Intangible capital stocks

Perpetual inventory method
The Australian Bureau of Statistics (ABS) estimates the stock of software, mineral
exploration and artistic originals and these national accounts data are used in thispaper. The measurement framework used to derive estimates of the stock of each

SERVICES FROMINTANGIBLE CAPITAL

41

the ‘new’ intangible is the perpetual inventory method (PIM).1 PIM can be
represented by
Rt+1 = (1-δ)Rt + Nt

where δ is the geometric constant depreciation rate of the asset2, Rt is the intangible
stock and N t is the flow of investment (expenditure in constant prices) at time t.3
Assuming that preceding the initial observation (the first available data point), there
was a long period of real investment growth at a constant rate of g, the initial stockof intangible capital in period t = 0 (Ro) can be calculated using
Ro = No /(g + δ)

where No is the investment in the intangible (in constant prices) during the first year
for which data are available; and g is approximated by the average annual
logarithmic growth of investment in the intangible (in constant prices) over the fullperiod for which data on the intangible are available.
This application of the PIM differs from that used in the United States, United
Kingdom and Japanese studies in the assumptions related to the initial stock.
Corrado, Hulten and Sichel (CHS 2006) assumed an initial stock of zero in a
specific year for each asset (for example, 1928 for advertising). Marrano, Haskel
and Wallis (MHW 2007) assumed an initial stock of zero for all intangible assets in
1970. Fukao et al. (2008b) constructed their initial stocks as they had investment
data back to 1973 and began their stock estimates in 1980. The method used in thispaper, as described above, does not set an initial stock equal to zero but can be used
to calculated the initial stock in any year (1974-75 in this case) for whichinvestment flow data are available. It does assume a constant rate of investment
growth for the period prior to the first data point for investment. However, this does
not make a large difference to the initial stock estimates because of the highdepreciation rates.

1 The ABS also uses the perpetual inventory method to estimate the stocks for the national
accounts intangibles. However, the ABS method is more complex than the method used in thispaper (see ABS 2000, chapter 16).
2 In the capital measurement literature, this form of PIM corresponds to the geometric ageefficiency profile for the productive capital stock. This differs from the hyperbolic function usedby the ABS for tangibles and the national accounts intangibles, where the decline in efficiency of
the asset increases as the asset ages (ABS 2000, para. 16.19–16.21).
3 CHS (2006, p. 23) note that the use of this identity assumes that investment becomes productive
as soon as it is put in place. This assumption, which avoids the complication of different gestation
lags for different assets, is in line with much of the growth accounting literature.
42

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITYThe investment flows (Nt) for each intangible were described in chapter 3. The
depreciation rates (δ) used for each new intangible in the PIM are those used in
CHS (2006) to enable comparability (table 4.1).4 These assumed rates are based on
the interpretation by CHS of the empirical literature for R&D and brand equity andtheir view that firm-specific human capital and organisational capital lie between
R&D and brand equity in terms of longevity (further details are provided inappendix A). The average ABS depreciation rates for software, mineral exploration
and artistic originals are included for comparison.5
Table 4.1

Depreciation rate assumptionsa

Category of intangible

Rate%

Computer software

20

Innovative property
Business R&D
Mineral exploration
Artistic originals
Other product development, design and research

20
10
60
20

Economic competencies
Brand equity
Firm-specific human capital
Organisational capital

60
40
40

a For the new intangibles the depreciation rate is assumed to be constant over time. For the intangibles
already included in the national accounts (software, mineral exploration and artistic originals) the ABS varies
the rate over time — the rate shown is the average for the period 1974-75 to 2005-06.
Sources: Corrado, Hulten and Sichel (2006, p. 23); ABS unpublished national accounts data.

4 It should be noted that the United States, United Kingdom and Japanese studies appear to use thesimple PIM for estimating the capital stocks for the existing national accounts intangibles. As
noted above, the Australian ABS estimates for these assets that have been used in this paper are
based on a more complex approach.
5 These depreciation rates differ from those in the US study, which used 33 per cent for softwareand 20 per cent for mineral exploration and artistic originals (CHS 2006, p. 23). Some sensitivity
testing of the growth accounting results to depreciation rate assumptions for the new intangibles
is presented in appendix D.
SERVICES FROMINTANGIBLE CAPITAL

43

Capital stock estimates
Current capital stock

The value of the total intangible capital stock of the market sector is estimated tohave been around $189 billion in 2005-06 (or 14 per cent of the total capital stock)(table 4.2).6 Just over 70 per cent of the total intangible stock was the newer
intangibles (that is, those not already treated as capital in the national accounts).
And several of the new intangibles were as large or larger than computerised
information (which is capitalised in the national accounts) and business R&D (forwhich treatment as capital in the national accounts is planned).
The composition of the total intangible stock was as follows (table 4.2).
•

Innovative property was more than half of this total stock (57 per cent).
– Of this, around two-thirds was intangibles not currently in the national
accounts (40 per cent of the total intangible stock). The largest individualcomponent was other product development (24 per cent), followed bybusiness R&D and mineral exploration (each around 16 per cent). Artistic
originals was the smallest share of total intangibles (less than 1 per cent).

•

Economic competencies made up nearly a third of the total intangible stock(30 per cent).
– Organisational capital was the largest component of this group (18 per cent)and of similar size to business R&D and mineral exploration. Firm-specifichuman capital and brand equity were both relatively small at around 6 percent of total intangible assets.

•

The remainder was computerised information (12 per cent of the total stock ofintangibles).
– The computerised information stock was smaller than some of the new
intangibles, including non-scientific R&D and organisational capital.

6 World Bank (2006) estimated that Australia’s intangible capital stock was $5624 billion in 2000.
However, as discussed in chapter 1, that estimate is based on a much broader definition of
intangibles (including raw labour, social capital and institutional infrastructure) than the CHS
methodology.
44

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Table 4.2

Value of intangible capital stocka, market sector, 2005-06
Value

Share of total$m%Computerised information

22 61912.0

Innovative property
Business R&D
Mineral exploration
Artistic originals
Other product development, design and research

108 240
29 49031 737
1 102
45 911

57.3
15.6
16.8
0.6
24.3

27 50718 405

14.6
9.7

58 03213 86730.7
7.3

12 160
1 707

6.4
0.9

10 42933 7375.5
17.9

22 650
11 08612.0
5.9

188 891

100.0

133 433
55 458
1 124 783
1 313 674

10.2
4.2
85.6
100.0

Financial product development
New architectural and engineering designs

Economic competencies
Brand equity
AdvertisingMarket researchFirm-specific human capital
Organisational capital
Purchased organisational capital
Own account organisational capital

Total intangibles
New intangibles
National accounts intangibles
Tangibles
Total capital
Ratio of intangibles to tangibles stock

0.17

a Net capital stock.
Sources: Authors’ estimates; ABS national accounts data.

Growth in the capital stock

Between 1974-75 and 2005-06, the total stock of intangibles grew from $37 billion
to $189 billion (in real terms) — an average rate of 5.4 per cent a year (figure 4.1).
The share of intangible capital in total capital (in nominal terms) grew from 7.3 percent in 1974-75 to 14 per cent in 2005-06, a growth rate of 2.1 per cent a year. Thisis a higher growth rate than found by Webster (2000), who estimated growth of
1.25 per cent a year over the 50 years to 1998 (on a trend basis). However, thisdifference is likely to be partly due to the longer time period (with intangibles
growth likely to have been slower in the pre-1975 period). Also, Webster’s
intangibles estimates, which were based on the difference between the stock market
value and balance sheet value of publicly-listed companies, were adjusted to
exclude a series of negative estimates of intangible capital.
SERVICES FROMINTANGIBLE CAPITAL

45

Figure 4.1

Total intangibles capital stocka, market sector, 1974-75 to
2005-06
2005-06 dollars, chain volume measure

220

$b

180
140
100
60
20
1974-75

1979-80

1984-85

1989-90

1994-95

1999-00

2004-05a For sensitivity of the intangible capital stock to some of the assumptions in its compilation, see appendix D.
Data source: Authors’ estimates.

The composition of the intangible capital stock changed considerably between
1974-75 and 2005-06 (figure 4.2). The share of computerised information capital
has increased, while that of innovative property as a group has decreased. The shareof economic competencies also increased slightly. However, there was also change
in the composition within economic competencies and innovative property.
Organisational capital gained share, while the shares of brand equity and firmspecific human capital fell. Within innovative property, mineral exploration lost
share, while business R&D and other product development gained share.

46

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Figure 4.2

Composition of total nominal intangible stock, 1974-75 to
2005-06
Per cent

100%

Organisational capital
Economiccompetencies

Firm-specific human80%

Brand equity
Other product development

60%

Artistic originals
Innovative
property

40%
Mineral exploration
Business R&D

20%

Computerised information0%
1974-75

1979-80

1984-85

1989-90

1994-95

1999-00

Computerised
information

2004-05

Data source: Authors’ estimates.

4.2

Capital services

For the purposes of calculating multifactor productivity (MFP), it is real capital
services that is the relevant input measure not the capital stock. Aggregate capital
services indexes are created using the volume index of the capital stock of each
asset weighted by its rental price weight (see appendix C).
Rental prices
Rental prices are the user cost of capital — their use as weights assumes that therental price reflects the marginal product of an asset. Therefore more productive
assets are given a higher weight in forming the capital services measure.
Rental prices include the opportunity cost of investing elsewhere, the loss in market
value of the good due to ageing; and the capital gains or losses due to asset priceinflation/deflation; and adjustments for differential tax treatment across assets. They
are derived from the rate of return on assets (which is common to all assets7), asset

7 This assumes that businesses invest in each type of capital until the rate of return is equal acrossassets, as is the case in standard growth accounting (see CHS 2006, p. 26 for further discussion).
SERVICES FROMINTANGIBLE CAPITAL

47

price deflators, the depreciation rate and income and non-income tax parameters8(see appendix C for a discussion of these rental price components).
As noted in chapter 2, the capitalisation of intangibles requires the equalising rate of
return on all assets to be recalculated. By capitalising intangibles, total value added,
total capital income and the pool of assets over which this income is distributed are
all changed. The equalising rate of return across all assets therefore changes and thisaffects the rental prices for all assets, not just the intangibles (see section C.1 for a
full derivation).9
Differences in rental prices across assets mean that the growth in aggregate capital
services will differ from growth in the aggregate capital stock. Figure 4.3 shows therental prices used for the new intangibles — there are considerable differences in
the level of and trends across assets. The growth in the capital stock of an asset witha higher rental price will carry a higher weight in the aggregate capital services
index.
One factor that has a large effect on the spread of the rental prices across assets isthe depreciation rate — the larger the depreciation rate, the higher the rental price.
Brand equity has the highest depreciation rate (60 per cent) and rental price,
followed by organisational capital and firm-specific human capital (40 per cent).
The remainder of the assets (business R&D, financial product development, andnew architectural and engineering designs) have a depreciation rate of 20 per centand lower rental prices.
There are additional parameter differences that explain some of the variation inrental prices between assets with the same depreciation rate. Different pricedeflators explain this variation between financial product development and newarchitectural and engineering designs, and between organisational capital and firmspecific human capital. Additional tax concessions lower the rental price of businessR&D compared with the other forms of R&D.
The major factors affecting the trend over time are changes in the price deflatorsand tax parameters. The depreciation rate for these assets is assumed to be constant.

8 The inclusion of the tax parameters in the rental price removes some of the distortions to therental price due to different tax allowances for different capital items and industries over time
(ABS 2000, para. 27.61).
9 In line with the ABS approach to deriving the rate of return, an exogenous floor rate of return(equal to consumer price index growth plus 4 per cent) has been applied. This differs from
CHS (2006), which uses an endogenous rate. The effects of this difference and the sensitivity of
the results to the rate of return assumption are discussed in appendix D.
48

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Figure 4.3

Rental prices by intangible asset type, 1974-75 to 2005-06
Dollars

1.0 $
0.8
0.6
0.4
0.2

0
1974-75

1979-80

1984-85

Business R&D
New arch./eng. design
Firm-specific human capital

1989-90

1994-95

1999-00

2004-05

Financial product development
Brand equity
Organisational capital

Data source: Authors’ estimates.

Capital services indexes
Capital services from intangible assets grew at a relatively high rate compared withtangible assets over the last thirty years (figure 4.4). On average, capital services
from total intangible assets grew at almost 6 per cent a year compared with less than
3 per cent a year for tangible capital services (table 4.3). The average contributionof intangibles to growth in total capital services was 33 per cent — of which
13 percentage points was national account intangibles and 20 percentage points was
the new intangibles.
Of the three major groups of intangibles, computerised information had the fastest
average growth (nearly 20 per cent a year), while innovative property and economic
competencies grew at similar rates (around 4.5 per cent a year). However, given thesmaller initial level of capital services from computerised information, thecontribution of each group to total capital services growth was fairly similar —11, 9 and 14 per cent, respectively.

SERVICES FROMINTANGIBLE CAPITAL

49

Figure 4.4

Capital services index, tangibles and intangibles, market sector,
1974-75 to 2005-06
Index 2005-06 = 100

Index
120
100
80
60

Tangibles

40
Total capital
20
Intangibles01974-75
1979-80

1984-85

1989-90

1994-95

1999-00

2004-05

Data source: Authors’ estimates.

There were considerable differences in growth rates amongst the components ofinnovative property and economic competencies. Average growth in business R&D(6 per cent a year) was higher than other product development (5 per cent), artistic
originals (4 per cent) and mineral exploration (3 per cent) — the contributions tototal capital services growth were 2, 5, 0.1 and 2 per cent, respectively. Growth inorganisational capital (8 per cent a year) far exceeded brand equity (3 per cent) andfirm-specific human capital (2 per cent) — the contributions to total capital services
growth were 7, 5 and 2 per cent, respectively.
Examining average growth in each of the last three decades (table 4.3), there wasrelatively little variation over time for total intangibles — average growth wasaround 5 per cent a year in the decade to 1984-85, and around 6 per cent in thefollowing two periods (1984-85 to 1994-95 and 1994-95 to 2005-06). However,
because growth in intangibles was faster than that for tangibles, the contribution of
intangibles to total capital services growth increased considerably — from around aquarter in the first period to around a third in the subsequent periods.

50

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Table 4.3

Growth rate of intangible capital services, market sector
Per cent per year (percentage contribution to total growth)
1974-75– 2005-06

1974-75– 1984-85

1984-85– 1994-95

1994-95– 2005-06

Computerised information

19.8
(32)

27.3
(16)

21.9
(42)

11.5
(35)

Innovative property

4.2
(27)
5.7
(5)
2.7
(6)
3.7
(0.4)
4.5
(15)
3.4
(8)
6.5
(7)

4.3
(34)
-0.4
(-1)
5.5
(16)
8.7
(1)
4.5
(18)
4.2
(12)
5.0
(5)

4.5
(27)
10.4
(6)
1.6
(5)
-1.7
(-0.3)
5.6
(17)
4.7
(11)
7.3
(7)

3.9
(22)
7.1
(8)
1.2
(1)
4.1
(1)
3.6
(12)
1.5
(3)
7.2
(8)

4.7
(41)
3.3
(15)
2.8
(13)
12.4
(2)
2.3
(5)
7.5
(21)
15.3
(15)
4.1
(6)

4.4
(51)
5.4
(34)
5.3
(32)
15.4
(1)
2.8
(7)
3.8
(10)
16.1
(5)
2.2
(5)

4.0
(31)
1.5
(6)
1.1
(5)
11.8
(2)
4.8
(9)
8.0
(16)
15.7
(10)
4.6
(6)

5.5
(43)
3.0
(9)
2.2
(7)
10.4
(2)
-0.4
(-0.6)
10.4
(35)
14.2
(28)
5.5
(7)

Total intangibles

5.8
(100)

5.1
(100)

6.3
(100)

6.0
(100)

New intangibles

4.7
(20)
9.2
(13)
2.8
(67)
3.4
(100)

4.2
(18)
8.9
(9)
2.6
(74)
3.0
(100)

4.8
(19)
10.3
(16)
2.3
(64)
3.0
(100)

5.1
(22)
8.6
(13)
3.5
(65)
4.1
(100)

0.2

0.3

Business R&D
Mineral exploration
Artistic originals
Other product development,
design and research
Financial productdevelopment
New arch./eng. designs
Economic competencies
Brand equity
AdvertisingMarket researchFirm-specific human capital
Organisational capital
Purchased org. capital
Own account org. capital

National accounts intangibles
Tangibles
Total capital services

Intangibles to tangiblesa

0.2

Average ratio
0.2

a Share of capital income.
Source: Authors’ estimates.
SERVICES FROMINTANGIBLE CAPITAL

51

The fairly constant average growth rate for total intangibles masks different patternsof growth in individual intangibles over time.
•

Computerised information had the fastest growth rate in each period (except forpurchased organisational capital in the third period) and, although the rate
declined in each successive period, the contribution to total capital services
growth increased (from 4 to 15 per cent between the first two periods before
declining to 12 per cent in the third period).

•

The growth in innovative property accelerated in the second period before
dropping back to a rate lower than in the first period (the contribution to total
capital services growth similarly rose from 9 to 9.5 per cent before droppingback to 8 per cent).
– Business R&D was a large contributor to this acceleration in the second
period. Other product development was the largest contributor to the decline
in the third period.

•

Economic competencies growth fell between the first and second periods before
rising to its highest rate in the third period (the contribution to total capital
services growth was 14, 11 and 15 per cent, respectively).
– Growth in organisational capital increased in successive periods (itscontribution rising from 3 to 6 and then 12 per cent of total capital services
growth) but in the second period this was offset by a large decline in growthin brand equity (its contribution dropping from 9 to 2 per cent).

Figure 4.5 highlights the changing composition of the service flow from intangible
capital. Services from computerised information have clearly increased inimportance over time. While economic competencies as a group has accounted for a
falling share of total capital services, the contribution of organisational capital has
grown strongly. High growth in purchased organisational capital is behind thistrend. There was a smaller shift in the composition of innovative property capital
services to non-scientific R&D from other R&D (business R&D and mineral
exploration). This was largely because of relatively slow growth in mineral
exploration investment combined with relatively low and stable rental prices.
Comparing figures 4.5 and 4.2 highlights the effect of using a capital services
measure rather than a capital stock measure — for a given size capital stock, thoseassets with shorter asset lives (that is, higher depreciation rates) have a higher
capital services flow in a given period than those with longer asset lives. For
example, for economic competencies the share of capital services is higher than theshare of the capital stock, while the opposite is the case for innovative property.

52

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Composition of total intangible capital servicesa, 1974-75 to
2005-06

Figure 4.5

Per cent
100%
Organisational capital

80%

60%

Firm-specific human capital

Brand equity

Artistic originals

40%

20%

Economiccompetencies

Other product development

Innovative
propertyBus. R&D
Mineral exploration0%
1974-75

1979-80

Computerised
information

1984-85

1989-90

1994-95

1999-00

2004-05

a The composition is based on the share of capital services (capital stock weighted by rental prices as
described in appendix C). For sensitivity of the composition of intangibles capital services to some of theassumptions in its compilation, see appendix D.
Data source: Authors’ estimates.

SERVICES FROMINTANGIBLE CAPITAL

53

5

Growth accounting results

This chapter presents the results of growth accounting including intangible assets.
Three different definitions of capital have been used to analyse the impact ofintangibles on measured productivity growth in the market sector:•

all intangible and tangible assets•

all Australian Bureau of Statistics (ABS) national accounts assets (which
includes all tangible assets and a subset of the intangible assets1)•

tangible assets only.

A comparison of the results for the three definitions of capital provides a picture of
the impact of intangibles on measured productivity growth and the extent to which
the national accounts are affected by not capitalising some intangible assets.
The data for national accounts tangible and intangible assets are sourced from ABS
national accounts data.2 The other intangible investment and intangible capital
services have been estimated as described in chapters 3 and 4.

5.1

Growth accounting components

The general aim of growth accounting is to understand the drivers of output growthin the economy. It is used to show how much output growth is attributable toincreases in measured input — usually labour and capital inputs. The residual
growth not explained by changes in these inputs is due to other factors, and is called
multifactor productivity (MFP) growth.
Most of the growth accounting results presented in this chapter are for labour
productivity growth, that is, growth in the level of output per unit of labour input.
This controls for any output growth attributable to changes in the work force, suchas higher population growth, changes in the unemployment rate or changes in the
1The ABS definition of capital includes only three intangible assets: software, mineral exploration
and artistic originals (ABS 2000, paras 16.47 - 16.56).
2 All published and unpublished national accounts data used in the growth accounting in this paper
are from the dataset underlying ABS Australian System of National Accounts, 2006-07(Cat. no. 5204.0).
GROWTHACCOUNTINGRESULTS

55

participation rate. Labour productivity growth can be decomposed into capital
deepening, which is the capital income share weighted growth in capital inputs
relative to labour, and MFP growth.
The first question is what portion of LP growth normally attributed to MFP growthis actually due to an increase in capital deepening in unaccounted intangible assets.
The second question is how much are growth measures affected by not including
intangible investments as outputs.
As discussed in chapter 2 and appendix B, in the case where no intangibles aretreated as capital, growth in output can be expressed as
•

•

•

•

Q′ = MFP′+ s′L L + s′K K(5.1)

where Q′ is output excluding investment in all intangible assets; L and K arelabour and capital inputs; s′L and s′K are labour and capital income shares before the•inclusion of intangibles; and MFP′ is residual MFP growth.
Re-expressing this in per unit of labour terms gives labour productivity growth (seeappendix B)•••⎛ Q′ ⎞
LP′ = ⎜ ⎟ = KD′+ MFP′
⎝L⎠
•

(5.2)
•

•

⎛K⎞
where capital deepening KD′ is s′K ⎜ ⎟
⎝L⎠

(5.3)

Capital deepening is the growth of capital inputs relative to labour. It is derived bymultiplying the rate of change of the capital/labour ratio by the average capitalincome share.
Treating intangibles as capital changes output growth, total capital input growth, thecapital and labour income shares and MFP growth.
Output growth becomes
•

•

•

•

•

Q = MFP + s L L + s K K + s R R(5.4)

where Q = Q′ + N , that is, output including intangible investment ( N ), and R is theintangible capital stock.

56

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

And therefore in labour productivity terms
•

•

•
•
⎛Q⎞
LP = ⎜ ⎟ = KD+ MFP
⎝L⎠

(5.5)

•

where MFP is MFP growth adjusted for capitalising intangibles and capital•

deepening KD is combined tangible and intangible capital deepening.
On the output side, the size of the effect on labour productivity growth from
capitalising intangibles will depend on the size of intangibles investment relative tototal output and the growth rate of intangibles relative to other output.
•

•

⎛Q⎞
LP = ⎜ ⎟ =
⎝L⎠

•

N
Q

•

Intangible
investment
as a share of
total output

⎛N⎞
⎜ ⎟
⎝L⎠

+

Growth inintangible
investment
relative to labour

Q′
Q
Other output
as a share of
total output••⎛ Q′ ⎞
⎜ ⎟
⎝L⎠

(5.6)

Growth inother output
relative to labour

If growth in intangible investment is higher (lower) than growth in other output,
then total output growth, and therefore labour productivity growth, will increase(decrease) with the inclusion of intangibles.3 The magnitude of this effect will
depend on the size of intangibles investment as a share of total output.
On the input side, treating intangibles as capital affects capital deepening and MFP
growth as the residual.
Total capital deepening including intangible capital becomes
•

•

•

⎛K⎞
⎛R⎞
KD = s K ⎜ ⎟+ s R ⎜ ⎟
⎝L⎠
⎝L⎠

(5.7)

•

where KD is the tangible capital income share weighted growth in tangible capital
relative to labour plus the intangible capital income share weighted growth inintangibles relative to labour.

3 Growth in labour inputs will not change with the treatment of intangibles as capital, so labour
productivity growth will only change if output growth is affected.
GROWTHACCOUNTINGRESULTS

57

The income shares s R and s K ares K ≡ PK K /(PK K + PR R + PL L) ands R ≡ PR R /(PK K + PR R + PL L)(5.8)( Pi is the price of input i )(5.9)

With the inclusion of intangible capital, the total capital income share increases( s K + s R > s′K ).
The effect of including intangible capital on the rate of capital deepening depends
on both the increase in the total capital income share and the growth in intangible
capital inputs relative to the growth in tangible assets.
MFP growth as the residual is derived as•••

MFP = LP − KD

(5.10)The treatment of intangibles as capital affects both inputs and output, so thedirection of the effect on MFP growth depends on the relative size of the output andinput effects. If the inclusion of intangible capital increases the rate of capital
deepening by more (less) than it increases the rate of labour productivity growth,
MFP growth will fall (rise).
Impact of intangibles on growth accounting components
This section shows the relative changes to the components of the production
function due to capitalising intangibles. As explained above, capitalising intangible
assets will affect several components of the production function and each of thesewill affect the productivity results. The components are examined in turn for theperiod 1974-75 to 2005-06 (and three sub-periods covering decades ending
1984-85, 1994-95 and 2005-06.)
OutputMarket sector gross value added (GVA) is the output measure used for the growthaccounting. Figure 5.1 compares market sector GVA for each of the threedefinitions of capital — including investment in all intangible assets, including
national accounts intangibles and excluding all intangibles. As reported in chapter 3(table 3.2), investment in the new intangible assets is larger than investment in thenational accounts intangible assets (software, mineral exploration and artistic
originals). Therefore the new intangible assets represent a much larger proportion of
total GVA (including all intangible investment) than the national accounts
intangibles. And intangibles in total have grown as a percentage of GVA.
58

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Figure 5.1

Market sector gross value added, 1974-75 to 2005-06
2005-06 dollars, chain volume measures

600

$b

500

400

300

200
1974-75

1979-80

1984-85

1989-90

1994-95

1999-00

2004-05

Including all intangible investment a

Including national accounts intangible investment b
Excluding all intangible investment ca Market sector GVA including national accounts intangibles is existing market sector GVA supplied by the
ABS national accounts. b Market sector GVA including all intangibles is existing market sector GVA plus
investment in new intangibles. c Market sector GVA excluding all intangibles is existing market sector GVA
minus gross fixed capital formation (GFCF) in the national accounts intangible assets. For details see
appendix C.
Data sources: Authors’ estimates; published and unpublished ABS national accounts data.

Because investment in intangible assets grew at a faster rate than GVA excluding all
intangibles, growth in GVA once all intangibles were included was higher in eachperiod (table 5.1). However, over the full period the gap between growth in GVA
excluding all intangible investment and growth in intangibles investment narrowed,
especially in the final period 1994-95 to 2005-06. Over the full period, GVA growth
was 0.16 of a percentage point (5 per cent) higher with the inclusion of all
intangible investment compared with the no intangibles case. This slowed from anaverage of 8 per cent higher between 1974-75 and 1984-85 to 3 per cent higher
between 1994-95 and 2005-06. Of this growth in GVA including all intangible
investment, the new intangible assets contributed more than the national accounts
intangible assets.

GROWTHACCOUNTINGRESULTS

59

Table 5.1

Growth in market sector gross value added
Per cent per yeara

Including all intangible investment
Including national accounts intangible
investment
Excluding all intangible investment

1974-75– 2005-06

1974-75– 1984-85

1984-85– 1994-95

1994-95– 2005-06

3.06
(5)

2.33
(8)

3.11
(6)

3.69
(3)

2.95
(2)

2.25
(4)

2.97
(2)

3.57
(0)

2.90

2.16

2.93

3.57

a Bracketed figure is the increase in growth rate (compared with excluding all intangible case) as a percentageof the growth rate when all intangible investment is excluded.
Sources: Authors’ estimates; published and unpublished ABS national accounts data.

Capital services

As discussed in chapter 4, aggregate capital services indexes are created using thevolume index of the productive capital stock for each asset weighted using rental
prices as weights.4 The treatment of intangibles as capital will only increase thegrowth rate of the aggregate capital services index if the growth of intangibles ishigher than the growth of tangibles.
Figure 5.2 shows the total capital services indexes for each of the three definitionsof capital. Growth in capital services before the treatment of any intangibles ascapital averaged 2.7 per cent a year over the full period. With the treatment of all
intangibles as capital this increased to 3.4 per cent a year, an increase of 19 per cent.
This shows that growth in capital services from intangibles was faster than growthin capital services from tangible assets.

4 For the new intangible assets, it has been assumed the productive capital stock is equal to the net
capital stock. This is likely to slightly understate the size and growth of intangible capital
services. More detail on the methodology used to build the capital services indexes is containedin appendix C, section C.1.
60

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Figure 5.2

Capital services, market sector, 1974-75 to 2005-06
Index 2005-06 = 100

Index
110

90

70

50

30
1974-75

1979-80

1984-85
1989-90
1994-95
1999-00
Including all intangible capital
Including national accounts intangible capital
Excluding all intangible capital

2004-05

Data sources: Authors’ estimates; published and unpublished ABS national accounts data.

As shown in figure 5.2, including the national accounts intangible assets has a larger
impact on capital services growth than the new intangible assets. Growth in capital
services increased by 11 per cent with the treatment of the national accounts
intangibles as capital and a further 10 per cent with the treatment of the new
intangibles as capital. Although the national accounts intangibles are a smaller shareof the total capital stock than the new intangibles, the national accounts intangible
assets had a larger impact on capital services growth because of the combination ofhigher growth in both rental prices and investment than the new intangibles.5
Factor income shares

Table 5.2 shows the contribution of intangible assets to changes in the factor
income shares. There is an upward trend in the capital share of total factor income
over the period 1974-75 to 2005-06 even before the treatment of intangibles ascapital. However, capitalising all intangibles has increased the average capitalincome share over the period from 37 per cent to 41 per cent, with a corresponding
fall in the labour income share.6

5 Investment growth in the national accounts intangibles averaged 12.8 per cent a year for theperiod 1974-75 to 1984-85, compared with 4.2 per cent for the new intangible assets. More detailon the construction of rental prices is contained in appendix C, section C.1.
6 Total capital income when capitalising all intangibles is equal to investment in new intangible
assets added to the existing capital income estimate supplied by the ABS.
GROWTHACCOUNTINGRESULTS

61

Because investment in the new intangibles is much larger than investment in thenational accounts intangibles, the investment in the new intangible assets increases
the capital income share by a greater percentage than the national accounts
intangible assets.
Table 5.2

Capitala and labour income shares, market sector

Including all intangible assets
New intangible assets

1974-75– 2005-06

1974-75– 1984-85

1984-85– 1994-95

1994-95– 2005-06

0.06

0.05

0.05

0.08

National accounts intangible assets

0.02

0.01

0.02

0.03

Tangible assets

0.34

0.31

0.35

0.34

Total capital

0.41

0.37

0.42

0.45

Labour

0.59

0.63

0.58

0.55

Including national accounts intangible assets
National accounts intangible assets
0.02

0.02

0.02

0.03

Tangible assets

0.36

0.32

0.37

0.38

Total capital

0.38

0.35

0.39

0.41

Labour

0.62

0.65

0.61

0.59

Excluding all intangible assets
Capital

0.37

0.34

0.38

0.40

Labour

0.63

0.66

0.62

0.60

a When intangibles are not capitalised, all capital income is attributed to tangibles, including the return on
intangibles. When intangibles are capitalised, total capital income is allocated across both tangibles andintangibles. See appendix B for details.
Sources: Authors’ estimates; published and unpublished ABS national accounts data.

5.2

Growth accounting results

This section presents the growth accounting results using the three different
definitions of capital described above. The effect of capitalising intangibles onlabour productivity growth, MFP growth and capital deepening are examined.
These estimates are also decomposed to examine the relative effect of capitalising
the new intangibles and the national accounts intangibles on each estimate.

62

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Contribution of intangibles to labour productivity growth
Table 5.3 shows the relative contributions of MFP growth and capital deepening tooverall labour productivity growth (as specified in equation 5.5). Labour
productivity for the case where all intangibles are treated as capital grew at a rate of
2.28 per cent a year between 1974-75 and 2005-06, compared with 2.12 per cent a
year for the case where no intangibles are treated as capital — an increase of 0.16 ofa percentage point, or around 8 per cent.
The relative contributions of capital deepening and MFP growth to labour
productivity growth shifted after all intangibles were treated as capital, with the rateof capital deepening increasing while the contribution of MFP growth decreased.
Capital deepening after the inclusion of all intangible capital increased from0.76 per cent a year to 1.08 per cent a year, or a 42 per cent increase (table 5.3). The
contribution of MFP growth decreased from 1.36 per cent a year to 1.20 per cent, ora 12 per cent fall. The fall in the rate of MFP growth indicates that some labour
productivity growth that was attributed to MFP growth before the capitalisation of
intangibles was actually driven by capital deepening due to intangibles. This capital
deepening was attributable largely to an increase in the capital income share fromthe inclusion of intangibles investment. An increase in the growth rate of the capital
services index due to intangibles had a smaller, though still positive, effect on
capital deepening.
Although on average over the full period MFP growth was lower and capital
deepening higher after capitalising intangibles, the relative contributions of MFP
growth and capital deepening to labour productivity growth shifted considerablyacross decades. For the first period, 1974-75 to 1984-85, MFP growth was virtuallyunchanged with the treatment of the national accounts intangibles as capital —including investment in these intangibles increased labour productivity growth byabout the same amount as the increase in capital deepening.
Growth in labour productivity was at its lowest between 1984-85 and 1994-95, withmost of the fall attributable to a decline in the rate of capital deepening, although
MFP growth was also lower during this period. However, growth in investment inintangibles was still strong, so the inclusion of intangible capital almost doubled therate of capital deepening when compared with the case where no intangible capital
was included.

GROWTHACCOUNTINGRESULTS

63

Table 5.3

Contributions to labour productivity growtha, market sector
Per cent per year (Percentage share of total growth)
1974-75– 2005-06

1974-75– 1984-85

1984-85– 1994-95

1994-95– 2005-06

1.08
(47)
1.20
(53)
na

1.12
(47)
1.25
(53)
na

0.63
(39)
1.00
(61)
0.27
(17)

1.43
(51)
1.35
(48)
0.19
(7)

na

na

2.28
(100)

2.37
(100)

0.73
(45)
1.63
(100)

1.16
(42)
2.78
(100)

Including national accounts intangible assets
Capital deepening
0.91
(42)
MFP growth
1.26
(58)
b
Labour composition
na

0.99
(43)
1.30
(57)
na

0.48
(32)
1.02
(68)
0.28
(19)

1.20
(45)
1.45
(54)
0.21
(8)

na

na

2.17
(100)

2.29
(100)

0.74
(49)
1.50
(100)

1.25
(47)
2.67
(100)

0.76
(36)
1.36
(64)
na

0.90
(41)
1.31
(59)
na

0.32
(22)
1.13
(78)
0.28
(19)

1.02
(38)
1.63
(61)
0.22
(8)

na

na

2.12
(100)

2.20
(100)

0.85
(59)
1.45
(100)

1.43
(54)
2.66
(100)

Including all intangible assets
Capital deepening
MFP growth
Labour compositionb
MFP growth adjusted forlabour composition
Labour productivity growth

MFP growth adjusted forlabour composition
Labour productivity growth

Excluding all intangible assets
Capital deepening
MFP growth
Labour compositionb
MFP growth adjusted forlabour composition
Labour productivity growtha Shares of labour productivity growth may not add to total due to rounding. b Labour productivity growth
attributable to change in the quality adjusted labour inputs index. See appendixes B and C for more
information.
Source: Authors’ estimates.

64

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Table 5.4 shows the breakdown of capital deepening by asset type. The rate ofcapital deepening was considerably higher after the treatment of intangibles ascapital. The contribution of intangibles capital deepening to labour productivity
growth has increased over time, from 0.29 per cent a year from 1974-75 to 1984-85
to 0.57 per cent a year from 1994-95 to 2005-06.
Table 5.4

Contributions to capital deepeninga, market sector
Per cent per year (Percentage share of total capital deepening)
1974-75– 2005-06

1974-75– 1984-85

1984-85– 1994-95

1994-95– 2005-06

0.17
(15)
0.24
(22)
0.69
(63)
1.08
(100)

0.10
(9)
0.19
(17)
0.84
(74)
1.12
(100)

0.19
(28)
0.16
(25)
0.31
(47)
0.63
(100)

0.22
(15)
0.35
(24)
0.89
(61)
1.43
(100)

Including national accounts intangible assets
National accounts intangible assets
0.17
(19)
Tangible assets
0.74
(81)
Total capital deepening
0.91
(100)

0.10
(11)
0.89
(89)
0.99
(100)

0.18
(37)
0.32
(63)
0.48
(100)

0.23
(19)
1.00
(81)
1.20
(100)

Excluding all intangible assets
Total capital deepening

0.90

0.32

1.02

Including all intangible assets
National accounts intangible assets
New intangible assets
Tangible assets
Total capital deepening

0.76

a Percentage contributions shown in brackets, numbers may not add to total due to rounding.
Source: Authors’ estimates.

The average percentage contribution of all intangibles to total capital deepening
increased from 26 per cent between 1974-75 and 1984-85 to 39 per cent between
1994-95 and 2005-06. The contribution of intangibles to total capital deepening
peaked in the period 1984-85 to 1994-95 at 53 per cent (a period in which capital
deepening attributable to tangibles was low). When all intangible assets weretreated as capital, they contributed an average of 37 per cent of all capital deepening
over the full period.
Including intangible capital increased the total rate of capital deepening anddecreased the contribution to capital deepening of tangible assets. The contributionof tangible assets decreased, as a result of treating intangibles as capital, for several
reasons: existing capital income fell as a share of total income (including intangible
GROWTHACCOUNTINGRESULTS65

investment); a portion of existing capital income (previously attributed to tangibles)
was redistributed to intangibles as a result of the reweighting of capital income
shares for each asset7; and the rental prices for tangibles also changed.8
The justification for the redistribution of a portion of existing capital income fromtangibles to intangibles is that some capital income that is currently attributed totangible assets is actually a return on unmeasured intangible capital.
Comparing the impact of the new and existing intangibles
The new intangible assets and the national accounts intangible assets had different
effects on the rate of capital deepening and MFP growth.
Growth in total investment in the national accounts intangible assets is higher thangrowth in investment in the new intangible assets. However, the level of investmentin the new intangibles is much higher than that of the national accounts intangibles.
The new intangibles have a greater effect on adjusted GVA growth because they
represent a higher share of total investment, even though growth in investment in
the new intangibles is lower than that of the national accounts intangibles.
Capitalising the new intangibles also has a bigger impact on the rate of capital
deepening than that of the national accounts intangibles. Most of this difference iscaused by the new intangibles increasing the rate of capital deepening through alarger increase in the capital income share.9
The rate of MFP growth is determined by the ratio of capital deepening to growth inlabour productivity. The new intangible assets had a similar impact on the rate ofcapital deepening and labour productivity growth, meaning the impact on MFP
growth was limited. However, including the national accounts intangibles as capitalincreased the rate of capital deepening by more than it increased the rate of labour
productivity growth, leading to a larger relative impact on MFP growth.

7 Capital income is split between assets based on the rental price weight of each asset. The
treatment of intangibles as capital reduced the rental price weight of the tangible assets.
Therefore tangible assets had a lower share of total capital income attributed to them.
8 There are several components of the rental price equation, including the equalising rate of returnacross all assets, that will change for national accounts tangible assets after capitalisingintangibles. More detail on these changes are included in appendix C.
9 The rate of capital deepening can also be increased by an increase in the growth of the aggregate
capital services, but this change is usually smaller than that caused by the increased capitalincome share.
66

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Growth accounting periods
This section analyses the impact of intangible investment on the growth in MFP,
specifically concentrating on the impact of intangibles on the timing and magnitudeof the MFP growth cycles. The growth cycles are the trend periods in MFP growth
identified by the ABS in the national accounts. Marrano, Hulten and Wallis(MHW 2007) identified that for the United Kingdom capitalising intangibles
changed the pattern of the MFP cycles in that country. This section tests whether
this is also the case in Australia.
Figure 5.3 shows that capitalising intangibles expenditure has changed the averagerate of MFP growth, but the pattern of MFP growth, including all of the turning
points, is virtually unchanged.
Figure 5.3

Multifactor productivity, market sector, 1974-75 to 2005-06
Index 2005-06 = 100

Index

110
100

90
80
70
60
50
1974-75

1979-80

1984-85

1989-90

1994-95

1999-00

2004-05

Including all intangible assets
Including national accounts intangible assets
Excluding all intangible assets

Data source: Authors’ estimates.

For most periods MFP growth does not change as much as the rate of capital
deepening and labour productivity growth (figure 5.4). Broadly speaking, the timing
and magnitude of the MFP growth cycles remain similar after the treatment ofintangibles expenditure as investment. Each period consistently shows thattreatment of the new intangibles as capital increases the rate of capital deepening,
while in general only reducing the rate of MFP growth by a relatively small amount(table 5.5).

GROWTHACCOUNTINGRESULTS

67

The productivity surge from 1993-94 to 1998-99 is still present after capitalisingintangibles. MFP grew at a rate of 2.30 per cent a year during this period (table 5.5),much higher than the average 1.20 per cent a year over the full period. MFP growth
was only 0.13 of a percentage point lower than the existing market sector estimates
after capitalising the new intangibles. New intangibles therefore accounted for onlya small portion of conventionally-measured MFP growth during this period(figure 5.4).
Figure 5.4

Contributions to labour productivity growth over MFP growth
cyclesa, market sector
Per cent per year

Per cent

4.0
3.5

Left column: Capitalising national accounts intang bles only
Right column: Capitalising all intangibles

3.0
2.5
2.0
1.5
1.0
0.5
0.0
5 to
74-7

81-8

2

2 to
81-8

84-8

5

MFP growth

5 to
84-8

88-8

9

9 to
88-8

93-9

4

4 to
93-9

Labour compositionb

98-9

9

9 to
98-9

03-0

4

5 to
74-7

05-0

6

Capital deepening

a The estimates for the national accounts definition of assets are different to the ABS national accounts
estimates due to differences in the level of aggregation at which the estimates are constructed. The reasonsfor this are discussed in detail in appendix C. b Labour composition data are not available for the periods prior
to 1984-85 to 1988-89 and therefore the full period 1974-75 to 2005-06. Labour composition change iscaptured in MFP growth where not separately identified.
Data source: Authors’ estimates.

68

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Table 5.5

Productivity growth cycle analysisa, market sector
Per cent per year
1974-75 1981-82 1984-85 1988-89 1993-94 1998-99 1974-75–1981-82 –1984-85 –1988-89 –1993-94 –1998-99 –2003-04 –2005-06

Labour productivity
Including all
intangible assets
Including national
accounts intangible
assetsExcluding all
intangible assets

2.31

2.50

1.04

2.24

3.55

2.17

2.28

2.20

2.48

0.92

2.12

3.31

2.16

2.17

2.03

2.59

0.91

2.03

3.27

2.16

2.12

1.08

0.89

1.01

2.30

0.98

1.20

1.19

0.88

1.07

2.43

1.07

1.26

1.43

0.98

1.19

2.59

1.26

1.36

0.99

1.44

0.15

1.24

1.23

1.16

1.08

0.85

1.32

0.05

1.06

0.87

1.07

0.91

0.78

1.19

-0.06

0.85

0.68

0.89

0.76

Multifactor productivityb
Including all
intangible assets
1.32
Including national
accounts intangible
assets
1.35
Excluding all
intangible assets
1.25
Capital deepening
Including all
intangible assets
Including national
accounts intangible
assetsExcluding all
intangible assets

a MFP growth cycles. b Includes labour composition change for comparability across periods.
Source: Authors’ estimates.

Sensitivity testing results
The estimates for investment in the new intangible assets used in this paper are
experimental, as are the depreciation rates, deflators, and tax rates used for
calculating capital stock estimates and capital services indexes. Therefore, theresults presented above have been tested for their sensitivity to changes in theinvestment estimates for the new intangibles and changes to selected parameters
used in the growth accounting. The tests include higher and lower estimates ofinvestment in intangibles, changes to parameters within the rental price equationand increasing the depreciation rate on intangible assets. See appendix D for fulldetails of the sensitivity tests undertaken.

GROWTHACCOUNTINGRESULTS

69

The tests show that the main results of the growth accounting are robust to most of
the changes trialled. This is consistent with the results of similar sensitivity tests
undertaken by MHW (2007) and Fukao et al. (2008b). The only test to produce alarge change in the estimates was the use of a purely endogenous rate of return
rather than using the ABS methodology (which has been used for comparability
with ABS results).10 The change in results was consistent across each of the threecapital definitions. Therefore the effect is not important when measuring the relative
impact of capitalising different groups of intangible assets. However, because someoverseas studies use endogenous rates of return, the international comparability isaffected by the use of the exogenous floor rate of return. The use of the endogenous
rate returns a change in Australian growth accounting results as a result ofcapitalising all intangibles that is closer to that estimated for the United States by
Corrado, Hulten and Sichel (CHS 2006).

10 The ABS methodology uses an endogenous rate of return unless the endogenous rate falls below
the level of consumer price index (CPI) growth plus 4 per cent. If the rate falls below this level,
CPI growth plus 4 per cent is used as the rate of return. In practice the rate of return, which wasconstrained to be the same across all assets, rarely fell below this mark and can therefore beconsidered to be an exogenous rate of return for most years. This differs from the CHS (2006)
methodology, which used a purely endogenous rate of return.
70

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

6

International comparisonsThis chapter examines the estimates of Australian intangibles in an international
context. As noted in earlier chapters, the Corrado, Hulten and Sichel (CHS)
methodology has also been used to measure intangible investment and its effect on
productivity for the United States, the United Kingdom, Japan, Finland, theNetherlands, France, Germany, Italy and Spain, and intangible investment only for
Canada.1
Estimates based on the same methodology provide a reasonable basis for making
international comparisons. However, there are a few points to note about thecomparisons in this chapter.
•

National statistical systems differ from country to country and this affects
comparability of the underlying data. (Differences in data sources are discussed
in appendix A.)•

Although the basic methodology for measuring intangibles is quite similar, data
limitations have led to some differences in its application across countries.
(These are noted in the comparisons below.)•

The implementation of the growth accounting differs across countries. For
example, the US and UK results use capital services indexes based on
endogenous rates of return, while the results for the Netherlands are based on an
exogenous rate of return. Results for Australia have been estimated using an
endogenous rate of return with a exogenous floor rate of return (which inpractice leads to an exogenous rate in the majority of years) and sensitivity
tested using a purely endogenous rate.

•

The proportion of the total economy for which intangibles is measured isdifferent in each country — the market sector for Australia (62 per cent of thetotal economy); the market economy for France (65 per cent), Germany (70 percent), Italy (72 per cent) and Spain (75 per cent); the non-financial business

1 The United States in CHS (2005, 2006), the United Kingdom in Marrano and Haskel (MH 2006)
and Marrano, Haskel and Wallis (MHW 2007), Japan in Fukao et al. (2007) andFukao et al. (2008b), Finland in Jalava, Aulin-Ahmavaara and Alanen (JAA 2007), theNetherlands in van Rooijen-Horsten, van den Bergen and Tanriseven (RBT 2008) and van
Rooijen-Horsten et al. (2008), France, Germany, Italy and Spain in Hao, Manole and van
Ark (2008) and Canada in Belhocine (2008).
INTERNATIONAL
COMPARISONS

71

sector for Finland (72 per cent); the non-farm business sector for the UnitedStates (77 per cent); the market sector for the United Kingdom (89 per cent); andthe whole economy for the Netherlands2, Canada and Japan (100 per cent).3
Data availability is one reason for this. The other reason is that the focus of thestudies is on identifying the contribution of intangibles in measured MFP, and
MFP is measured for different sectors of the economy in each country.
•

The estimates do not cover the same time period for each country. This limits thecomparability and the ability to examine differences between sub-periods.

•

The periods for which data are available do not necessarily coincide with thepeak-to-peak growth periods4 that provide the most accurate view of growth.

There are also a number of other points to note about the interpretation of theinternational comparisons in this chapter.
•In addition to the differences in application of the methodology across countries,
the limitations of the underlying methodology also mean that the relativities
between countries are only indicative. (For example, the proportions ofintangible expenditure that are treated as investment are assumed because oflimited information and are uniform across countries.)•

Country-specific circumstances will affect the appropriate level and type ofintangible investment for a particular country — the country with the highest
ratio of intangibles to output should not be regarded as a benchmark. As withany other investment, it is allocative efficiency that counts for maximising its
benefits for productivity and living standards. More is not necessarily better.

•

The growth accounting approach does not provide information about the causal
links between intangible investment and productivity growth.

2 In some cases, data are available for the commercial sector as well as the total economy for the
Netherlands. However, the estimates reported in van Rooijen-Horsten et al. (2008) for thecommercial sector are less disaggregated by intangible type than those for the total economy.
Therefore section 6.1 focuses on the total economy results, while the growth accounting results in
section 6.2 are for the commercial sector.
3 Australian market sector share of gross value added (GVA) at basic prices in 2005-06 (ABS Cat.
no. 5204.0); US non-farm business GVA as a share GDP in 1998–2000 (BEA 2008); UK market
sector share of GVA at basic prices in 2004 (ONS 2006); Finnish non-financial business sector
share of GVA at basic prices in 2005 (Statistics Finland 2008); and France, Germany, Italy andSpain market economy share of value added at basic prices in 2004 (EU KLEMS 2008). Theseshares are only indicative as they are measured on varying bases and use recent national accounts
data — due to revisions this data may differ from that which underlies the intangibles estimatesin the individual country studies.
4 Calculating productivity trends from ‘peak to peak’ is one way of overcoming the spurious
influences of business cycles in estimates of productivity growth. Business cycles will affect theutilisation of existing capital stocks but because of insufficient information, productivity
estimates are based on the assumption of constant utilisation of capital.
72

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

6.1

Intangible investment as a share of output

To compare the importance of intangible investment across countries, it is necessary
to scale this investment to a common measure, for example, output. Intangible
investment as a percentage of GDP was reported in each of the country studies andhas therefore been estimated for Australia (table 6.1). Based on this measure,
Australia has a relatively low proportion of intangible investment to output — about
half that of the United States and Japan, 56 per cent of the United Kingdom, 60 per
cent of Canada, 65 per cent of Finland, 70 per cent of the Netherlands5, 71 per centof France and 83 per cent of Germany. Australia has a higher proportion than Spainand Italy (by 13 per cent).
This provides one perspective on the relativities between countries. However, it isdistorted to some extent because, as noted above, the proportion of the total
economy for which investment has been measured differs across countries. An
alternative perspective is to consider intangible investment as a percentage of outputof the sector for which the investment is estimated — that is, intangible investment
as a percentage of the output it is used to produce. From this perspective,
Australia’s relative position rises.
Table 6.2 shows intangible investment as a share of the adjusted output (including
investment in intangibles) of the sector for which intangibles are measured6 — themarket sector for Australia, the United Kingdom, France, Germany, Italy and Spain,
non-farm business sector for the United States, the non-financial business sector for
Finland, and the total economy for Japan, the Netherlands and Canada. The
intangible investment share for Australia increases to 66 per cent of that for Finland,
71 per cent of the United States, 74 per cent of the United Kingdom, 76 per cent ofFrance, 91 per cent of Japan, and 95 per cent of Germany. Australia also has ahigher share than Canada (by 5 per cent), the Netherlands (by 22 per cent)7, Italy(by 30 per cent) and Spain (by 32 per cent).

5 This percentage rises to 82 per cent if the results for the commercial sector of the Netherlands areused for comparison.
6 Estimates have been derived using a number of sources with some variation in measuresremaining (see notes to table 6.2) and may therefore be only indicative.
7 This percentage falls to 3 per cent higher if the result for the commercial sector of theNetherlands is used for comparison.
INTERNATIONAL
COMPARISONS

73

2.9
0.9
0.4
1.6
5.9

Economic competencies
Brand equity
Firm-specific human capital
Organisational capitalf

Total

11.7

5.4
1.5
1.2
2.7

4.6
2.0
0.2
0.8
1.6

10.5

5.2
1.0
2.5
1.8

3.4
1.1
0.0
0.2
2.1

1.9

11.5

3.4
1.1
0.5c
1.7c

5.9
2.8
0.0
1.1
2.0c

2.2

economy(2000–05)

sector(2004)- marketJapan- totalUK

8.4 [7.2]

5.2 [4.6]
2.3
1.2
1.8

1.8 [1.4]
1.0
0.0
0.2
0.6d

1.4 [1.2][commercial](2005)

9.1

4.1
1.7
1.2
1.1

4.0
2.7
0.0
0.1
1.1e

1.0

business(2005)

Netherlandsa Finland- total economy - non-fin.

8.3

4.4
1.0
1.5
1.8

3.1
1.3
0.0
0.3
1.5

0.9

sector(2004)

7.1

2.9
0.6
1.3
1.0

3.5
1.7
0.0
0.2
1.6

0.8

sector(2004)

France Germany- market- market

5.2

2.2
0.8
1.0
0.4

2.3
0.5
0.0
0.1
1.6

0.7

sector(2004)

Italy- market

5.2

2.0
0.4
0.8
0.7

2.5
0.6
0.0
0.2
1.7

0.8

sector(2004)

9.8

3.8
0.5
2.2
1.1

5.0
1.9
1.1
0.1
1.9

1.0

economy(2005)

Spain Canada- market- total

Sources: UK from MHW (2007) and MH (2006); USA from CHS (2005, table 3; 2006, table 1); Japan from Fukao et al. (2008b, tables 2, 4); Finland from JAA (2007,
table 2); Netherlands from van Rooijen-Horsten et al. (2008, tables A2, A4); Canada from Belhocine (2008, table 1); France, Germany, Italy and Spain from Hao, Manoleand van Ark (2008, table 1); authors’ estimates for Australia.

Components may not add to total due to rounding. a Results for the Netherlands are available for the total economy and the commercial sector, although the data for thelatter are less disaggregated. b Includes R&D in social sciences for Australia, Finland, the Netherlands, France, Germany, Italy and Spain. R&D in social sciences is
included in Other product development, design and research for the USA, UK, Japan and Canada. c Fukao et al. (2008b, p. 14) note that this is likely to be anunderestimation due to lack of reliable data. d Includes a narrower scope of financial services R&D. e Relates to the non-financial business sector so does not include
financial services R&D. f Differences in scope and data sources across countries (see table A.3).

2.2
0.8
0.3
0.1
1.1

Innovative property
Scientific R&Db
Mineral exploration
Copyright and licence costs
Other product development,
design and research

1.7- marketsector(2005-06)

0.8

USA- non-farmbusiness(1998–00)

Australia

Percentage of existing GDP

Intangible investment as a share of GDP, by country

Computerised information

Table 6.1

3.6
1.3
0.4
0.1
1.7
4.7
1.4
0.7
2.6
9.6
0.44

Innovative property
Scientific R&Dc
Mineral exploration
Copyright and licence costs
Other product development,
design and researchc

Economic competencies
Brand equity
Firm-specific human capital
Organisational capitalc
Total

USA

6.2
1.7
1.4
3.1
13.5
1.2

5.3
2.3
0.2
0.9
1.8

2.0

- non-farmbusiness(1998–00)

6.5
1.2
3.1
2.2
13.0
1.1

4.2
1.3
0.0
0.3
2.6

2.3

sector(2004)

UK- market

3.1
1.0
0.4
1.6
10.5
0.6

5.4
2.6
0.0
1.0
1.8

2.0

economy(2000–05)

4.9 [6.0]
2.2
1.1
1.7
7.9 [9.3]
0.5 [1.0]

1.7 [1.8]
0.9
0.0
0.2
0.6

1.3 [1.6][commercial](2005)

6.6
2.7
1.9
1.8
14.6
1.2

6.4
4.3
0.0
0.2
1.8

1.6

business(2005)

Japan Netherlandsb Finland- total - total economy - non-fin.

6.6
1.5
2.3
2.8
12.6
0.9

4.7
2.0
0.0
0.5
2.2

1.3

sector(2004)

4.1
0.8
1.9
1.4
10.1
0.8

4.9
2.4
0.0
0.3
2.2

1.1

sector(2004)

France Germany- market- market

3.2
1.2
1.4
0.6
7.4
0.3

3.2
0.8
0.1
0.1
2.3

1.0

sector(2004)

Italy- market

2.7
0.6
1.2
0.9
7.3
0.4

3.5
0.8
0.1
0.3
2.4

1.1

sector(2004)

3.5
0.5
2.0
1.0
9.1
0.9

4.6
1.8
1.0
0.1
1.8

0.9

economy(2005)

Spain Canada- market- total

Sources: Derived from MHW (2007) and MH (2006); CHS (2006); Fukao et al. (2008b); JAA (2007); van Rooijen-Horsten et al. (2008); Belhocine (2008); Hao, Manoleand van Ark (2008); authors’ estimates for Australia.

Components may not add to total due to rounding. a Percentages from table 6.1 scaled by reported ratios of total investment in intangibles to relevant output adjusted toinclude intangibles not already included in output: adjusted non-farm business sector output for USA (CHS 2006, fig. 2); adjusted market sector GVA for UK (MHW 2007,
p. 11); adjusted non-financial business sector GVA for Finland (JAA 2007, p. 12); adjusted total economy VA for Japan (Fukao et al. 2008b, tbl. 2). Where adjusted
ratios not reported, derived using data from additional sources: adjusted GDP and adjusted commercial sector VA for the Netherlands (derived from value of intangible
investments on pp. 27 and tables A2; and percentage of unrevised GDP in tables A3 and A4 of van Rooijen-Horsten et al. 2008); adjusted market economy VA forFrance, Germany, Italy and Spain (derived from market economy VA at basic prices from EU KLEMS 2008 and value of intangible investment from Hao, Manole and van
Ark 2008, tbl. 2); and adjusted total economy GDP (derived from percentage of unadjusted GDP in Belhocine 2008, tbl. 1 and value of GDP from Statistics Canada
2008). The Australian estimate is total intangible investment as percentage of adjusted market sector GVA (market sector GVA at basic prices plus investment in new
intangibles). b Results for the Netherlands are available for the total economy and the commercial sector, although the data for the latter are less disaggregated.
c Comparisons affected by lack of data for some intangibles or differences in scope. See notes to table 6.1 and table A.3.

Intangible to tangible investment ratio

1.3- marketsector(2005-06)

Percentage of adjusted outputa
Australia

Intangible investment as a share of adjusted output, by country

Computerised information

Table 6.2

The ratio of intangible investment to tangible investment is around one for theUnited States, the United Kingdom, Canada, Finland, France and Germany but isaround 0.5 for Japan, the Netherlands8, Italy, Spain and Australia.
Fukao et al. (2008b) note that while this ratio is low for Japan, intangible
investment as a share of GDP in Japan is not that far behind the United States. The
lower ratio is attributed to considerably higher tangible investment in Japan, which
has been explained as a consequence of their financial system.
In Japan, financial institutions such as banks play a major role in the provision of
corporate funds and they typically require tangible assets as collateral to provide
financing. As a result, Japanese firms have preferred to accumulate tangible assets
which can be used as collateral. In addition, small firms have been hampered in their
growth because they often possess insufficient tangible assets to increase borrowing.
These mechanisms as a result of Japan’s financial system are likely to be importantreasons why the ratio of intangible to tangible investment is low in Japan. (p. 7)

Australia’s lower ratio reflects both a lower rate of intangible investment and a
relatively high rate of tangible investment to output (26 per cent). For example, therate of tangible investment was lower in Japan and Italy (22 per cent); Netherlands
and Finland (20 per cent); United States and Germany (18 per cent); and United
Kingdom (17 per cent).9
There are remaining distortions in the international comparability of these estimates
related to industry coverage and measurement issues for specific intangibles(see appendix A for details). The studies do not measure intangibles for the samegroup of industries in each case. If the rates of investment in intangibles differ
across industries, the average rate will be affected by the differences in industry
coverage across countries. And differences in the scope of the measures forindividual intangibles, particularly computerised information, R&D in social
sciences, other product development and purchased organisational capital, may
partly explain differences between the rates of intangible investment in Australia
compared with other countries. It has not been possible to determine the extent of
any relative underestimation or overestimation.10

8 This is for the total Netherlands economy — for the commercial sector the ratio rises to one.
9 Gross fixed capital formation excluding software for the total economy as a share of total value
added (at basic prices) (EU KLEMS 2008) for the years in table 6.2. Equivalent data for Canada
and Spain are not available from the EU KLEMS database.
10 The estimates for some of the other countries do not include the same coverage of intangibles(see notes to table 6.1 and appendix A). Sensitivity testing of the Australian results to the size ofinvestment in particular intangibles is reported in appendix D.
76

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

While the overall rate of intangible investment differs considerably across countries,
there is less variation in the composition of that investment (figure 6.1). On thebasis of the broad types of intangibles (computerised information, innovative
property and economic competencies) the United States, United Kingdom, Franceand Australia are fairly similar.
Figure 6.1

Composition of intangible investment, by country
Percentage share

Eco. comp.
Innov. prop.
Comp. info.

49
38
13

47
39
14

50
32
18

52
37
10

45
44
11

62
22
11

100%
80%
Economiccompetencies

60%
40%

Innovative
property

20%

Computerised
information

0%

Eco. comp.
Innov. prop.
Comp. info.

AUST(2005-06)

USA(1998–2000)

UK(2004)FRANCE(2004)FINLAND(2005)

NETH(2005)

49
38
13

43
44
13

41
49
11

39
51
10

37
48
15

29
51
20

100%
Economiccompetencies

80%
60%

Innovative
property

40%
20%

Computerised
information

0%
AUST(2005-06)

ITALY(2004)GERMANY(2004)CANADA(2005)

SPAIN(2004)

JAPAN(2000–2005)

Computerised information

Scientific R&D

Mineral exploration

Copyright and licence costs

Other product R&D

Brand equity

Firm-specific human capital

Organisational capitala Organisational capital and firm-specific human capital for the United States have been derived frominformation in CHS (2005, 2006). b Total economy, not commercial sector, estimates for the Netherlands.
Data sources: CHS (2005, 2006); Fukao et al. (2008b); MH (2006), MHW (2007); JAA (2007); van RooijenHorsten et al. (2008); Hao, Manole and van Ark (2008); Belhocine (2008); authors’ estimates.

INTERNATIONAL
COMPARISONS

77

•

Australia has a very similar composition of intangible investment to the UnitedStates in terms of the three main categories of intangibles.
– Australia’s lower rate of investment in intangibles relative to the UnitedStates reflects a lower rate in each of the main groups of intangibles, rather
than a concentration of investment in any one of these groups.

•

The United Kingdom is also fairly similar but with a lower proportion ininnovative property than the United States.
– The UK’s lower rate of investment in total intangibles relative to the UnitedStates is virtually all attributable to a lower rate of investment in innovative
property.

•

By comparison, the other countries have quite different compositions ofinvestment to Australia.
– For most of these countries, investment is more heavily concentrated ininnovative property and less concentrated in economic competencies thanAustralia. The exception is the Netherlands for which the opposite is the case— with the highest share in economic competencies and the lowest share ininnovative property.

At a more disaggregated level of intangibles there is more variation in composition.
•

Within innovative property, there is considerable variation in the investment
shares of most individual intangibles.
– The scientific R&D investment share ranges from 10 per cent (United
Kingdom and Italy) to 30 per cent (Finland) — Australia is mid-range (15 percent), along with the United States and France.11– Mineral exploration is negligible for most countries — for Australia the shareis 4 per cent, putting it between the United States (2 per cent) and Canada(11 per cent).
– Copyright costs are around 2-3 per cent for most countries — the exceptions
are Japan (9 per cent) and the United States (7 per cent).
– The other product development share ranges from 7 per cent (Netherlands) to
33 per cent (Spain) — Australia is mid-range (18 per cent), along with mostof the other countries.

11 This comparison is affected by scientific R&D also including R&D in social sciences, except in
the case of the United States, United Kingdom, Japan and Canada (where it is included in otherproduct development). This measure of scientific R&D for each country also takes no account of
any spillovers from R&D done in other countries.
78

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY•

It is a similarly varied picture for economic competencies.
– The brand equity share of total intangible investment ranges from 5 per cent(Canada) to 28 per cent (Netherlands) — Australia lies mid-range at 15 per
cent.
– For firm-specific human capital the range is 4 per cent (Japan) to 24 per cent
(United Kingdom). For Australia it is 8 per cent, with the United States ataround 10 per cent. Fukao et al. (2008b) suggest that Japan’s particularly low
share is partly due to the CHS method not including on-the-job training,which is often utilised in Japan.12– Australia has the highest organisational capital share (27 per cent), while theUnited States, the Netherlands and France have shares around 20 per cent.
The United Kingdom13, Japan and Germany have a share of around 15 per
cent, just ahead of Canada, Finland and Spain (around 12 per cent). Italy has
the lowest share (8 per cent). However, there is considerable variation acrosscountries in the data sources used to measure organisational capital.

Some of the differences in composition between Australia and the other countries
are to be expected or are already documented.
•

Differences in industrial composition will lead to different types of intangible
investment.
– For example, the mining industry is a larger share of GDP in Australia than inmost of the other countries.14 Therefore Australia might be expected to havea higher share of its intangible investment in mineral exploration.

•

Differences in business expenditure on R&D (BERD) between countries are
already documented (see, for example, PC 2007), with Finland, Japan, theUnited States, Germany, France and Canada having a higher rate of investment
in BERD than Australia and the United Kingdom.15

12 Fukao et al. (2008b, p. 11) cite a 2007 survey estimating that Japanese workers spend about 9.9
per cent of their time on on-the-job training.
13 MH (2006, p. 13) note this is consistent with the UK’s poorer investment (compared with theUnited States) in organisational capital suggested by micro-comparisons of management andfindings of higher firm-specific training based on other datasets.
14 Mining value added averaged 1 per cent of US GDP over the period 1998 to 2000 (BEA 2008).
The comparable figure for Australia for 2005-06 was 7 per cent (and around 4 per cent in
1998-2000). In 2005, the equivalent measure was 2.3 per cent in the UK, 3 per cent in the
Netherlands, 0.3 per cent in Finland and 0.1 per cent in Japan (EU KLEMS 2008). In Canada,mining was 5 per cent of GDP at basic prices in 2005 (Statistics Canada 2007).
15 In 2002, BERD intensity (business expenditure on R&D as a percentage of total value added)
was 0.8 per cent in Italy and Spain, 1.2 per cent in Australia, 1.5 per cent in the Netherlands and1.8 per cent in the United Kingdom compared with 3.6 per cent in Finland, 3.0 per cent in Japan,
2.6 per cent in the United States and Germany, 2.2 per cent in France and 1.6 per cent in Canada
INTERNATIONAL
COMPARISONS

79

•

Differences in the level of executive remuneration between countries will affectown account organisational capital.
– Fukao et al. (2008b) found that remuneration of Japanese executives is lower
than in the United States. Australian managers are also paid less on averagethan those in the United States.16

Growth in investment
Figure 6.2 shows the growth in investment in intangibles relative to output (and thecomposition of that growth) by country.17 These are cumulative charts so that the
top line shows the share of total intangible investment in output. The gap between
the lines is the share of each category of investment (in these figures mineral
exploration is included in Scientific R&D). The total line shows the rising
importance of nominal intangible investment in each case. In general, brand equity
has been relatively constant, while computerised information and firm-specificresources (firm-specific human capital plus organisational capital) have shown themost marked increases. The exceptions are Finland and Japan, where scientific
R&D has increased its share more than firm-specific resources, and Canada, where
all shares have been relatively constant (for a relatively short period for which data
are available).
The rate of growth of intangible investment relative to output has varied over timeand across countries. However, most countries had a period of relatively highgrowth in the latter half of the 1980s and the latter half of the 1990s.
In the latter half of the 1980s, firm-specific resources and computerised information
were the main contributors to growth in this ratio in the United Kingdom and theUnited States. Non-scientific R&D and computerised information were the largest
contributors in Japan. This was also the case in Australia in the first half of the
1980s (a period of higher growth for Australia than the latter half of the 1980s).
This period was also the one of highest growth in the 1980s in Finland — with
scientific R&D contributing around half of total growth.
(PC 2007, p. 575). (The first group of countries is that with a relatively low share of intangible
investment in scientific R&D compared with the second group of countries.) These differences
have also been attributed, in part, to differences in industry structure (see PC 2007, appendix C).
16 For example, average annual earnings for Managers and administrators in Australia was
A$67 704 in 2006 (ABS Cat. no. 6310.0) compared with Management occupation annual
earnings of A$121 347 for the United States (US$91 930 from BLS 2008 at an average exchange
rate of US$0.757 to A$1).
17 Equivalent time series for France, Germany, Italy and Spain were not reported in Hao, Manoleand van Ark (2008).
80

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

In the latter half of the 1990s, firm-specific resources and computerised software
were again the main contributors to growth in the ratio of intangible investment to
output in the United Kingdom and the United States. These intangibles were also
the largest contributors in the Netherlands. Finland was an exception, with scientific
R&D accounting for around two-thirds of growth. For Australia, the first half of the
1990s was a higher growth period than the second half, with firm-specific resources
contributing almost half of this growth.
Hao, Manole and van Ark (2008, pp. 6–7) examined France, Germany, Italy andSpain between 1991 and 2004. The share of intangible investment in GDP was
relatively stable in Germany and France, while it grew faster in Spain and Italy(from a lower base). The growth in Italy was across the three main categories ofintangible, with little change in the composition of intangible investment. For Spain,
the growth was in computerised information and innovative property, with the shareof economic competencies falling. The share of economic competencies also fell inFrance and Germany, with growth in the share of investment in computerised
information in France and Germany and in innovative property in Germany.

INTERNATIONAL
COMPARISONS

81

Figure 6.2

Intangible investment shares of outputa, by country
Per cent

Australian investment in intangibles as a share of adjusted market sector gross value added
Per cent

10
Computerised info.

8

Non-scientific R&D

6
Scientific R&D

4

Firm-specific resources2
Brand equity0
1974-75

1979-80

1984-85

1989-90

1994-95

1999-00

2004-05

United Kingdom investment in intangibles as a share of adjusted market sector gross value addedComp. info.

Non-scientific R&D
Scientific R&D

Firm-specific resources

Brand equity(continued on next page)82

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Figure 6.2(continued)

United States investment in intangibles as a share of adjusted non-farm output

Finnish investment in intangibles as a share of adjusted business gross value added

Org. capitalFirm-sp. human cap.

Brand equity

Non-sci. R&D
Scientific R&D

Comp. info.

(continued on next page)

INTERNATIONAL
COMPARISONS

83

Figure 6.2(continued)

Netherlands investment in intangibles as a share of adjusted GDP
Per cent

10

8Computerised info.
Non-scientific R&D

6

Scientific R&D
Firm-specific resources

42

Brand equity

0
1987

1995

2000

2005

Japanese investment in intangibles as a share of unadjusted value addedb
Per cent

12

Computerised info.

10

Non-scientific R&D

8
6

Scientific R&D

4
Firm-specific resources20
1980–84

Brand equity

1985–89

1990–94

1995–99

2000–05(continued on next page)84

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Figure 6.2(continued)

Canadian investment in intangibles as a share of unadjusted GDPc
Per cent

10
Computerised info.

8

Non-scientific R&D

6

Scientific R&D

4
Firm-specific resources2
Brand equity

0

1998

1999

2000

2001

2002

2003

2004

2005

a Investment for sector of the economy listed in table 6.1 (total economy not commercial sector for the
Netherlands). Output differs across countries: adjusted market sector gross value added (market sector GVA
at basic prices plus market sector investment in new intangibles) for Australia; adjusted market sector GVA for
United Kingdom; adjusted non-farm business output for the United States; adjusted business GVA for Finland;
adjusted GDP for the Netherlands; unadjusted VA for the total economy for Japan; and unadjusted GDP for
Canada. Mineral exploration is included in Scientific R&D for all countries. It also includes R&D in social
sciences for Australia, Finland, the Netherlands, France, Germany, Italy and Spain. b Japanese estimates are
based on the share of unadjusted VA and will therefore be larger than if calculated using adjusted VA (which
includes intangible investment), as used for the other countries. Data are averages for five periods.
c Canadian estimates are based on the share of unadjusted GDP and will therefore be larger than if
calculated using adjusted GDP (which includes intangible investment), as used for the other countries.
Sources: Data sources are authors’ estimates for Australia; derived from van Rooijen-Horsten et al. (2008,
table A2) for the Netherlands; derived from Fukao et al. (2008b, table 4) for Japan; and derived from
Belhocine (2008, table 1) for Canada. Figures are reproduced (with additional labels added) from Corrado,
Hulten and Sichel (2006, figure 2) for the United States; Giorgio Marrano, Haskel and Wallis (2007, chart 3.1)
for the United Kingdom; and JAA (2007, figure 4) for Finland.

6.2

Growth accounting results compared

As noted above, the periods for which data are available differ across countries. For
this reason, only a single period is discussed in this section — the mid-1990s to theearly 2000s. Estimates for this period are available from all the country studies thathave identified intangibles in growth accounting analysis.18 The MFP growth
18 For the Netherlands the full decomposition of labour productivity growth is not available, but
MFP growth results are reported for the commercial sector. Growth accounting results for earlier
periods are reported in the country studies for the United States, the United Kingdom and Japan.
Results for later periods are reported in the country studies for Japan, the Netherlands, Finland,
France, Germany, Italy and Spain.
INTERNATIONAL
COMPARISONS

85

estimates presented in this chapter have been adjusted for labour compositionchange for all countries except the Netherlands.
It should also be noted that the results for Australia presented in this chapter are fora different time period to those in chapter 5. The series has been truncated to 2003
to match the majority of other countries. The period 1994-95 to 2002-03 is not apeak-to-peak period for Australia and may be affected by the influences of businesscycles. This caveat also applies to the periods reported from the other country
studies.19
Comparison of the importance of intangibles
Intangibles capital deepening, and capital deepening in total, made a relatively small
contribution to Australian labour productivity (LP) growth compared with most of
the other countries — the largest contribution was from multifactor productivity(MFP) growth (table 6.3).
•

The contribution of intangibles capital deepening to LP growth was
5-10 percentage points lower in Australia than most of the other countries.
– The contribution in Finland (16 per cent) was lower than Australia (19 percent). Most of the other countries had a contribution in the range of 20-27 percent. For Spain it was 38 per cent, while for Italy intangible capital deepening
was greater than LP growth (which was negative).

19 The closest peaks for Australia are 1993-94 and 2004-05. The MFP index for 1994-95 is higher
than 1993-94 and 2002-03 is slightly lower than 2003-04. So while not ideal the periods
examined are at least not distorted by being peak to trough. JAA (2007, p. 14) note that the
Finnish data for 1995–2000 are affected by the cyclical effects from exiting the early 1990s
recession. For the United States, the cycle period is 1995–2003 (Dolman, Parham andZheng 2007, p. 63). MHW (2007, p. 23) note that for the United Kingdom 1990–2000 is a fullpeak-to-peak cycle period (Kneller and Young 2001). Fukao et al. (2003) note that Japan’s
official business cycle peaks are May 1997 and October 2000.
86

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

1.36
(45)
0.81
(27)
0.57
(19)
0.24
(8)
1.51
(47)

3.01
(100)
1.68
(54)
0.85
(28)
0.84
(27)
0.33
(11)
1.08
(35)

3.09
(100)
2.14
(73)
1.54
(53)
0.60
(20)
0.31
(11)
0.48
(16)

2.93
(100)

1995
–2003

UK

0.83

1996
–2000

Neth.

0.13
(3)
-0.51
(-12)
0.64
(16)
0.06
(1)
3.93
(95)

4.12
(100)

1995
–2003

Finland

0.44
(25)

1.34
(75)
0.86
(48)
0.48
(27)
na

1.78
(100)

1995
–2000

Japan

1.19
(51)
0.64
(27)
0.55
(24)
0.29
(12)
0.87
(37)

2.34
(100)

1995
–2003

France

1.42
(69)
0.97
(47)
0.45
(22)
0.04
(2)
0.60
(29)

2.07
(100)

1995
–2003

Germany

0.64(-640)
0.45(-450)
0.19(-190)
0.15(-150)
-0.89
(890)

-0.10
(100)

1995
–2003

Italy

0.58
(363)
0.52
(325)
0.06
(38)
0.49
(306)
-0.91
(-569)

0.16
(100)

1995
–2003

Spain

Sources: MHW (2007, table 5) for the United States and United Kingdom; Fukao et al. (2008b, table 9-1) for Japan; van Rooijen-Horsten et al. (2008, table A8);JAA (2007, table 3) for Finland; Hao, Manole and van Ark (2008, table 5) for France, Germany, Italy and Spain; authors’ estimates for Australia.

United States, which is included as part of the tangibles.

a Market sector for Australia, United Kingdom, France, Germany, Italy and Spain; non-farm business sector for the United States; commercial sector for the Netherlands;
non-financial business sector for Finland; and total economy for Japan. b Includes all intangibles as covered in table 6.1. c Does not include mineral exploration for the

MFP growth

Labour composition

Intangiblec

Tangible

Decomposition:
Capital deepening

1995
–2003

1994-95–2002-03

Including all intangible assetsb

USA

Australia

Per cent per year (percentage contribution to LP growth)

Productivity growth after accounting for all intangiblesa, by country

Labour productivity growth

Table 6.3

•Although Australia (and particularly Finland) had lower contributions of total
capital deepening to LP growth, intangibles were a relatively larger share of total
capital deepening than in the United Kingdom, Japan and Germany (which had
relatively high existing levels of tangible capital deepening).
– Intangibles accounted for 42 per cent of total capital deepening in Australia
compared with around a quarter in the United Kingdom. Intangibles
accounted for around a third of total capital deepening in Japan and half in
the United States. Intangibles contributed more than 100 per cent of total
capital deepening in Finland because there was tangible capital shallowing.

•

MFP growth (as the residual) was a larger share of LP growth in Australia andFinland than the other countries.
– MFP growth was 47 per cent in Australia and 95 per cent in Finland,
compared with around 35 per cent in the United States, France and Germany.
For Japan it was around a quarter and for the United Kingdom it was 16 percent. MFP growth was negative in Spain and Italy.

This comparison across countries is affected to some extent by the use of an
exogenous floor rate of return for the Australian capital services estimates.20 Thisdiffers from the US study, in which an endogenous rate of return is used. All of theother country studies also use an endogenous rate of return, except the study of theNetherlands (which uses an exogenous rate of return). As discussed in chapter 5, theAustralian results were sensitivity tested to the rate of return assumptions. Using an
endogenous rate of return, the effect on the Australian growth accounting estimatesof treating all intangibles as capital is larger. The increase in capital deepening islarger and there is a correspondingly larger decrease in MFP growth (seeappendix D for details of estimates using endogenous rates of return). In terms ofcomparisons with the US results:•

the contribution of intangible capital deepening to LP growth increases, to alevel more similar to the United States•

the contribution of MFP growth to LP growth falls by about 5 percentage points,
to levels more similar to the United States.

20 This approach is used in this paper because it is used by the ABS in the Australian national
accounts (see appendix C for details).
88

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Contribution of each intangible asset

By broad asset type, Australia’s pattern of contributions to total intangible capital
deepening was most similar to the United States and United Kingdom (figure 6.3).
— economic competencies made the largest contribution followed by computerised
information and innovative property. Of all the countries shown in figure 6.3,
Australia had the lowest contribution from innovative property and the highest
contribution from computerised information.
The other countries had quite different patterns of intangible capital deepening. For
France and Italy, economic competencies were also the main contributor but forthese countries innovative property made a larger contribution than computerised
information. For Finland, Germany and Spain, innovative property was the largest
contributor. Computerised information was a particularly small share of total
intangibles capital deepening in Finland and economic competencies made anegative contribution in Spain.
Figure 6.3

Contributions of individual intangibles to total intangible capital
deepening, by countrya
Percentage shares

Eco. comp.
Innov. prop.
Comp. info.

100%

41
21
38

42
26
31

AUST

USA

b

45
25
31

42
48
8

UK

FINLAND

42
36
22

20
60
20

FRANCE GERMANY

47
32
21

ITALY

-200
200
100
SPAIN
(RH axis)

300 %

80%

200 %

60%

100 %

40%

0

20%

-100%

0%

-200%
1994-95 – 1995 –2002-03
2003

1995 –
2003

Computerised information

1995 –
2000

1995 –
2003

Innovative property

1995 –
2003

1995 –
2003

1995 –
2003

Economic competencies

Components may not add to 100 due to rounding. a No comparable data were available for Japan or the
Netherlands. b Does not include mineral exploration for United States — the growth accounting in CHS (2006)
treats mineral exploration as a tangible asset.
Data sources: MHW (2007, table 6) for the United States and United Kingdom; JAA (2007, table 4) for Finland;Hao, Manole and van Ark (2008, table 5) for France, Germany, Italy and Spain; authors’ estimates forAustralia.

INTERNATIONAL
COMPARISONS

89

Figure 6.4 illustrates the significance in total capital deepening of the ‘new’
intangibles compared with the ‘traditional’ intangibles.21 CHS (2006, p. 31) notedthat growth accountants in the United States should not lose sight of the new
intangibles that are just as large as the ‘traditional’ intangibles — computerised
information (which is already capitalised) and scientific R&D (which is on theagenda to be capitalised). This point also applies to the United Kingdom, Australia
and, to some extent, Finland.
Figure 6.4

Contributions of new and ‘traditional’ intangibles to total
intangible capital deepening, by country
Percentage shares

New‘Traditional’

55
46

59
41

68
32

46
54

100%
80%

new

60%
40%
traditional20%0%1994-95 – 2002-03
Australia

1995 – 2003
United States

1995 – 2003
United Kingdom

Computerised info.

Scientific R&D a

Brand equity

Firm-specific resources

1995 – 2000
FinlandNon-scientific R&D bcComponents may not add to 100 due to rounding. a Scientific R&D includes mineral exploration for the United
Kingdom, Australia and Finland (it also includes R&D in social sciences for Australia and Finland, which isincluded in non-scientific R&D for the United Kingdom and the United States). It does not include mineral
exploration for United States — the growth accounting in CHS (2006) treats mineral exploration as a tangible
asset. b Non-scientific R&D includes other product development and copyright and licence costs. c Firmspecific resources includes firm-specific human capital and organisational capital.
Data sources: MHW (2007, table 6) for the United States and United Kingdom; JAA (2007, table 4) for Finland;authors’ estimates for Australia.

21 Disaggregated data for France, Germany, Italy and Spain were not reported in Hao, Manole andvan Ark (2008).
90

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Firm-specific resources made a similar contribution to computerised information(slightly less in Australia and slightly more in the United States, Finland and United
Kingdom). Non-scientific R&D contributed more than scientific R&D, except inFinland. The contribution of scientific R&D was 94 per cent of that for total R&D
in Finland, compared with 7 per cent in the United Kingdom and 35 to 40 per centin the United States and Australia.22
Comparison of the effect of adding intangibles
As discussed in chapter 5, capitalising rather than expensing intangibles expenditure
results in a change to measured MFP growth. MFP growth can rise or fall,depending on the relative growth rates of current intangible investment on the
output side and services from accumulated intangible capital on the input side.
Table 6.4 and figure 6.5 show growth accounting estimates for the three definitionsof capital — including no intangibles, national accounts intangibles and all
intangibles. For most countries examined in this chapter, the direction of effect ofincluding intangible capital was the same — labour productivity growth rose by lessthan capital deepening, resulting in a fall in MFP growth (which is derived as theresidual).23 Input growth from including intangibles capital services generally
outweighed the increase in output growth from including intangible investment.
Intangibles therefore raised the importance of capital deepening and lowered theimportance of MFP growth as sources of growth.

22 MHW (2007, p. 21) note that this accords with discussion that in the United Kingdom ‘design’
is strong but scientific R&D lags behind the United States.
23 The exceptions are the Netherlands (for which MFP growth was unchanged after capitalising the
new intangibles), Japan (for which MFP growth rose after capitalising all intangibles) and Spain(for which MFP growth was unchanged after capitalising all intangibles).
INTERNATIONAL
COMPARISONS

91MFP growth

Labour composition

Intangible

Tangible

Decomposition
Capital deepening

Labour productivity growth

MFP growth

Labour composition

Decomposition
Capital deepening

1994-95–2002-03

UK
1995
–2003

0.98
(35)
0.38
(14)
1.42
(51)

1.64
(63)
0.36
(14)
0.58
(22)

1996
–2000

Neth.

1.12
(38)
0.90
(31)
0.23
(8)
0.26
(9)
1.56
(53)
0.37
(13)
1.32
(45)

1.26
(43)

0.35
(13)
0.56
(21)

1.82
(67)

0.83

Including national accounts intangible assetsc
2.94
2.95
2.73
(100)
(100)
(100)

0.92
(32)
0.27
(9)
1.71
(59)

Excluding most intangible assetsb
2.90
2.78
2.59
(100)
(100)
(100)

USA
1995
–2003

Australia

Per cent per year (percentage contribution to LP growth)

-0.48
(-13)
-0.53
(-14)
0.05e
(1)
0.07
(2)
4.05
(111)

3.64
(100)

1995
–2000

Finland

0.37
(25)

1.13
(75)
na

1.50
(100)

1995
–2000

Japan

0.78
(36)
0.32
(15)
1.08
(50)

2.17
(100)

1995
–2003

FranceEffect of intangibles on productivity growth, by country and intangible groupa

Labour productivity growth

Table 6.4

1.14
(59)
0.05
(3)
0.73
(38)

1.93
(100)

1995
–2003

Germany

Italy

0.58
(580)
0.52
(520)
-1.00
(-1000)

0.10
(100)

1995
–2003

Spain

(continued on next page)

0.49(-204)
0.16
(-67)
-0.89
(371)

-0.24
(100)

1995
–2003

(continued)

1995
–2003

1994-95–2002-03

1995
–2003

UK

1.36
(45)
0.81
(27)
0.57
(19)
0.24
(8)
1.41
(47)

1.68
(54)
0.85
(28)
0.84
(27)
0.33
(11)
1.08
(35)

2.14
(73)
1.54
(53)
0.60
(20)
0.31
(11)
0.48
(16)

Including most intangible assetsd
3.01
3.09
2.93
(100)
(100)
(100)

USA

Australia

0.83

1996
–2000

Neth.

0.13
(3)
-0.51
(-12)
0.64
(16)
0.06
(1)
3.93
(95)

4.12
(100)

1995
–2000

Finland

0.44
(25)

1.34
(75)
0.86
(48)
0.48
(27)
na

1.78
(100)

1995
–2000

Japan

1.19
(51)
0.64
(27)
0.55
(24)
0.29
(12)
0.87
(37)

2.34
(100)

1995
–2003

France

1.42
(69)
0.97
(47)
0.45
(22)
0.04
(2)
0.60
(29)

2.07
(100)

1995
–2003

Germany

0.64(-640)
0.45(-450)
0.19(-190)
0.15(-150)
-0.89
(890)

-0.10
(100)

1995
–2003

Italy

0.58
(363)
0.52
(325)
0.06
(38)
0.49
(306)
-0.91
(-569)

0.16
(100)

1995
–2003

Spain

Sources: MHW (2007, table 5) for the United States and United Kingdom; Fukao et al. (2008b, table 9-1) for Japan; van Rooijen-Horsten et al. (2008, table A8);JAA (2007, tables 3, 5) for Finland; Hao, Manole and van Ark (2008, table 5) for France, Germany, Italy and Spain; authors’ estimates for Australia.

a Market sector for Australia, United Kingdom, France, Germany, Italy and Spain; non-farm business sector for the United States; commercial sector for the Netherlands;
non-financial business sector for Finland; and total economy for Japan. b Computerised information excluded in all cases. The intangibles of mineral exploration and thearchitectural and design services embedded in equipment purchases are included for the United States. c For the United States, includes computerised information,mineral exploration and the architectural and design services embedded in equipment purchases. For the United Kingdom, includes computerised information. For
Australia includes computerised information, mineral exploration and artistic originals — calculated using aggregate methodology rather than aggregating from industry
estimates and will differ from ABS published estimates. d Includes all intangibles as covered in table 6.1. e Computerised information only. f Does not include mineral
exploration for the United States, which is included as part of the tangibles.

MFP growth

Labour composition

Intangiblef

Tangible

Decomposition:
Capital deepening

Labour productivity growth

Table 6.4

Figure 6.5 illustrates the differences between the three panels in table 6.4, that is thechange in the decomposition of LP growth as different groups of intangibles aretreated as capital.
Figure 6.5

Decomposition of labour productivity growth, by country, by
definition of capitala, mid-1990s to early 2000sb
Per cent per year

Per cent
5.0
4.0
3.0
2.0
1.0

Al
l

No
ne

Al
l

USA

Na
t.
a/
c

AUST

Na
t.
a/
c

No
ne

Al
l

Na
t.
a/
c

No
ne

0.0

UK

Per cent
5.0
4.0
3.0
2.0
1.0
0.0

MFP growth

ITALY

Al
l

ne
No

Al
l

ne

Al
l

ne

GERMANY

Labour compositionNo

FRANCE

No

Al
l

ne

Al
l

FINLAND

No

JAPAN

Na
t.
a/
c

Al
l

No

ne

-1.0

SPAIN

Capital deepening

a ’None’ is no intangibles treated as capital; ‘National accounts’ is national accounts intangibles treated ascapital; and ‘All’ is all intangibles treated as capital. For Japan any labour composition effect is not separately
identified. b 1994-95 to 2002-03 for Australia; 1995 to 2003 for the United States and the United Kingdom;
1995 to 2000 for Japan; 1995 to 2000 for Finland; and 1995 to 2003 for France, Germany, Italy and Spain.
Data sources: MHW (2007, table 5) for the United States and United Kingdom; Fukao et al. (2008b, table 9-1)
for Japan; JAA (2007, tables 3, 5) for Finland; Hao, Manole and van Ark (2008, table 5) for France, Germany,
Italy and Spain; authors’ estimates for Australia.

94

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITYExamining the effect of capitalising all intangibles (compared with the no
intangibles case):•labour productivity growth was higher in all countries– but in percentage terms, LP growth increased by less in Australia because of
the relatively smaller contribution of intangible investment to output growthand/or a higher LP growth in the no intangibles case than the other countries•

the contribution of capital deepening to LP growth was higher in all countries(except Spain where there was no change)– the contribution of capital deepening to LP growth rose more (in percentage
terms) in the United States, France and Australia than the United Kingdom
and Japan (which already had high rates of capital deepening)24•

in most countries, the increase in capital deepening was greater than the increasein LP growth, so the contribution of MFP growth (as the residual) fell
– the contribution of MFP growth to LP growth fell less (in percentage terms)
in Australia (18 per cent) than the United States (24 per cent) and France(19 per cent), the same as in Germany (18 per cent) but more than the United
Kingdom (17 per cent) and Spain (9 per cent). There was no change in Italy
and in Japan the contribution rose 19 per cent.

Overall, capitalising all intangibles in the growth accounting (compared withcapitalising none) generally shifted the sources of growth towards capital deepening
and away from MFP growth. However, this shift was less pronounced in percentage
terms for Australia than some of the other countries because of lower investment inintangibles and/or relatively high MFP growth. For Australia, even after thecapitalising all intangibles, MFP growth remained a larger contributor to LP growththan capital deepening — this was not the case for most of the other countries.
Relative importance of ‘new’ and ‘old’ intangibles

As noted above, the national accounts already include some intangibles (mainlycomputerised information). This raises two questions:•

How do the contributions of the new intangibles compare with those of theexisting intangibles?

•

To what extent are the national accounts estimates affected by not treating the
new intangibles as capital?

24 MHW (2007, p. 22) noted that the effect in the United Kingdom is less than the United States
because capital deepening is already quite high in the United Kingdom.
INTERNATIONAL
COMPARISONS

95

Figure 6.5 illustrates the progressive effect of capitalising the national accounts andthe new intangibles for Australia, the United States and the United Kingdom (andthe new intangibles for Finland). The answer to the first question is that over theperiod examined the ‘new’ intangibles affect the MFP results more than the ‘old’
intangibles25, highlighting the importance of attempting to capitalise the new
intangibles in the national accounts. For Australia, however, the difference between
the ‘new’ and ‘old’ intangibles is small.
The answer to the second question varies across countries. Overall, in percentage
terms, not treating the new intangibles as capital affects MFP growth in theAustralian national accounts26 less than it affects the national accounts of most of
the other countries for which data are available (figure 6.5).27 Australian MFP
growth is overstated by 10 per cent (0.15 of a percentage point), compared with
18 per cent (0.24 of a percentage point) in the United States, 14 per cent (0.08) in
the United Kingdom and 3 per cent (0.12) in Finland (table 6.4).
Overall, not capitalising all intangibles in the national accounts affects the picture of
the relative importance of the sources of growth. Capital deepening is relatively
more important and MFP growth relatively less important when the new intangibles
are measured.
Effect on growth accounting results over shorter periods
The above results cover only one period but data for various shorter periods were
examined in most of the country studies and the growth cycle periods were
examined for Australia in chapter 5. While in many cases treating intangibles ascapital altered the extent of any acceleration/deceleration in MFP growth between
periods, in only two countries is it reported to have reversed the pattern of MFP
growth.
•For the United Kingdom, the inclusion of the ‘new’ intangibles changed adeceleration in LP growth and MFP growth between the early and late 1990s to
an acceleration in LP growth and MFP growth (MHW 2007, table 3).

25 The change in MFP growth from moving from a capital definition that includes no intangibles to
one that includes the national accounts intangibles is less than the change in MFP growth frommoving from a capital definition that includes national accounts intangibles to one that includes
all intangibles.
26 The estimates for the national accounts definition of capital are not the same as ABS publishedestimates for Australia because of differences in methodology (see appendix C).
27 There are some differences across countries as to which intangibles are already treated as capitalin the national accounts — the US estimates do not include artistic originals, which are includedin the Australian and UK national accounts.
96

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

– MHW (2007) suggest that the ‘mystery’ of the LP growth slowdown in theconventionally measured statistics was in fact a ‘statistical illusion’ caused by
not accounting for investment in intangibles.
– This was a period of rapid investment in intangibles that raised output growthmore than input growth was raised by including intangible capital services as
an input.
•

For the Netherlands, capitalising intangibles resulted in a deceleration rather
than an acceleration in MFP growth between 1996-2000 and 2001-05.
– Capitalising intangibles left MFP growth unchanged in 1996-2000 but
lowered it in 2001-05. The MFP growth rate therefore became higher in
1996-2000 than 2001-05, the reverse of the pattern before capitalisingintangibles (van Rooijen-Horsten et al. 2008, p. 30).

•

For Australia, as shown in chapter 5, there has been no change in the pattern ofgrowth across the cycles (in terms of a switch from acceleration to deceleration).
– In general, the lower levels of investment in intangibles means that treatingintangibles as capital has a lesser effect on the growth accounting results thanin some of the other countries. This also makes it less likely that the effect oftreating intangibles as capital will be large enough to change the periods ofacceleration and deceleration between cycles.

6.3

Summary

The estimates for Australia (and the other countries) are exploratory and have anumber of identified deficiencies. And the international comparisons are further
hampered by differences in coverage and underlying data used in the estimates.
Even comparable estimates should be interpreted carefully — the country with thehighest ratio of intangibles to output should not be seen as a benchmark. Countryspecific circumstances will affect the appropriate level and type of intangible
investment for a particular country. However, with these caveats in mind, there are
a number of broad similarities and differences between Australia and the othercountries that are of interest.
•

Australia has a lower rate of intangible investment than the United States, United
Kingdom, Japan, France, Germany and Finland but greater than the Netherlands,
Canada, Italy and Spain (when measured as a share of adjusted output for thesector for which intangibles were measured).
– But Australian investment in intangibles is still large — $57 billion or around
10 per cent of adjusted market sector gross value added in 2005-06.

INTERNATIONAL
COMPARISONS

97

– And the pattern of growth has been similar to most of the other countries
examined, including the United States and United Kingdom.
•

Even though Australia (like Japan, Italy and Spain) has a relatively low ratio of
intangibles to tangibles investment, compared with the United States, it is stillaround half the size of tangible investment.
– And with higher growth in intangible investment than tangible investment
over the longer term, this changes the trend in the Australian ratio ofinvestment to output from a declining to relatively stable one.

•The composition of Australia’s intangible investment is more similar to theUnited States than most of the other countries examined (particularly Japan).
– The lower ratio of intangible investment to output is due to lower levels
across the three main groups of intangibles rather than particularly low
investment in any one group.

•

While further analysis is required, the international comparisons suggest that thetype of intangible investment may be important for growth performance.
– For example, Japan has a higher share of its intangibles investment incomputerised information than the United States or Australia but a lower
share of investment in economic competencies. Fukao et al. (2008b) note thatdifferences in the accumulation of intangible assets that play acomplementary role to ICT capital (for example, organisational capital)
might explain differences in productivity growth compared with the UnitedStates.
– Other studies have suggested that Australian productivity performance has
benefited from links between ICTs and organisational capital.
Gretton et al. (2003) found significant interactions between ICT use andcomplementary organisational variables (including human capital, history ofinnovation, the use of advanced business practices and the intensity oforganisational change) using an Australian firm-based longitudinal dataset.
And Australia is one of the few countries to show evidence of MFP gains
related to ICT use (OECD 2003). The differences between Australia andJapan in organisational capital investment (as measured using the CHSmethodology) also suggest that this is a potential explanation for some of thedifference in MFP growth.28

28 It should be noted that comparability of organisational capital measures across countries isaffected by data limitations — the Japanese estimate is likely to be an underestimate (Fukao et al.
2008b) and the Australian estimate may be an overestimate (see chapter 3).
98

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

•

In most countries, when intangibles are capitalised LP growth and capital
deepening rise and MFP growth falls — that is, part of conventionally-measured
MFP growth was actually attributable to previously unmeasured intangible
assets.
– The percentage contribution of ‘new’ intangibles to conventionally-measured
MFP growth is relatively low in Australia compared with the United States
and United Kingdom. This reflects a lower level of intangible investment andrelatively high MFP growth in Australia. (However, it also reflects the use ofan exogenous floor rate of return rather than endogenous rate of return, underwhich the contribution of intangibles to conventionally-measured MFP
growth in Australia is larger.)•

Only a small proportion of Australia’s relatively high MFP growth is directly
attributable to intangibles and capitalising intangibles does not appreciably
change the pattern of growth over the productivity cycles (unlike in the United
Kingdom).
– This does not rule out indirect effects from intangibles, such ascomplementarities with ICTs, contributing to MFP growth.

INTERNATIONAL
COMPARISONS

99

A

Data sources for investment inintangibles

This appendix describes the Australian data sources used in this study and presents
the capital series estimates. While the intent has been to follow the Corrado, Hulten
and Sichel (CHS) methodology used in the studies of the United States (CHS 2005,
CHS 2006), the United Kingdom (Marrano and Haskel 2006, Marrano, Haskel andWallis 2007) and Japan (Fukao et al. 2008b), to allow comparability, data
availability has led to some differences. A discussion of how the data sources
compare with those used in the other studies is included.1
The estimates of intangibles have been constructed for the market sector (theindustries that make up the market sector are listed in table A.1). All references to
ABS ANZSIC (Australian Bureau of Statistics Australian and New ZealandStandard Industrial Classification) are to the ANZSIC 1993 edition. The closest
available ASIC (Australian Standard Industrial Classification) industry
division/subdivision has been used for early years in the absence of sufficient data
to use a more precise concordance.
Table A.1

Industries included in the market sectora

Agriculture, forestry & fishing

Retail trade

MiningAccommodation, cafes & restaurants

Manufacturing

Transport & storage

Electricity, gas & waterCommunication services

Construction

Finance & insurance

Wholesale trade

Cultural & recreational services

a The industries excluded are Property & business services, Government administration & defence,
Education, Health & community services, and Personal & other services.

1 The Corrado, Hulten and Sichel methodology (CHS 2006) has also been used to measureintangibles for Finland (Jalava, Aulin-Ahmavaara and Alanen 2007), the Netherlands (RBT 2008,
van Rooijen-Horsten et al. 2008), France, Germany, Italy and Spain (Hao, Manole and van
Ark 2008) and Canada (Belhocine 2008). Any major measurement differences in these studies
are noted in table A.3 and the international comparisons in chapter 6.
DATA SOURCES

101

Table A.2 summarises the measures, data sources, deflators and depreciation rates
used to construct the Australian capital stock for each of the intangibles. The
following sections explain these factors, and the rationale for them, in more detail.
Table A.3 at the end of the chapter compares data sources across studies.

A.1

Expenditure on computerised information

As noted above, computer software is already capitalised into the national accounts
by the ABS and these data are used in this paper.
The ABS defines computer software as:… computer programs, program descriptions and supporting materials for both systems
and applications software. Included are purchased software, and, if the expenditure islarge, software developed on own-account. Large expenditure on the purchase,development or extension of computer databases that are expected to be used for morethan one year, whether marketed or not, are also included. (ABS 2000, p. 452)

CHS (2006) identify computer software and computerised databases separately —taking the computer software data and own account computer databases data fromthe US National Income and Product Accounts. The purchased component ofcomputer databases is estimated from US Services Annual Survey (based onsubscription revenue from database and directory publishing industry).2
The ABS measure appears broadly similar to the combined CHS measures.
However, the ABS measure may understate this intangible through the exclusion ofsome database and own-account software development.
It should be noted that the asset lives used for computer software differ acrosscountries. For example, the average depreciation rate is 20 per cent in the Australiannational accounts compared with 40 per cent in the United Kingdom. In the US
study, CHS (2006) use 33 per cent and this is followed by in the Japanese study.

2 This was around 2 per cent of software included in the US National Income and ProductAccounts in 1998–2000 (CHS 2005, table 3).
102

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Main
data source

ABS national
accounts(5204.0)

ABS BERD
survey (8104.0)

ABS national
accounts(5204.0)

ABS national
accounts(5204.0)

Computerised
information

Business
expenditure on
R&D

Mineralexploration

Artistic originals

2006-1975 GFCF and PKS for artistic
originals

2006-1975 GFCF and PKS for mineral
exploration

2006-1975 Business expenditure on R&D by
market sector industries (excluding R&D by
the financial services industry)

2006-1975 Gross fixed capital formation(GFCF) and productive capital stock (PKS)for computer software by market sector
industries

1

1

1

1

ABS artistic
originals IPD

ABS mineral
exploration
IPD

Impliedmarket sector
gross value
added (GVA)
deflator

ABS computer
softwareimplicit pricedeflator (IPD)

Proportion of
expenditureconsidered as
Time series (all refer to financial year ended) investment
Deflator

0.6

0.1

0.2

0.2

Dep’n
rate

Summary of data sources and assumptions used to construct stocks of intangibles

Type ofintangible

Table A.2

1 102

31 73729 49022 619(continued on next page)

698

2 503

7 904

7 435

Investment Stock2006 ($m) 2006 ($m)

Maindata source(continued)

New architectural ABS Industry
and engineering survey (8155.0)
designs

New product
ABS IO/SU
development in
tables (5215.0/
financial industry unpublished)Type ofintangible

Table A.2

All scaled to market sector using market
sector intermediate usage as a share ofAustralian production of SUPC 43020 from
SU tables back to 1994-95 (backcast using
market sector share of GVA).

1994-1975 Backcast using growth rate inArchitectural services, surveying andconsulting engineering in IO product tables.
Assumes growth for broader group is sameas ANZSIC 7821-23.

1998-1995 Backcast using growth inArchitectural, surveying, consulting
engineering and quantity surveying services
SUPC 43020. Assumes growth for broader
group is same as for ANZSIC 7821-7823.

2005-1999 Half of sales of architectural andconsulting engineering services (ANZSIC
7821, 7823).

2006 Forecast at 2005 growth rate

1994-1975 Backcast using growth rate inintermediate usage of Financial & insurance

2004-1995 20 per cent of intermediatepurchases of SUIC 380 Finance and Financeshare of SUIC 400 Services to finance,
investment & insurance

2006-2005 Forecast at 2004 growth rate

Time series

11

Impliedmarket sector
GVA deflator

ImpliedFinance &insuranceindustry GVA
deflator

Proportion of
expenditureconsidered as
investment
Deflator

0.2

0.2

Dep’n
rate

4 650

5 591

18 40527 507

Investment Stock2006 ($m) 2006 ($m)

CEASA (2003,
2006, 2007)

ABS Industry
surveys (8155.0,
8677.0)AdvertisingMarket research

Scaled to market sector using market sector
intermediate usage as a share of Australianproduction of Other business services SUPC
43031 from SU tables back to 1994-95(assumes this share is the same for market
research services) (backcast using market
sector share of GVA).

1992-1975 Backcast using growth rate inMarket and business services from IO
product tables. Assumes growth rate for thisbroader group is same as for ANZSIC 7853.

2005-1993 Twice sales of market researchservices (ANZSIC 7853), to impute own
account market research.

2006 Forecast at 2005 growth rate

2006-1975 Total advertising expenditure lessexpenditure on classifieds and directories.
Multiplied by 2 to arrive at estimate including
production costs. Scaled to market sector
using market sector intermediate usage as ashare of Australian production of advertising
services (SUPC 43025 from SU tables backto 1994-95, backcast using market sector
share of GVA)

Impliedmarket sector
GVA deflator

Impliedmarket sector
GVA deflator

0.6

0.6

0.6

0.6

1 707

12 160(continued on next page)

1 107

7 337

Main
data source

ABS Training
surveys (6353.0,
6278.0)Firm-specifichuman capital(continued)

Type ofintangible

Table A.2

Linear interpolation used to estimated realcosts per hour between survey data (2002,
1997, 1994, 1991) and exponential trend
growth used for 1975-1990 and 2003-2006.

Total hours of training based on growth in
employee numbers and; for years between
survey observations (1990, 1991, 1994,
1997, 2001, 2005) an assumed linear growthin hours per employee; or for 1975-89
assumed hours per employee at 1990 levels
and for 2006 at 2005 levels.

Estimates (in real terms) for other years
derived from estimated total hours of training
and estimated real costs per training hour

Survey data for training costs (including
wages of employees being training) for 2002,
1997, 1994, 1991.

Market sector excluding AgricultureTime series
1

Averageweekly fulltime ordinary
earnings
deflator

Proportion of
expenditureconsidered as
investment
Deflator
0.4

Dep’n
rate

4 353

10 429Investment Stock2006 ($m) 2006 ($m)

Purchasedorganisational
capitalABS Industry
survey (8155.0)

All scaled to market sector using market
sector intermediate usage as a share ofAustralian production of Other businessservices SUPC 43031 from SU tables backto 1994-95 (assumes this share is the samefor business management services)(backcast using market sector share of
GVA).

1994-1975 Backcast using growth rate inMarket and business services from IO
product tables. Assumes growth rate for thisbroader group is same as for ANZSIC 7855.

1998-1995 Backcast using growth rate in
Other business services SUPC 43031.
Assumes growth rate for this broader groupis same as for ANZSIC 7855.

2005-1999 Sales of business management
services (ANZSIC 7855).

2006 Forecast at 2005 growth rate

0.8

Impliedmarket sector
GVA deflator

0.4

22 650(continued on next page)

10 208

Maindata source

ABS Labour
survey (6310.0)

Own accountorganisational
capital(continued)

Type ofintangible

Table A.2

1988-1975 Earnings backcast using growthrate in earnings of full-time employees
classified as Administrative, executive andmanagerial employees for the total economy.
Assumes market sector growth rate is thesame as for full-time Managers &administrators employees for the total
economy. Employee numbers backcast using
growth in total employed in Administrative,
executive and managerial occupations forapproximated market sector less Agriculture.

1997-1989 Earnings backcast using growthrate in earnings of employees classified as
Managers & administrators for the total
economy. Assumes market sector growthrate is the same as for the total economy
Employee numbers backcast using growth intotal employed Managers & administratorsfor market sector less Agriculture.

2006-1998 20 per cent of earnings of market
sector employees classified as Managers &administrators (excluding farm managers andIT managers).

Time series
1

Impliedmarket sector
GVA deflator

Proportion of
expenditureconsidered as
investment
Deflator
0.4

Dep’n
rate

4 938

11 086

Investment Stock2006 ($m) 2006 ($m)

A.2

Expenditure on innovative property

CHS (2005) include six types of innovative property — scientific R&D, mineral
exploration, copyright and licence costs, new product development costs in thefinancial industry, new architectural and engineering designs, and R&D in social
sciences and humanities. The extent to which these types of innovative property arecovered by the ABS in the Australian national accounts and the survey of business
expenditure on R&D (BERD) (Research and Experimental Development,
Businesses, Australia, Cat. no. 8104.0) was examined and compared with the US
study.
In brief, mineral exploration and copyright and licence costs are already capitalisedby the ABS in the national accounts. The ABS survey of BERD clearly covers
scientific R&D and R&D in social sciences and humanities. It also covers some
aspects of product development costs in the financial industry and new architecturaland engineering designs. Whether this coverage is as broad as that envisaged by
CHS (2005) is examined in more detail below, together with issues of double
counting. Fewer issues of double counting arise in the US and UK studies — the US
R&D survey covers only scientific R&D, while the UK R&D survey does not cover
the financial services industry.
Business expenditure on R&D
R&D activity is generally defined as
Creative work undertaken on a systematic basis, in order to increase the stock ofknowledge, including knowledge of man, culture and society, and the use of this stockof knowledge to devise new applications. (ABS Cat. no. 8104.0, 2005-06, p. 30)

More specifically it includes
Systematic investigation or experimentation involving innovation or technical risk. The
outcome of which is new knowledge, with or without a specific practical application, or
new or improved products, processes, materials, devices or services. R&D activity
extends to modifications to existing products/processes. R&D activity ceases and preproduction begins when work is no longer experimental. (p. 34)

Data on scientific R&D expenditure are relatively well collected. CHS (2005) use
US Census Bureau data, collected for the National Science Foundation, andincludes mainly industrial R&D, covering the physical sciences, biological sciences,and engineering and computer science (but excluding geophysical, geological,
artificial intelligence, and expert systems research) (CHS 2005, table 1.3).
DATA SOURCES

109

Expenditure series
A current price series for Australian BERD for the market sector (excluding
Agriculture, forestry & fishing3) was available from Shanks and Zheng (2006).4
This series covered 1968-69 to 2002-03. For this paper it was updated and extended
to 2005-06 using revised and updated data from the ABS Research andExperimental Development, Businesses, Australia, 2005-06 (Cat. no. 8104.0).5
The Shanks and Zheng dataset is primarily based on ABS Cat. no. 8104.0 and
related unpublished data but has been adjusted in several ways. These adjustments
are discussed in detail in appendix A of Shanks and Zheng (2006). The main
adjustment was to approximate the market sector expenditure by deducting Property& business services (excluding Scientific research).6
It should be noted that the ABS BERD data includes R&D in social sciences andhumanities (identified as a separate category of intangible in the US study). In thispaper, the intangible category of ‘scientific R&D’ includes ‘R&D in social sciences
and humanities’ The ABS BERD survey uses the Frascati definition of R&D (asdescribed above), which includes R&D in fields classed as social sciences andhumanities.
•

For R&D undertaken by businesses themselves, the scope of the activity
includes social sciences and humanities (for example, fields such economics;
commerce, management, tourism and services; journalism, librarianship andcuratorial services; language and culture; and the arts). To the extent that R&D
in these fields is undertaken by businesses in the market sector, that R&D is
included in the market sector BERD estimates discussed above.

3 The ABS did not directly survey farms and other businesses in this industry until 2005-06.
Generally R&D related to this industry is performed in government, higher education and private
non-profit institutions, as well as by businesses classified to other industries (Shanks andZheng 2006, p. A.3). Agriculture has been excluded from the 2005-06 data to maintaincomparability over time.
4 An electronic dataset is available athttp://www.pc.gov.au/research/staffworkingpaper/
economicmodelling [R&D stocks constructions (domestic) Ext Rel.xls: Series - adjusted BERD
(less PBS)] (accessed 31 October 2007).
5 The series used is total expenditure on R&D, not just current expenditure. This means that there
is some double counting of capital expenditure, as was also the case in the UK study. However,capital expenditure was only 6 per cent of total Australian BERD in 2005-06 ($641 million out of$10 081 million).
6 Some non-market sectors could not be excluded because of lack of disaggregated data. The
industry ‘Scientific Research’ (ANZSIC 781) was not excluded because it undertakes R&D
principally for other industries. The R&D of this industry was therefore redistributed to the otherindustries using a breakdown by socio-economic objective of the R&D, so as to obtain the market
sector portion of this research. See Shanks and Zheng (2006, appendix A) for further details.
110

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

•In addition, the market sector BERD estimates include a portion of ANZSIC
industry 7810 Scientific research. The scope of this industry also includes social
sciences as well as agricultural, biological and physical sciences.

van Rooijen-Horsten et al. (2008, p. 12) note that it is possible that an R&D survey
based on Frascati definitions of R&D would result in an underestimation of R&D insocial sciences and humanities (as well as R&D in financial services). This isbecause ad hoc R&D is common in social sciences, humanities and financial
services industries rather than systematic R&D (as would be required to meet the
Frascati definition of R&D). However, in the absence of any measure of the likely
understatement, in this paper (as in van Rooijen-Horsten et al. 2008) it is assumed
that the BERD survey correctly measures R&D in social sciences and humanities.
While R&D in social sciences and humanities was separately identified in the US
and UK studies of intangibles this has not been possible for this paper.7 A separate
consistent time series for this subset of R&D was not readily available for Australia.
It should also be noted that the ABS BERD data does include some R&D related tofinancial services and architectural/engineering services. It appears that the scope ofthese types of R&D as discussed in CHS (2005) is broader than those activities that
may be covered by the BERD survey. For this reason the CHS method has beenused to estimate these components of R&D (as discussed below). The ABS BERD
data have therefore been adjusted, where possible, to avoid double counting of thesetypes of R&D under Scientific research. For R&D in financial services it has beenpossible to construct a series for the financial services industry component of the
ABS BERD estimates8 and reduce BERD by this amount. Insufficient data are
available to make any adjustment for ‘new architectural and engineering designs’(the extent of any duplication is discussed below under that heading).
Investment series
Marrano and Haskel (MH 2006) exclude expenditure on R&D in the computerindustry from its investment series in order to avoid double counting with software.
It has not been possible to make this exclusion for this paper. However, much ofsoftware R&D would be undertaken by the Computer services industry (part of
Property and business services and outside the market sector) and is alreadyexcluded from the Shank and Zheng estimates of BERD for the market sector.
7 R&D in social sciences was also included with Scientific R&D for Finland and the Netherlands.
For the Japanese study this category was not included at all due to lack of data.
8 Data are available for expenditure on R&D by the financial services industry from 1986-87 to
2005-06. Prior to this R&D for the financial services industry was included in ‘Other nec’ and thegrowth in this series has been used to backcast the financial services industry series.
DATA SOURCES111

In line with CHS (2006) the whole of BERD for the market sector was consideredinvestment. The expenditure series was deflated by the implied market sector GVA
deflator (base year 2005-06) to obtain the real investment series.
Capital series
The capital stock series was constructed using the perpetual inventory method(PIM), as described in chapter 4, with an assumed 20 per cent depreciation rate.
This was in line with the rate used in CHS (2005, p. 23), which is assumed to be the
mid-range of rates reported in the literature. As discussed in chapter 4, instead of
selecting a year when the initial stock is equal to zero, the alternative method wasused in which the initial stock for the first year of the data series is estimated by
dividing that year’s investment by the sum of the depreciation rate and the trend
growth rate over years for which investment data are available.
Mineral exploration
As noted above, mineral exploration is already capitalised into the national accounts
by the ABS and these data are used in this paper. There is no overlap between R&D
carried out for Mining, such as the development of new exploration techniques andassociated research, which is included in Scientific R&D, and mineral exploration
as currently capitalised, which is the use of existing exploration techniques.
CHS (2005, table 1.3) include mining R&D and mineral exploration, having
excluded mining R&D from scientific research. The UK study includes mining
R&D under scientific R&D, and therefore includes only mineral exploration in its
estimate of this intangible.
Artistic originals
As noted above, artistic originals are already capitalised into the national accounts
by the ABS and these data are used in this paper. The ABS defines entertainment,
literary or artistic originals as:… originals of films, sound recordings, manuscripts, tapes, models, etc., on which
drama performances, radio and television programming, musical performances,
sporting events, literary and artistic output, etc., are recorded or embodied. (ABS 2000,
p. 454)The UK, Finnish and Netherlands studies also use artistic originals as defined under
the System of National Accounts (SNA93). This measure appears to have similar
coverage to the copyright and licence cost intangible in CHS (2005), which is112

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

proxied by development costs in the motion picture industry plus double new
product development costs for motion pictures as crude proxy for development
costs in radio, TV, sound recording and book publishing industries. MH (2006, p. 6)
note that while the national accounts measure may not cover as wide a definition asenvisaged by CHS it probably covers the main expenditures of this type.
Other product development, design and research
Traditional definitions of R&D exclude items such as design and some nonscientific research. However, the Frascati Manual (OECD 2002) in its proposed
standard practice for surveys on R&D does include R&D activities beyond the
traditional scientific R&D, such as R&D in banking and insurance, other service
industries and R&D in social sciences and humanities. This is the classification
system used by the ABS in its survey of business R&D. Therefore the estimates of
BERD will include some of these ‘other product development, design and research’listed in CHS (2005). The scope of the measures used in this paper for each type ofother product R&D is discussed below.
New product development costs in the financial industry

CHS (2005) use a crude proxy for spending on new product development by thefinancial services industry of 20 per cent of total intermediate purchases of thatindustry. CHS (2006, p. 18) note
Many new products in the financial services industry involve computerized
information; to avoid double-counting (particularly with the own-account portion ofcomputer software), we deliberately were very conservative in our estimates for thiscomponent.

MH (2006, p. 7) improve on this crude proxy by deducting purchases ofintermediate inputs counted elsewhere in intangibles — that is, advertising,
software, consulting services and architectural and engineering activities.
The ABS BERD survey follows the Frascati Manual classification of R&D.
Examples of R&D in banking provided in the Frascati Manual (OECD 2002,
pp. 49–50) include:•

Mathematical research relating to financial risk analysis.

•

Development of risk models for credit policy.

•

Experimental development of new software for home banking.

•Development of techniques for investigating consumer behaviour for the
purpose of creating new types of accounts and banking services.
DATA SOURCES

113

•

R&D related to electronic banking and insurance, Internet-related services ande-commerce applications.

•

R&D related to new or significantly improved financial services (new concepts
for accounts, loans, insurance and saving instruments).

Australian BERD would therefore appear to cover at least some of the types ofdevelopments envisaged by CHS (2006), although no specific examples were givenin their paper. van Rooijen-Horsten et al. (2008, p. 12) note that it is possible that an
R&D survey based on Frascati definitions of R&D would result in anunderestimation of R&D in financial services industries. They suggest that ad hoc
R&D is common in the financial services industries and is excluded from the
Frascati definition of R&D since it is not undertaken on a systematic basis.
Estimates based on the CHS method were compared with the financial services
industry component of the ABS BERD survey and found to be considerably
smaller.9 For comparability with the US study, the CHS method of estimating
financial services R&D has been used in this paper.10 To avoid double counting, thefinancial services industry component of total BERD from the ABS R&D survey
has been excluded from Scientific research (as noted above).
However, it should be noted that if the ABS estimate of financial services industry
R&D does cover all relevant R&D activity in this industry, the CHS-type estimate
will represent a considerable overstatement of this intangible.
Expenditure series
The financial services industries of interest in the Australian context are a subset of
ANZSIC Division K Finance & insurance — that is, Finance (ANZSIC 73) and ashare of Services to finance and insurance (ANZSIC 75).
For this paper, a series for total intermediate purchases by the financial services
industries has been constructed from ABS data from input-output (IO) and supplyuse (SU) tables. The SU industry codes equivalent to ANZSIC 73 and 75 are
380 Finance and 400 Services to finance, investment and insurance. The share ofServices to finance, investment and insurance is based on the output share of
Finance in the combined output of Finance and Insurance.
9 In 2005-06 the ABS BERD survey (Cat. no. 8104.0) reported total expenditure on R&D by
Finance & insurance of $902 million, which equates to only 16 per cent of the estimate using the
CHS methodology. It is estimated that this percentage ranged from 2 to 17 per cent over the fullperiod examined.
10 Both the US and UK surveys of R&D do not include financial services.
114

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

An unpublished ABS SU data series was obtained for 1994-95 to 2003-04. To
construct a data series covering the period 1974-75 to 2005-06 it was necessary to
backcast and forecast sections of the data series. To backcast the period to 1974-75
a series for total intermediate purchases of financial services industries wasassembled from ABS published IO tables, in the same manner as for the SU tables.
The IO tables were available annually up to 1993-94, except for 1976-77, 1977-78,
1984-85, 1985-86, 1987-88, 1988-89, 1990-91 and 1991-92. The data for the
missing years was interpolated and then the year on year growth rates from thisseries were applied to backcast the actual SU data series.11 The last two years of the
SU series were then forecast on a linear growth path based on the actual SU data
series. The resulting series was smoothed using a 3-period moving average.12
In line with CHS (2005), 20 per cent of intermediate purchases was counted as
expenditure on financial services R&D. The Finance & insurance industry is part ofthe market sector so all expenditure on this intangible is relevant to a market sector
estimate.
Investment series
Deductions of specific intermediate inputs (as suggested by MH 2006) have notbeen made. The need to combine irregular data from different sources in different
classifications would have made any adjustment of this kind very imprecise. Someaccount of the potential for double counting is made by using the CHS (2006)‘conservative’ 20 per cent of total intermediate purchases.
The investment series was deflated by the implied Finance & insurance gross value
added (GVA) deflator.
Capital series
The capital stock series was constructed using PIM, as described in chapter 4, withan assumed depreciation rate of 20 per cent. This is in line with CHS (2006, p. 23)— based on the mid-range of rates for R&D in general (not specifically this type of
R&D) reported in the literature.

11 The IO intermediate usage series is in basic prices while the SU series is in purchaser prices.
This backcasting method therefore assumes no major change in the rate of taxes, subsidies andmargins (the difference between basic and purchaser prices).
12 The series was smoothed to remove some volatility caused by changes in classifications. The
ABS cautions against interpreting IO data as a time series.
DATA SOURCES

115

New architectural and engineering designs

CHS (2005) estimate this intangible as half of the revenue of the architectural andengineering industries. MH (2006) use 50 per cent of architectural and engineering
activities industry turnover (after deducting industry purchases of advertising,
software and consulting to avoid double counting with other intangibles). They also
add twice the turnover of another industry, specialty design activities, as an estimateof own account new designs. Fukao et al. (2008b) estimate this intangible using
input-output table data for new architectural design and service industry survey data
for engineering design.
The Frascati Manual (OECD 2002) includes engineering and architectural R&D
amongst the fields covered and these are also included in the ABS BERD survey.
There are few details given in CHS (2005) as to the nature of the new architecturaland engineering designs that make up this intangible asset in their study. However,it appears clear that the activities the authors have in mind fall outside what would‘normally’ be considered architectural and engineering R&D — an example may be
new designs using existing technology and methods — since their data source for‘scientific R&D’ already includes engineering R&D in its scope. It is therefore
assumed there is no issue of double counting between a CHS-type measure forAustralia and activities covered above under the ABS BERD survey.
It is also the case that the ABS already capitalises some portion of architectural
services (allocated to dwellings capital expenditure) and consulting engineering
services (allocated to non-dwelling construction capital expenditure).13 Sufficient
data to make an adjustment for double counting with the CHS-type measure were
not available. However, in the case of architectural services there should not be any
overlap with an estimate for the market sector since dwellings capital falls outside
the market sector.
Expenditure series
A time series of revenue of architectural and engineering industries was constructed
for this paper using a number of data sources. The relevant industries for new
designs are ANZSIC 7821 Architectural services and ANZSIC 7823 Consulting
engineering.

13 The Dutch and Finnish studies (RBT 2008 and Jalava, Aulin-Ahmavaara and Alanen 2007) bothrefer to a large part of architectural and engineering design expenditure being registered as
investment in the national accounts. In those studies, this investment is deducted from tangible
capital and separately identified.
116

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Data on revenue for ANZSIC industry classes are available from AustralianIndustry (ABS Cat. no. 8155.0).14 Sales of goods and services/operating income isavailable for 1998-99 to 2000-01 and 2002-03 and total income (including otherincome such as interest income) for 2002-03 to 2004-05. Sales of goods andservices is the most relevant measure so the growth rate in total income for the latter
period was applied to sales in 2002-03 to estimate this series to 2004-05. The
2005-06 estimate was made assuming that growth rate for sales was the same as in
2004-05.
To estimate data for the missing years and backcast the aggregate series ofarchitectural and engineering services to 1974-75, the growth rates for Australianproduction in published data for a related group of services from the product detailsof the ABS Australian National Accounts: Input-Output Tables (Cat. no. 5215.0)
and unpublished SU tables were used.15,16
The SU data were used to backcast from 1998-99 to 1994-95 and derive an estimate
for 2001-02. The most recent data in the SU tables (1994-95 to 2002-03) coverArchitectural services, surveying, consulting engineering and quantity surveying(SUPC 43020).17 Surveying (equivalent to ANZSIC 7822) is not included above
but accounts for only a small proportion of the combined total of
ANZSIC 7821-7823 (for example, 7 per cent in 2004-05) and should not distort thegrowth rate to any great extent for this purpose.
The IO Australian production data were used to backcast from 1998-99 to 1974-75.
The IO tables cover selected years over the period 1974-75 to 2001-02.18 There has
been a variety of classification changes over time but a reasonably consistent series
is available for the sum of Architectural services, Surveying and Consulting
engineering (including Technical services nec which is not included above) for theperiod 1974-75 to 1986-87.19 In 1989-90 and 1992-93 there were classification
14 Prior to 1998-99 there were some irregular surveys of selected technical services (for example,
Technical Service, 1992-93, ABS Cat. no. 8676.0 and Engineering and Technical Services
Industry, 1987-88, Cat. no. 8666.0) but data from these surveys was not comparable as a result ofdefinitional changes.
15 Product data included the amount of that product produced by all industries not just the mainindustry that produces that product. However, in this case most of these services are produced by
one industry.
16 The series was smoothed with a 3-period moving average to remove some volatility due toclassification changes.
17 There is no equivalent group in the SU tables from 2003-04 onwards because of a change inclassification.
18 Annual except for 1975-76, 1976-77, 1984-85, 1985-86, 1987-88, 1988-89, 1990-91, 1991-92,
1995-96, 1997-98, 1999-00 and 2000-01.
19 Unable to exclude Surveying because of apparent changes in classification over time.
DATA SOURCES

117

changes that affected the growth rate but there were no readily available data to use
to adjust for these changes. The missing years in the IO series were interpolated bysimple averages.
The resulting series for sales income for architectural and engineering design
services was for the total economy (that is, Australian production of these
services20). It was necessary to scale it down to the share relevant to market sector
intermediate usage. Using the SU tables the market sector intermediate usage shareof Australian production of SUPC 43020 Architectural, surveying, consulting
engineering and quantity surveying services was calculated for 1994-95 to
2002-03.21 This share was backcast to 1974-75 and forecast for 2003-04 to 2005-06
using growth in the market sector share of gross value added.22
In line with CHS (2005), 50 per cent of the derived sales series was counted as
expenditure on new architectural and engineering designs.
Investment series
Deductions of specific intermediate inputs (as suggested by MH 2006) have notbeen made due to lack of data. Nor has any additional estimate been made of own
account design.
The investment series was deflated by the implied market sector GVA deflator.
Capital series
The capital stock series was constructed using PIM, as described in chapter 4, withan assumed depreciation rate of 20 per cent, in line with CHS (2006, p. 23).

20 Insufficient data were available to make any adjustment for any difference between exports andimports of these services. The estimates implicitly assume net exports are zero — if net exports
are positive (negative) then the estimates will be overstated (understated).
21 This share was smoothed using a 3-period moving average to remove volatility.
22 Intermediate usage data from IO tables for a broader group of services (Scientific research,technical and computing services) that includes architectural and engineering services) were
examined but the series was quite volatile — partly due to changes in classifications over time.
The ABS cautions against using such data as a time series.
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INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

A.3

Expenditure on economic competencies

Economic competencies are defined by CHS (2005, p. 28) as the value of brandnames and other knowledge embedded in firm-specific human and structural
resources.
Brand equity
Spending on brand development is proxied by spending on advertising and market
research. CHS (2005, p. 28) suggest this includes the costs of launching new
products, developing customer lists and maintaining brand equity and note that
Although advertising and market research are generally aimed at building a firm’s
market share at the expense of its competitors, such spending is necessary fordeveloping new brands and maintaining the value of existing brands.

Various rationales have been put forward for capitalising advertising and marketing
expenditures — they may result in a positive image of the firm in the market andhelp to secure future orders (De and Dutta 2007); and they may establish a
reputation for quality or educate consumers about the existence of new goods(Nakamura 1999, p. 6). A reputation for reliability may persuade shoppers to try a
new item for the first time.
Advertising

CHS (2005) and Marrano, Haskel and Wallis (MHW 2006) estimate this intangibleusing data on advertising spending as collected by advertising associations.
Fukao et al. (2008b) use advertising industry output from the national accounts. In
all three studies 60 per cent of the expenditure on advertising was treated as
investment.23
Expenditure series
Advertising expenditure by media sector is available from an annual survey of theindustry conducted by Commercial Economic Advisory Service of Australia(CEASA 2003, 2006, 2007). This expenditure includes only media costs, notadvertising agency commission, production costs or any other costs than for time

23 US data included all commissions as well as the art, mechanical and production expenses thatare part of the advertising budget for each medium (Universal McCann 2007). UK data also
included production costs (Advertising Association 2005).
DATA SOURCES

119

and space. This is a similar type of data source to that used in the overseas studies,
except for the exclusion of production costs.
Hamilton and Denniss (2000, p. 55), stated that data on Australian production costsof advertisements, such as recording, editing and graphic design, are not available.
This still appears to be the case. The production activities undertaken for advertising
are also undertaken for other purposes. ABS data is not sufficiently disaggregated to
identify the share relevant to advertising.
As the most readily available and complete time series of advertising expenditure
for the total Australian economy, the CEASA series has been used. Data werecompiled for 1974-2006. An adjustment was then made for production costs.
There are some readily available data on the likely share of production costs in total
advertising expenditure in the United States. Data on total advertising expenditure
are available from Universal McCann (2007) (as used in CHS 2006) and advertisingexpenditure excluding production costs from CEASA (2003, 2006, 2007).
Production costs averaged 44 per cent of total advertising expenditure between 1993
and 2006. A similar calculation for the United Kingdom for 2004, using data fromMHW (2006) and CEASA (2006), puts the UK share at 52 per cent. This assumes
the data sources with and without production costs are reasonably comparable,
which they appear to be.
Based on these data it is assumed that Australian advertising expenditure excluding
production costs is 50 per cent of total advertising expenditure. Therefore the
CEASA series, which excludes production costs, has been multiplied by two. The
CEASA calendar year data were also averaged to derive a financial year series.
This has been scaled down to a market sector estimate using market sector
intermediate usage as a share of Australian production24 of advertising services
from the ABS SU tables for 1994-95 to 2003-04.25 This share was backcast to
1974-75 and forecast for 2004-05 and 2005-06 using growth in the market sector
share of gross value added.26

24 Insufficient data were available to make any adjustment for any difference between exports andimports of these services. The estimates implicitly assumes net exports are zero — if net exports
are positive (negative) then the estimates will be overstated (understated).
25 This share was smoothed using a 3-period moving average to remove volatility.
26 Intermediate usage data from IO tables for a broader group of services (Legal, accounting,marketing and business management services) were examined but the series was quite volatile —partly due to changes in classifications over time. The ABS cautions against using such data as atime series.
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INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Investment series
The extent to which expenditure on advertising is building an asset rather than being
consumed is a separate issue. MH (2006, p. 8) suggest this is a difficult question.
An advertisement proclaiming the reliability of a good would seem, at least in part, tobe expenditure on an asset. An advertisement proclaiming a price reduction for the next
two weeks would seem to be better thought of as an intermediate spending, although if
it is building a reputation for lower prices that would be an asset.

There are two issues — does the ad build an asset and how long lived is it? Somestudies deducted from the expenditure series those types of ads not considered to beasset building at all. The US study only included the national ads as they wereconsidered to be those aimed at selling specific products rather than promoting sales
at specific stores (CHS 2005, p. 33). The UK study excluded classified ads (small
personal ads by individuals or recruiting advertisements for vacancies to be filled ina relatively short time period) (MH 2006, p. 8). It has been possible to deductclassifieds and directories from the CEASA series for Australia.
Further adjustments were then made to account for ads that had short-lived effects.
Those ads with a service life of less than one year would be an expense not an
investment. CHS (2005, p. 32) note that while the literature finds that the effects ofadvertising are generally short-lived, more than half has a service life of at least one
year. From this they assumed that 60 per cent of total advertising expenditures
should be counted as investment.
In this study it will be assumed that 60 per cent of expenditure is an investment —this will provide comparability with the overseas studies.
The series was deflated by the implied market sector GVA deflator.
Capital series
The capital stock series was constructed using PIM, as described in chapter 4, withan assumed depreciation rate of 60 per cent. CHS (2006, p. 24) noted that theliterature reports a wide range of findings on the longevity of advertising capital —with studies estimating service lives of between 0 and 7 years. They concluded thatadvertising has a service life of less than 3 years, implying a geometric rate ofdepreciation of 60 per cent.

DATA SOURCES

121

Market research

CHS (2005) and MH (2006) estimate this intangible as twice the revenue of themarket and consumer research industry. The use of twice industry revenue is toestimate firm’s own account spending on market research.
Expenditure series
A time series of revenue of the market research industry was constructed for thispaper using a number of data sources. The relevant industry is ANZSIC 7853
Market research services.
Data on revenue for ANZSIC industry classes are available from AustralianIndustry (ABS Cat. no. 8155.0). Sales of goods and services/operating income isavailable for 1998-99 to 2000-01 and 2002-03 and total income (including otherincome such as interest income) for 2002-03 to 2004-05. Sales of goods andservices is the most relevant measure so the growth rate in total income for the latter
period was applied to sales in 2002-03 to estimate this series to 2004-05. The
2005-06 estimate was made assuming that the growth rate for sales was the same as
in 2004-05.
Prior to 1998-99, an irregular survey, Selected Business Services, 1992-93 (ABSCat. no. 8677.0) was carried out. From this survey data on sales of goods andservices was available.27
The estimates for the missing year 2001-02 was interpolated by simple averages.
To backcast the series of market research services from 1992-93 to 1974-75, thegrowth in published data for a related group of services from the product details of
the ABS Australian National Accounts: Input-Output Tables (Cat. no. 5215.0) wasused.28 The IO tables cover selected years over the period.29 There has been avariety of classification changes over time but a reasonably consistent series is

27 An irregular survey conducted in 2001-02 (Market Research Services, ABS Cat. no. 8556.0) but
this had a different coverage of business services and was not comparable.
28 Product data included the amount of that product produced by all industries not just the mainindustry that produces that product. However, in this case most of these products (or services inthis case) are produced by one industry.
29 Annual except for 1975-76, 1976-77, 1984-85, 1985-86, 1987-88, 1988-89, 1990-91, 1991-92,
1995-96, 1997-98, 1999-00 and 2000-01.
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INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

available for the sum of market and business services to 1991-92.30 Missing years
were interpolated by simple averages.
The resulting series for sales income for market research services was for the total
economy (that is, Australian production of these services31). It was necessary toscale it down to the share relevant to market sector intermediate usage using data on
the closest available group of services. Using the SU tables the market sector
intermediate usage share of Australian production of SUPC 43031 Other businessservices (which includes market research services among many other services) was
calculated for 1994-95 to 2003-04.32 This share was backcast to 1974-75 andforecast for 2004-05 and 2005-06 using growth in the market sector share of grossvalue added.33
In line with CHS (2005), this series was doubled to obtain total expenditure on
market research including own account market research.
Investment series
The expenditure series was adjusted to account for some market research
information having a service life of less than one year. In this study it will beassumed that 60 per cent of expenditure is an investment — this will provide
comparability with the overseas studies. The investment series was deflated by the
implied market sector GVA deflator.
Capital series
The capital stock series was constructed using PIM, as described in chapter 4, withan assumed depreciation rate of 60 per cent, in line with CHS (2006, pp. 23–4) andthe same as for advertising. This is based on a service life of less than 3 years, theaverage of the range reported in the advertising literature (see the discussion ofadvertising above).

30 The series was smoothed with a 3-period moving average to remove some volatility due toclassification changes.
31 Insufficient data were available to make any adjustment for any difference between exports andimports of these services. The estimates implicitly assumes net exports are zero — if net exports
are positive (negative) then the estimates will be overstated (understated).
32 This share was smoothed using a 3-period moving average to remove volatility.
33 Intermediate usage data from IO tables for a broader group of services (Legal, accounting,marketing and business management services) were examined but the series was quite volatile —partly due to changes in classifications over time. The ABS cautions against using such data as atime series.
DATA SOURCES

123

Firm-specific human capital
CHS (2005, p. 29) suggest that spending on firm-specific human capital can bemeasured by the costs of workforce training and education. Spending on workforce
training consists of two types of expenses:•

direct firm expenses (outlays on inhouse and external training)•

wage and salary costs of employee time spent in informal and formal training.

Expenditure series

No single data source provides a time series of employer-provided training
expenditure. To construct a series, several different sources were used, together
with a number of assumptions. The resulting series is therefore only indicative.
The ABS Employer Training Expenditure, Australia (Cat. no. 6353.0), an employer
survey, measured both direct costs and wage and salary costs for the total economy(excluding agriculture) for July to September34 1989, 1990, 1993 and 1996. The
ABS also estimated this measure for 2001-02 based on data from Employer
Training Expenditure and Practices (Cat. no. 6362.0) and Education and Training
Experience (Cat. no. 6278.0) (NCETS 2004).35 Specifically the measure includes
The sum of employers’ expenditure for employees gross wages and salaries for timereceiving and providing structured training, fees paid to consultants and institutions andother expenditure on structured training. (ABS Cat. no. 6353.0, 1996, p. 46)

where structured training is defined as
all training activities which have a predetermined plan and format designed to develop
employment-related skills and competencies. It consists of periods of instruction, or a
combination of instruction and monitored practical work. (ABS Cat. no. 6353.0, 1996,
p. 45)

34 These were multiplied by four to arrive at financial year estimates for 1989-90, 1990-91,
1993-94 and 1996-97.
35 It has not been possible to assess the effect of differences between these surveys on the trend in
the expenditure data. However, the ABS did make some adjustments for differences in scope tothe expenditure data reported in NCETS (2004) for its comparison across surveys.
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INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

No adjustment was made to account for Agriculture so the estimates will be anunderstatement.36
For 1993-94 and 1996-97 expenditure data were also available by industry enabling
the construction of a market sector (excluding Agriculture) total. For 1990-91, themarket sector estimate was derived by using the total economy growth in
expenditure between 1990-91 and 1993-94. (This assumes a constant market sector
share over this period.) For 1989-90 total expenditure was not available — data
were only available for the total economy average of expenditure per training hour
and training hours per employee. These data were used with the estimated training
hours series for the market sector (discussed below) to derived total training
expenditure for the market sector.
For 2001-02 the market sector estimate was derived by using total economy growthin expenditure between 1996-97 and 2001-02, adjusted for the fall in market sector
share of total hours of training from ABS Education and Training Experience,
Australia (Cat. no. 6278.0).
To complete the expenditure series it was necessary to use growth in a relatedseries. No ideal series was available, but it was possible to construct an approximate
series for total training hours for the market sector (excluding Agriculture). Hoursof training per market sector employee was available for 1993-94 and 1996-97 fromABS Cat. no. 6353.0. The same measure for all employees was available from thesame source for 1989-90, 1990-91, 1993-94 and 1996-97. The growth rate in thisseries was used to estimate the market sector measure for 1989-90 and 1990-91. It
was also possible to derive hours of training per market sector employee from ABS
Cat. no. 6278.0 for 1996-97, 2000-01 and 2004-05.37 Because of differences insurvey coverage and methodology between these two surveys38, the growth ratefrom Cat. no. 6278.0 was applied to the Cat. no. 6353.0 series to estimate it for
2000-01 and 2004-05. In the absence of any other data, a time series of training
hours per market sector employee from 1974-75 to 2006-07 was completed byassuming linear growth in that measure between the data points discussed above
36 Sufficient data were not available to estimate a time series for training expenditure for
Agriculture. However, Richardson (2004, p. 31) notes that Agriculture offers particularly low
levels of training (around 60 per cent of the total industries average for training hours per
employee in 1996).
37 Total training hours for the market sector were available from table 26 of the 2005 issue ofCat. no. 6278.0. The market sector employee numbers to which these training hours related were
estimated using the market sector share of total employees from Labour Force, Australia (ABSCat. no. 6291.0) and total employees (excluding owner managers) from Cat. no. 6278.0. Training
hours per market sector employee was derived from these data.
38 ABS Cat. no. 6353.0 is an employer survey while Cat. no. 6278.0 is an employee survey thatcovers the four most recent training courses undertaken by an employee.
DATA SOURCES

125

and a constant level of hours per employee from 1974-75 to 1989-90 (at the
1989-90 level) and for 2005-06 (at the 2004-05 level).39 This was used inconjunction with a series for market sector employees40 to derive a series formarket sector total hours of training.
The actual training expenditure data points were deflated using an index of average
weekly ordinary time earnings for full-time adult employees in the total economy(excluding Agriculture) from Average Weekly Earnings (ABS Cat. no. 6302.0).41
This provided real expenditure for these years. This was then used to calculate a real
expenditure per hour of training. An exponential trend was fitted to this data andused to estimate real cost per hour from 1974-75 to 1988-99 and from 2002-03.
Linear growth in cost per hour was assumed between the actual cost data points
from 1990-91 to 2001-02. Multiplying real costs per hour and total hours, a market
sector total expenditure was derived for the missing years to complete the real
training cost series for the market sector.

39 These assumptions are crude, particularly for the earlier period. However, they are made fortransparency in the absence of sufficient data to fit a trendline. There are breaks in series causedby the Training Guarantee, which was introduced in 1990, suspended in 1994 and abolished in
1996 (ABS Cat. no. 6353.0, 1996). The Training Guarantee required employers with an payroll
above a set amount to spend a minimum amount on training equivalent to a specific proportion of
their gross wages and salaries. Apart from the 1989 ABS data, there are no reliable andcomparable measures of training expenditure prior to the introduction of the Training Guarantee.
The Business Council of Australia (BCA) survey from the mid-1980s, often cited to suggest thattraining levels in Australia were lower than other countries (see, for example, Curtain, Krbavac
and Stretton 1986), does not provide a measure that is comparable with the ABS data. It has also
been suggested that the BCA survey, as a small survey designed to gather data about total labour
oncosts, provides highly unreliable estimates of small components of this total, such as training
costs (Stromback and Moy 1989).
The ABS data post-1996 are suggestive of a decrease in training hours after the removal of theTraining Guarantee. However, as noted by Long (2002, p. 8), decreases in training hours do notnecessarily indicate a decrease in training effort because of the possibility of increased efficiencyof training delivery.
40 The employee numbers from ABS Cat. no. 6353.0 (from which the cost data are taken) do notcorrespond to the standard series from the Labour Force Survey (even after excluding
Agriculture). For consistency with the training survey data, the growth rate in the LFS employedpersons series (ABS Labour Force Timeseries 6291.0.55.003 EO5_nov84 and aug_94 and6204.0.55.001 Labour Force Historical Timeseries, Australia, 1966 to 1984) was applied to theemployee numbers from Cat. no. 6353.0 at either end of the series (pre 1990-91 and post
1996-97). The missing years in between these two years were filled using a linear trend between
the actual data points (rather than growth in the employed numbers from the LFS, because ofdifferences in trends over these short time periods).
41 This was available back to 1983-84. This was backcast using the Reserve Bank of Australia
historical series for average weekly ordinary time earnings for full-time adult employees to
1980-81 and average weekly total earnings for full-time adult employee to 1974-75 (RBA 2008).
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INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

It should be noted that the 2001-02 training expenditure data suggest a large
increase in real training costs per hour compared with 1996-97, while training hours
per employee appear to have fallen. It has not been possible to determine the extent
to which this may reflect differences in the ABS surveys from which these data arederived. However, the ABS data also show a large increase in fees paid to external
trainers (NCETS 2004, table 2). This may mean that a change in pattern of training
provision has affected costs per hour of training. It may also reflect a change in thecomposition of those participating in training (for example, those in higher paid
employment representing a larger proportion of total participants) or a change in thequality of the training.
Investment series

All such expenditure is counted as investment, in line with overseas studies.
The process of constructing the expenditure series was done in real terms (using the
average weekly earnings deflator), so no further deflation was required to get thereal investment series.
Capital series

The capital stock series was constructed using PIM, as described in chapter 4, withan assumed depreciation rate of 40 per cent. This was the rate assumed by
CHS (2006, p. 24), an average of the depreciation rates of brand equity and R&D(see discussion under organisational capital).
Organisational capitalThis intangible, along with firm specific human capital, is particularly difficult toestimate. However, CHS (2006, p. 18–9) note that importance of organisational
capital requires its treatment as an investment for consistency with other assets.
They also cite micro data evidence that firm level differences in organisational
practices are strongly related to productivity.
MH (2006, p. 11) liken the measurement problem of establishing a volume oforganisational capital from observed expenditure to that of establishing the volume
of R&D knowledge capital from observed expenditure on R&D. An additional
problem is that expenditure on organisational capital is unobserved.
CHS (2005, p. 29) suggest that investment in organisational capital is made up of
two components
DATA SOURCES

127

•

purchased — such as management consultant fees•

own account — measured in terms of the value of executive time spent on
improving the effectiveness of business organisations (that is, time spent on
developing business models and corporate cultures).

CHS (2005, pp. 29–30) note that
Consulting expenditure and the estimated value of executive time conceptually overlap
by a small amount (the value of executive time in the management consulting industry).
In addition, some portion of management time arguably overlaps with R&D, so that,for some industries, the line between industry-specific process innovation andorganizational change more generally may not be easily drawn. But, whatever
uncertainty the amount induces in our estimates, it is dwarfed by the use of an arbitrary
fraction for the amount of executive time devoted to organizational change anddevelopment.

MH (2006, p. 12) also suggest some overlap with IT consulting and software
investment. They also note that some expenditure on management consultants is todeal with short term problems (for example, closing down businesses anddischarging employees).
Purchased

CHS (2005) estimate this intangible from the revenue of the management consulting
industry. Only 80 per cent of this revenue is included to account for the portion
devoted to short term problems.42 Fukao et al. (2008b) were not able to find data
for the consulting industry in Japan, so instead use the output of the closest relevant
industry (law and accounting business services) from input-output tables.
Expenditure series
It has been noted in studies of the Australian management consulting industry that
there is a paucity of available data (see, for example, Kitay and Wright 1999 and
Gowen 1999). The measurement difficulties are compounded by the industry being

42 CHS (2005, p. 34) note that little is known about the composition of purchased management
expertise but they have a strong suspicion that a portion of these costs are current expenses rather
than investment. They make an arbitrary deduction of 20 per cent of the spending estimate toarrive at the estimate for investment. There are some anomalies in the treatment of purchasedorganisational capital across the papers using the CHS method — in some cases the 20 per centdeduction is made to the own-account spending estimate instead. However, it seems clear that theoriginal CHS methodology intended that the deduction be made to purchased component ofspending rather than own account spending component (which they note was developed by
explicitly considering what was investment).
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INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

defined in various ways and changes in the range of activities undertaken bymanagement consultants over time.
For this paper, a time series of revenue of the management consulting industry was
therefore constructed using the few data sources available for the business
management services industry (ANZSIC 7855). This industry is broader than justmanagement consultancy — for example, it includes public relations consultancies(which are excluded from the UK and US studies). An adjustment for thisdifference of scope is discussed below.
Data on revenue for ANZSIC industry classes are available from AustralianIndustry (ABS Cat. no. 8155.0). Sales of goods and services/operating income isavailable for 1998-99 to 2000-01 and 2002-03 and total income (including otherincome such as interest income) for 2002-03 to 2004-05.43 Sales of goods andservices is the most relevant measure so the growth rate in total income for the latter
period was applied to sales in 2002-03 to estimate this series to 2004-05. The
2005-06 estimate was made assuming that the growth rate for sales was the same as
in 2004-05. The estimates for the missing year 2001-02 was interpolated by simple
averages.
To backcast the series of business management services from 1998-99 to 1974-75,
the growth in published data for a related group of services from the product detailsof the ABS Australian National Accounts: Input-Output Tables (Cat. no. 5215.0)
was used.44 The IO tables cover selected years over the period.45 There has been avariety of classification changes over time but a reasonably consistent series isavailable for the sum of market and business services.46 Missing years wereinterpolated by simple averages.

43 Prior to 1998-99, an irregular survey, Selected Business Services, 1992-93 (ABS Cat.
no. 8677.0) was carried out. However, this was not used because of an apparent break in series.
Gowen (1999) suggests the 1992-93 figure considerably understates revenue but provides no firmalternative estimate.
44 Product data included the amount of that product produced by all industries not just the mainindustry that produces that product. However, in this case most of these products (or services inthis case) are produced by one industry.
45 Annual except for 1975-76, 1976-77, 1984-85, 1985-86, 1987-88, 1988-89, 1990-91, 1991-92,
1995-96, 1997-98, 1999-00 and 2000-01.
46 The series was smoothed with a 3-period moving average to remove some volatility due toclassification changes.
DATA SOURCES

129

The resulting series for sales income for business management services was for the
total economy (that is, Australian production of these services47). It was necessary
to scale it down to the share relevant to market sector intermediate usage using dataon the closest available group of services. Using the SU tables the market sector
intermediate usage share of Australian production of SUPC 43031 Other businessservices (which includes business management services among many otherservices) was calculated for 1994-95 to 2003-04.48 This share was backcast to
1974-75 and forecast for 2004-05 and 2005-06 using growth in the market sector
share of gross value added.49
A final adjustment was made to account for the broader scope of ANZSIC 7855
Business management services compared with the other studies. There is very
limited information about the size of the public relations segment of this industry.
The ABS in an irregular survey of Business management services in 1992-93
estimated that public relations consulting services accounted for 23 per cent of total
income from business management consulting services (Selected Business Services,
1992-93, Cat. no. 8677.0, table 14.1). In the absence of additional data, for eachyear of the series only 77 per cent of the total income from Business management
services has been counted as management consulting. The assumption of a constantshare may lead to the adjusted estimate in any given year being understated oroverstated.
No adjustment has been possible for some differences in the scope of this measurecompared with the studies for the United States and United Kingdom.
•

ANZSIC 7855 Business management services includes environmental
consultancies, which are not included in the US estimate of organisational
capital.50 This means that the Australian estimate is likely to be overstatedcompared with that of the United States. And this overstatement may havegrown over time if environmental consultancies have increased as a share of
total business management services. However, it has not been possible to makeany adjustment for this overstatement.

47 Insufficient data were available to make any adjustment for any difference between exports andimports of these services. The estimates implicitly assumes net exports are zero — if net exports
are positive (negative) then the estimates will be overstated (understated).
48 This share was smoothed using a 3-period moving average to remove volatility.
49 Intermediate usage data from IO tables for a broader group of services (Legal, accounting,marketing and business management services) were examined but the series was quite volatile —partly due to changes in classifications over time. The ABS cautions against using such data as atime series.
50 It is unclear if environmental consultancies are included in the UK estimates.
130

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY•MH (2006) adjust the UK estimate to exclude subcontracting of smaller
consulting firms to larger consulting firms. Insufficient data are available to
make any adjustment to the Australian data and this may result in an
overstatement of organisational capital.

The resulting Australian series shows considerable growth in the management
consulting industry (around 24 per cent a year between 1974-75 and 2005-06),
particularly in the 1980s (30 per cent) and from the mid to late 1990s (around 20 percent). There are few data sources against which to validate the estimates —however, there are some references to size and growth of the industry in particular
years that suggest the estimates in this paper are plausible (putting aside issues ofcomparability of scope with the overseas estimates).
•

It has been generally reported that growth in the management consulting
industry has been high globally (see, for example, Wooldridge 1997;
Gowen 1999). Kitay and Wright (1999, p. 7) estimated that the number ofconsulting businesses in Sydney and Melbourne (as listed in the yellow pages)
grew nearly four-fold between 1978 and 1998. They also acknowledged thatwhile estimates of the overall size of the Australian consulting market varied
wildly, several studies had suggested growth of 25 per cent a year. Wright (2000,
p. 99) refers to dramatic growth in the 1980s in the Australian management
consulting industry as being fuelled by fundamental economic and technologicalchanges. Kitay and Wright (2003, p. 22) note that the Australian consulting
industry grew rapidly in the 1990s as was the case worldwide.

•

Gowen (1999, p. 33) estimated the size of the management consulting industry
to be $5-$6 billion in 1996, although she acknowledges that it is likely this may
include non-consulting revenue. Allen (1990) reported the annual turnover of theAustralian market and business consultancy industry as $1.3 billion in 1990.
Wright (2000, pp. 100–1) cited data for the leading firms that suggests total
turnover was $0.5 billion in 1985.51 The estimates based on the backcasting
method described above are broadly in line with these estimates at $5.1 billion
for 1995-96, $1.5 billion for 1989-90 and $0.4 billion for 1984-85.52

51 This is based on the reported turnover of leading firms of $104 million in 1985 and theassumption that the reported share of these firms in the late 1980s (20 per cent) also applied in1985.
52 Estimates of business management services after deducting estimated public relations
consultancies (and before scaling down to market sector usage).
DATA SOURCES

131

Investment series
In line with CHS (2005), 80 per cent of the expenditure series is used to represent
investment. No adjustment was made for any overlap with own accountorganisational capital (for the same reasons as noted by CHS above).
The investment series was deflated by the implied market sector GVA deflator.
Capital series
The capital stock series was constructed using PIM, as described in chapter 4, withan assumed depreciation rate of 40 per cent. This is in line with CHS (2006, pp. 23)— an average of the rates used for brand equity and R&D. CHS (2006, p. 24) justify
this as follows
Investments through strategic planning and reorganization reflect business’ need toconstantly adapt to changing economic conditions. While such investments
undoubtedly have a long-lasting “learning-by-doing” dimension (similar to that inR&D), we believe they also have a short-lived “organizational forgetting” dimension(similar to that in advertising).
Own account

CHS (2005, table 1.3) estimate the own account component of organisational capitalas 20 per cent of the value of executive time using US Bureau of Labor Statistics(BLS) data on employment and wages in executive occupations. MH (2006, p. 13)
use a similar approach but exclude ICT managers (to avoid double counting withcapitalised software) and self-employed (who they indicate they do not believe built
organisational capital in the same way as in other industries). The definition ofmanagers appears to be relatively broad (not just, for example, CEOs), although it
has not been possible to compare the specific occupational groups used.
It should be noted that percentage of executives’ time spent building organisational
capital is likely to have changed over time and to vary across countries — the use of
a constant 20 per cent of executive time may therefore be a source of
mismeasurement. For example, Fukao et al. (2008a) cite a 2006 study that estimatedthat Japanese CEOs spent only 9 per cent of their time on activities related tobuilding organisational capital. But he also noted that some Japanese firms havedivisions specialising in these activities, although there are no data about theirexpenditure. As Fukao notes, a new survey is probably needed to obtain bettermeasures of organisational capital.

132

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Expenditure series
The own account portion of organisational capital is estimated from average
earnings of managers and the number of managers in the market sector.
The specific occupation group used was Managers & administrators (ASCO 1)
excluding, where possible, both IT managers (ASCO 1224) and Farmers & farmmanagers (ASCO 13).53 The exclusions of IT managers was based on the reasoning
used by MH (2006) — avoiding double counting with IT capital. It was possible toexclude the self-employed (owner-managers of unincorporated enterprises54), as
done by MH (2006), because the ABS survey used excluded this group. The
additional exclusion of Farmers & farm managers has been made on the basis that
this subgroup is considerably different from the other managers and would not be
expected to build organisational capital in the same way.
Data on average weekly earnings and number of Managers & administrators wereavailable from the Employee Earnings, Benefits and Trade Union Membership(EEBTUM) survey (ABS Cat. no. 6310.0) (a supplement to the August Labour
Force Survey). Weekly earnings are defined in this survey as the amount of ‘last
total pay’ (that is, before taxation and other deductions have been made).55 The
average earnings are calculated excluding those employees who did not draw awage or salary, that is, people working in their own incorporated enterprises.
Unpublished data on earnings and employee numbers from Cat. no. 6310.0 wereavailable for Managers & administrators excluding IT managers and farmers in themarket sector annually for August 1997 to August 2006. These August observations
were used for the financial years 1997-98 to 2006-07. The number of employees
obtained includes persons who receive a wage or salary or persons who operate
their own incorporated enterprises. Using this number of employees to obtain thewages bill, implicitly assumes the value for own account organisational capital

53 Australian Standard Classification of Occupations (ASCO), Second edition, 1997 (ABS Cat.
no. 1222.0) has been used or the closest available occupation from the earlier occupationalclassifications, ASCO 1st edition and Classification and Classified List of Occupations (CCLO).
It has not been possible to compare the scope of Managers and administrators in thisclassification with the ‘executive’ occupations used in the US and UK papers.
54 Owner-managers of incorporated enterprises are included.
55 No adjustment is made for any back payment of wage increases, prepayment of leave, orbonuses, etc. No explicit reference to the treatment of salary sacrifice amounts years is made in
the survey questions, and the ABS considers it probable that some respondents are alreadyincluding amounts salary sacrificed in their responses, depending upon how their pay is reported.
(See Changes to ABS Measures of Employee Remuneration, 2006, ABS Cat. no. 6313.0, p. 31 forfurther details).
DATA SOURCES

133

investment for owner-managers equal to the average earnings of Managers &administrators drawing a wage or salary.
Prior to 1997 data were only available from the annual publication of Cat.
no. 6310.0.56 This provided data for the total economy for Managers &administrators numbers and average weekly earnings but insufficient data tocalculate market sector estimates. The EEBTUM Employee numbers were backcast
using growth in a series constructed from Labour Force Survey (LFS) data for all
Managers and administrators (not just employees) in an approximated market sector(excluding Agriculture).57
Average weekly earnings were also backcast using growth in the closest available
series to Managers and administrators (or the closest occupational classification) in
the market sector (less Agriculture). From 1988 to 1996, the closest series wasaverage weekly earnings of Managers and administrators (ASCO1) for the total
economy. Prior to this, it was full-time managers for the total economy (Manager &administrators ASCO1/Administrative, executive and managerial employees
CCLO). It was not possible to apply any industry or occupational concordance tothese dollar averages. The implicit assumption is therefore that growth in thesewages was representative of the ASCO2 Managers & administrators group ofinterest. The use of full-time average weekly earnings growth for the earlier periodalso assumes a constant share of part-time workers, that part-time workers work
constant hours and that part-time wages are proportional to full-time wages
according to hours worked. The share of part-time workers among Managers &administrators increased from 4 per cent in 1975 to 6 per cent in 198558 so isunlikely to represent a major distortion. The EEBTUM survey (Cat. no. 6310.0)
commenced in 1975, so the August 1974 estimate (used for 1974-75) was derived
using growth in Managers & administrators total employed from the Labour Force

56 No survey was conducted in 1996. No publication was produced in 1995 and the electronic data
file is no longer available. Data for these years are interpolated on a linear trend between 1994
and 1997 data.
57 Employed Managers & administrators by industry were taken from ABS 6291.0.55.003
EO9_aug 86 back to 1986-87 and from LFS microfiche back to 1974-75 (the ASIC to ANZSIC
industry concordance used in Gretton and Fisher 1997 was applied to the latter industry numbers
to construct a market sector estimate). Growth in each segment of this series was spliced together
as there were also two breaks in the series due to changes in occupational classification — fromCCLO to ASCO1 in 1986 and to ASCO2 in 1996. The closest occupational classification to
ASCO2 Managers and administrators was used in each case — CCLO Administrative, executive
and managerial and ASCO1 Managers and administrators (with ASCO 1st edition having a
different definitions of Managers & administrators).
58 From ABS Labour Force Historical Timeseries, Australia, 1966 to 1984 (Cat.
no. 6204.0.55.001).
134

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Survey for the number of employees and average weekly earnings estimatedassuming the growth rates between 1975 and 1976.
From these employee number series and average weekly earnings series, the total
wages bill was calculated as the number of employees multiplied by average weekly
earnings multiplied by 52 weeks. As noted above, this number of employees
excludes owner-managers of unincorporated enterprises. This may lead to anunderestimate of own-account organisational capital if this group does invest in thisintangible in the same way as other Managers & administrators.
Twenty per cent of this wages bill was counted as expenditure on own accountorganisational capital. CHS (2005, p. 30) note that their assumption that managers
spend 20 per cent of their time investing in organisational development is arbitrary.
However, for the purposes of comparability and in the absence of alternative
estimates of time spent, the same percentage is used in this paper.
Investment series
No further adjustments were made to the nominal expenditure to obtain nominal
investment.
The series was deflated by the implied market sector gross value added deflator.
Capital series
The capital stock series was constructed using PIM, as described in chapter 4, withan assumed depreciation rate of 40 per cent. This depreciation rate was selected forthe same reasons as described under purchased organisational capital above.

A.4

Comparison of data sources with other studies

As discussed in chapter 6, the various country studies do not measure intangibles
for the same group of industries in each case — the market sector for Australia andthe United Kingdom (but the UK market sector is much broader than that forAustralia); the non-farm business sector for the United States; the non-financial
business sector for Finland; and the whole economy for the Netherlands and Japan.
If the rates of investment in intangibles differ across industries, the average rate will
be affected by the differences in industry coverage across countries. For example,
the Australian market sector is defined more narrowly than the UK market sector,
which includes additional industries such as property and business services and
DATA SOURCES

135

private education and health. Higher than average rates of investment in intangibles
in these additional industries would increase the UK market sector averagecompared with a more narrowly defined market sector. Differences between the rateof intangible investment in the United Kingdom and Australia could therefore be
due to differences in industry coverage of the measure, rather than actual
differences between the countries at the industry level. However, it has not beenpossible to adjust for this possible source of bias and determine if this is the case.
Table A.3 summarises details of the proxies and sources used in other studies (forthe sector of the economy as listed above) and compares them with the Australiansources used.

136

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Comparison of data sources across countries

ComputersoftwareCanada: National accounts (purchases and own account).

Germany, Italy and Spain: EU KLEMS database software
investment.

France: France National Institute of Statistics and Economic
Studies, (purchased from SU tables and annual businesssurveys on software publishers; own account from labour costsof computer specialists).

Netherlands: National accounts (purchases and own account).

Finland: National accounts computer software series for the
non-financial business sector.

Japan: Data from Japan Industrial Productivity (JIP) database,compiled from IO tables and other surveys.

UK: Own use, purchased and custom software from Office for
National Statistics (ONS) estimates.

US: Own use, purchased and custom software from National
Income and Product Accounts (NIPA).

Computerised information

Category of intangible Sources from other studies

Table A.3

(continued on next page)

Purchased and own-account (but only includes softwaredeveloped in-house if expenditure is large) from ABS national
accounts.

Australian sources(continued)

Computerdatabases

Canada: Purchased from Survey of Software Development andComputer Services. Own account included in software
estimates.

France, Germany, Italy and Spain: EU KLEMS database gross
output of database activities industry.

Netherlands: Included in software estimates.

Finland: Included in software estimates.

Japan: Sales data for information service industry.

UK: Included in software estimates.

US: own use captured in NIPA software measures. Purchased
component estimated from Services Annual Survey(subscription revenue from database and directory publishingindustry).

Category of intangible Sources from other studies

Table A.3

Large expenditures on purchase, development or extension of
databases from ABS national accounts. Included in computer
software estimates.

Australian sourcesScientific R&D

Innovative property

Canada: BERD survey for manufacturing, utilities, construction
and agriculture.

France, Germany, Italy and Spain: EUROSTAT R&D expenses
for natural science and social science, excluding software.
Excludes government and higher education sector.

Netherlands: Current expenditure on R&D based on R&D
survey (compiled according to the Frascati manual) but
translated to R&D use according to national accountconventions. Excludes government consumption of R&D andmarket R&D use in the R&D- and universities industry.

Finland: BERD (compiled according to OECD Frascati manual
guidelines) adjusted for a number of factors including
acquisition of R&D, imports and exports.

Japan: Expenses on materials and labour costs on R&D
activities from Survey on R&D.

UK: current expenditure on R&D from BERD. R&D in computerindustry subtracted (to avoid double counting with software; stillleaves in possible double counting of tangible capital
expenditure on R&D by using current and capital expenditure
on R&D).

US: Mainly R&D in manufacturing, software publishing andtelecom industries. National Science Foundation Census.

(continued on next page)

Current expenditure by business on R&D from Shanks andZheng (2006) R&D database, updated from ABS survey of
BERD. R&D by financial services industry deducted.

(continued)

Mineralexploration

Canada: BERD survey for R&D of Mining, oil and gas
extraction industry and Annual survey of service industries
surveying and mapping for other geophysical and geological
exploration.

France, Germany, Italy and Spain: Derived from exploration
costs in the North Sea.

Netherlands: National accounts.

Finland: National accounts.

Japan: Estimated from Handbook of the Mining Industry andAnnual Report on Natural Gas.

UK: National accounts.

US: Mineral exploration in Census of Mineral Industries andNational Income and Product Accounts; R&D in mining
industries from Census of Mineral Industries.

Category of intangible Sources from other studies

Table A.3

Mineral exploration from ABS national accounts.

Australian sourcesCopyright andlicence costs

Canada: R&D of information and cultural industries.

France, Germany, Italy and Spain: Development costs ofmotion pictures from Screen Digest plus double these costs toproxy for development costs in radio, TV, sound recording andbook publishing.

Netherlands: National accounts.

Finland: National accounts (SNA93).

Japan: JIP database (nominal output of publishing andnewspaper industry and video picture, sound info, character
information production and distribution industry).

UK: National accounts (SNA93).

(continued on next page)

Artistic originals (SNA93) from ABS national accounts.
US: Mainly R&D in information sector industries (except
software publishing) — proxied by development costs in motion
picture industry from industry association plus double new
product development costs for motion pictures as crude proxyfor development costs in radio, TV, sound recording and bookpublishing industries.

(continued)

New productdevelopment
costs in thefinancialindustry

Canada: BERD survey of finance sector.

France, Germany, Italy and Spain: 20 per cent of intermediate
inputs of financial industry from OECD STAN database,adjusted to avoid double counting of inputs counted elsewhere.

Netherlands: Assumed to be included in Scientific R&D.

Finland: Not included because intangibles measured for the
non-financial business sector.

Japan: 20 per cent of all intermediate purchases by Financial
industry and Insurance industry.

UK: 20 per cent of all intermediate purchases by Financial
services industry (intermediate purchases reduced bypurchases of advertising, software, consulting and design). (UK
SIC 65, 67, includes services to finance but not insurance).

US: 20 per cent of all intermediate purchases by Financial
services industry. (US SIC 60-62, 67, includes services tofinance but not insurance).

Other product development, design and research

Category of intangible Sources from other studies

Table A.3

20 per cent of total intermediate usage by Finance industry(ANZSIC 380 and share of ANZSIC 400) from ABS Inputoutput/Supply-use tables.

Australian sourcesNew
architecturalandengineering
designs

Canada: BERD survey of architectural and engineering
services.

France, Germany, Italy and Spain: 50 per cent of gross outputof Architectural, engineering and other technical activities
industry from EU KLEMS database, excluding inputs counted
elsewhere.

Netherlands: National accounts. Intermediate input of these
designs in the production of capital goods. Investments are
two-thirds of this value.

Finland: Already included in tangible investments, so deducted
and separately identified.

Japan: Output data of the design, display, and machinery
design industries from the input-output tables for new
architectural design and data from Survey of Selected Service
Industries for investment in engineering design.

UK: Half of total turnover of architecture and design industry(turnover reduced by purchases of advertising, software andconsulting).

US: Half of total turnover of architecture and design industry.

(continued on next page)

Half of revenue from architectural and engineering industries(ANZSIC 7821 and 7823) from ABS industry surveys.

(continued)

R&D in social
science andhumanities

Australian sources

Canada: .BERD survey of remaining service industries notincluded elsewhere.

France, Germany, Italy and Spain: Included under Scientific
R&D.

Netherlands: Included under Scientific R&D.

Finland: Included under Scientific R&D.

Japan: no suitable data available.

Included under Scientific R&D.
UK/US: Twice industry revenues of social science andhumanities R&D industry (uses twice as way of estimating own
account spending).

Category of intangible Sources from other studies

Table A.3

Advertisingexpenditure

Brand equity

Canada: 60 per cent of revenue from Annual Survey ofAdvertising and Related Services.

France, Germany, Italy and Spain: 60 per cent of gross output
of advertising industry (excluding classified ads) fromEU KLEMS database.

Netherlands: Expenditure according to National accounts, onmarketing and advertisement, excluding spending byadvertising agencies. Further exclusions, based on industry
and type of advertisement, to arrive at estimates of capitalspending.

Finland: Included in marketing expenditure.

Japan: 60 per cent of nominal output of advertising industry
purchased by other industries.

(continued on next page)

US: 60 per cent of Grand total by type of advertiser as reported 60 per cent of total advertising expenditure, excludingclassifieds and directories, from CEASA industry survey
by Universal-McCann.
association. Doubled to estimate allow for production costs.
UK: 60 per cent of total spending on advertising reported byAdvertising Association, less expenditure on classified ads.

Economic competencies

(continued)

Market research

Canada: Twice revenue of market research industry from
Datamonitor survey (excluding public sector).

France, Germany, Italy and Spain: Twice turnover of Market
research and public opinion polling industry from StructuralBusiness Statistics of EUROSTAT.

Netherlands: Purchased market research based on national
accounts data series concerning total production andpurchases of economic advice as well as more detailed
microdata.

Finland: Purchased marketing expenditures from businessregister data for 1999-2005.

Japan: not separately measured.

UK: Twice revenues of the market and consumer researchindustry as reported in Annual Business Inquiry. (Twice as
estimate of own account spending).

US: Twice revenues of the market and consumer researchindustry as reported in Services Annual Survey.

Category of intangible Sources from other studies

Table A.3

Twice revenue of ANZSIC 7853 Market research services from
ABS industry surveys.

Australian sourcesFirm-specifichuman capital

Canada: Direct training expenses per employee from
Conference Board of Canada and employment data fromLabour Force Survey of Statistics Canada. Doubled to proxywage and salary costs of employee time.

France, Germany, Italy and Spain: Continuing Vocational
Training Survey and Labour Cost Survey from EUROSTAT andlabour compensations from EU KLEMS database.

Netherlands: Direct firm expenses and wage and salary costs
from Continuing Vocational Training Survey for most industries;
other survey data and annual reports for missing industries.

Finland: Direct firm expenses and wage and salary costs from
Continuing Vocational Training Survey for 1999.

Japan: As for US, using data on vocational education costs per
worker from the General Survey of Working Conditions andopportunity cost data from Survey of Personnel Restructuring
and Vocational Education/Training Investment in the Age of
Performance-based Wage Systems.

UK: National Employer Skills Survey 2005, similar survey of
employer-provided training adjusted to consider private sector
expenditure and all UK.

(continued on next page)

Cost of employer-provided training and wage and salary costs of
US: BLS surveys of employer-provided training in 1994 and1995. Includes direct firm expenses (inhouse trainers, outside employee time undertaking training from ABS training surveys.
trainers, tuition reimbursement and outside training funds); andwage and salary costs of employee time in formal and informal
training.

(continued)

Purchased

Australian sources

Canada: 80 per cent of revenue of Management, scientific andtechnical consulting services.

France, Germany, Italy and Spain: Revenue of the
management consulting industry survey by the European
Federation of Management Consultancies Associations(excluding public sector spending).

Netherlands: Based on National accounts data series
concerning total production and purchases of economic advice
as well as more detailed microdata.

Finland: Nominal gross output in business and management
consultancy activities.

Japan: Nominal output of law firms and accounting offices from
input-output tables.

UK: 80 per cent of revenue of management consulting industry
from Management Consulting Association (Private sector
expenditure only).

US: 80 per cent of estimate using Services Annual Survey data 80 per cent of revenue of 77 per cent of ANZSIC 7855 business
management services from ABS Industry survey.
on the revenues of the management consulting industry.

Organisational capitalCategory of intangible Sources from other studies

Table A.3

Canada: 20 per cent of wages bill of senior management
occupations from the census of population.

France, Germany, Italy and Spain: 80 per cent of 20 per cent ofcompensation of Legislators, senior officials and managers
derived from the EU KLEMS database and Structure ofEarnings Survey by EUROSTAT.

Netherlands: 20 per cent of value of executive time using
labour force data on wages in managerial occupations (basedon German data on the difference between average earnings inmanagement occupations and all occupations).

Finland: 20 per cent of value of management personnel timefrom Structure of Earnings statistics.

Japan: 20 per cent of salaries and bonuses for executives fromthe Survey of Financial Statements of Business Enterprises.

UK: 20 per cent of value of executive time using Annual Survey
Hours and Earnings data on employment and wages in
executive occupations, excluding software occupations.

US: 20 per cent of value of executive time using BLS data on
employment and wages in executive occupations.

20 per cent of value of Managers & administrators (less IT andfarm managers) time using data on employment and wages
from ABS labour force survey.

Sources: Corrado, Hulten and Sichel (2005); Marrano and Haskel (2006); Fukao et al. (2008b); Jalava, Aulin-Ahmavaara and Alanen (2007); van RooijenHorsten et al. (2008); Belhocine (2008); Hao, Manole and van Ark (2008); author’s estimates.

Own accountB

Specification of model

Corrado, Hulten and Sichel (CHS 2006, pp. 4–9) outline the implications ofcapitalising intangibles expenditures compared with their current treatment asintermediate goods. This appendix outlines the production functions and accounting
identities associated with the two approaches as specified by CHS (2006).

B.1

Intangibles treated as intermediate inputs

Suppose there are three goods produced, a consumption good C, a tangible
investment good I, and an intangible good N. When the intangible is considered to
be an intermediate good, it is an input to the other two goods (C and I), and labour L
and tangible capital K are inputs to all three goods.
The production function and flow account for each of the three sectors is then
Intangible sector

N t = FN (L N t , K N t , t)

PN t N t ≡ PLt L N t + PK t K N t(B.1)

Tangible sector

I t = FI (L I t , K I t , N I t , t)

PIt I t ≡ PLt L It + PK t K It + PN t N It

(B.2)

Consumption sector C t = FC (LC , K C , N C , t) PC C t ≡ PL LC + PK K C + PN N C (B.3)
t

t

t

t

t

t

t

t

t

t

where L ≡ L N + L I + LC , K ≡ K N + K I + K C , N ≡ N I + N C , and tangible capital
accumulates according to K t ≡ I t + (1-δ k )K t-1 with depreciation rate δk. The
production functions are linked to the accounting identities by the assumption thateach input is paid the value of its marginal product. In this case, Nt is both an output
and an intermediate input to the production of the other products. Nt therefore nets
out of the aggregate and does not appear separately in the GDP identity1
PQ′t Q′t ≡ PCt C t + PIt I t ≡ PLt L t + PK t K t(B.4)

1 CHS (2006) adopts the convention that intermediates used by the industry that produced them arenetted out of final output. They also omit chain weighting from the equations for simplicity of
exposition.
SPECIFICATION OF
MODEL

151

The conventional sources of growth (SOG) framework allocates the output growth
to the share-weighted input growth and a residual, multifactor productivity (MFP)
growth.2 The SOG equation is derived by logarithmic differentiation of (B.4):•••

Q′t = s′Ct C t + s′It I t
•

(B.5)
•

•

= s′Lt L t + s′K t K t + MFPt′•

where x t denotes the rate of growth of variable x t .
Rearranging (B.5) MFP growth3 is therefore
•

•

•

•

MFPt′ = Q′t - s′Lt L t - s′K t K′t

The expenditure shares

s′Ct ≡ [PCt C t ]/[PCt C t + P It I t ] and s′It ≡ [PIt I t ]/[PCt C t + P It I t ]and income shares s′L ≡ [PL L t ]/[PL L t + PK K t ] and s′K ≡ [PK K t ]/[PL L t + PK K t ]
t

t

t

t

t

t

t

t

are assumed to be equal to the corresponding output elasticities. Intangible input
and output do not appear in this SOG equation.

B.2

Intangibles treated as capitalIf the intangible is treated as capital, a different model applies. The output of theintangible, Nt, enters in the production functions of the consumption and tangible
investment sectors as a cumulative stock rather than as an intermediate input. The
intangible capital stock accumulates according to the perpetual inventory method
R t ≡ N t + (1-δ R )R t-1 , in the same way as tangible capital. The equations for each of
the sectors become
Intangible sector

N t = FN (L N t , K N t , R N t , t)

PN t N t ≡ PLt L N t + PK t K N t + PR t R N t (B.6)

Tangible sector

I t = FI (L It , K It , R It , t)

PIt I t ≡ PLt LIt + PK t K It + PR t R It

Consumption sector C t = FC (LC , K C , R C , t)
t

t

t

(B.7)

PCt C t ≡ PLt LCt + PK t K Ct + PR t R Ct (B.8)

2 This follows Solow (1957).
3 As is common practice, the continuous time variables are approximated with their discrete time
counterparts. And a combined input index is computed as a Tornqvist index (a discrete
approximation of a continuous Divisia index).
152

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

The

balance equations are modified with R ≡ R I + R C +R N replacing
N ≡ N I + N C .4 The production functions are linked to the accounting identities by
the assumption of marginal productivity pricing, as in the above case. The GDP
identity is expanded to include the flow of new intangibles on the expenditure sideand the flow of services from the intangible stock on the income side:(B.9)

PQt Q t ≡ PCt C t + PIt I t + PN t N t ≡ PLt L t + PK t K t + PR t R t

The price PR is the rental price associated with the services of the intangible stocktand is a source of income that is not included in the conventional intermediate
goods case (B.4).5
When intangible capital is treated in the same way as tangibles, the SOG equation
becomes••••(B.10)

Q t = s Ct C t + s It I t + s N t N t
•

•

•

•

= s Lt L t + s K t K t + s R t R t + MFPt

4 In this second case, CHS (2006) expand the technology of the intangible producing sector to use
its own stock of accumulated intangibles.
5 The rental price of tangible capital ( P ) will also change when intangibles are capitalisedKtbecause of the change in the equalising rate of return (see appendix C). However, the same
notation ‘ PK t ’ is maintained in both cases for simplicity.
In practice, total capital income is derived as the difference between total income and labour
income, which is

PK t K t ≡ PQ′t Q′t − PLt L twhen intangibles are expensed

PK t K t + PR t R t ≡ PQt Q t − PLt L t when intangibles are capitalised.
Since capitalising intangibles increases total income ( PQt Q t > PQ′t Q′t ) and labour income isunchanged, total capital income increases. However, after the capitalisation of intangibles therental price of tangible capital changes (as a result of the changed capital income, and theinclusion of intangible assets in the derivation of a new equalising rate of return). ( PK t is derived
from total capital income rather than measured directly, so when intangibles are expensed some
capital income that is attributed to tangible capital is actually a return on intangibles that have notbeen counted as part of the capital stock.) Total capital income is split between tangibles andintangibles as follows[PK t K t ]/[PK t K t + PR t R t ] for tangibles[PR t R t ]/[PK t K t + PR t R t ] for intangibles.
SPECIFICATION OF
MODEL

153

where the expenditure shares are nows Ct ≡ [PCt C t ]/[PCt Ct + PIt I t + PN t N t ] ,s It ≡ [PIt I t ]/[PCt C t + PIt I t + PN t N t ]ands K t ≡ [PK t K t ]/[PLt L t + PK t K t + PR t R t ]ands N t ≡ [PN t N t ]/[PCt C t + PIt I t + PN t N t ]and the income shares are nows Lt ≡ [PLt L t ]/[PLt L t + PK t K t + PR t R t ] ,s R t ≡ [PR t R t ]/[PLt L t + PK t K t + PR t R t ] .

Rearranging (B.10) MFP growth6 is therefore
•

•

•

•

•

MFPt = Qt - s Lt L t - s K t K t - s R t R t••Comparing (B.5) and (B.10), not only the growth terms N t and R t change, but also
all the income and expenditure shares.

6 This can also be expressed in labour productivity (LP) terms by rearranging (B.10)
•

•

•

•

Q = s L L + (1 − s L )( TK) + MFP
•

•

•

•

•

•

where TK ≡ K + R and s L + s K +s R = 1( Q - L ) = s L L + (1-s L )( TK) + MFP − L
•

•

•

•

= (1 − s L )( TK) − (1 − s L ) L + MFP••(Q / L) = (1 − s L )(TK / L )+ MFP•••

LP = KD + MFP
The labour composition effect can be separately identified (not shown above for simplicity). This
•

•

•

•

•

results in the expression LP = ( Q / H ) = KD+ MFP* + s L LSC , where labour (L) is separated into two
components, Lsc the skill composition component and H the labour quantity (hours), and MFP* is
MFP adjusted for skill composition change.
154

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

C

Growth accounting

This appendix describes the methodology used in this paper to construct new
growth accounting results for the market sector. These have been calculated using
the three different definitions of capital detailed in chapter 5. The first definition
includes all intangible and tangible assets. The second definition contains the same
capital assets as the Australian Bureau of Statistics (ABS) national accounts, while
the third definition of capital excludes all intangible assets.
Section C.1 details the methodology for constructing new capital services indexes
for the market sector including intangible assets. This includes detailing how the
new rental prices were calculated and how a rate of return for all assets including
the new intangible assets was calculated. Section C.2 details changes to other terms
in the production function. This includes output, labour inputs and the factor income
shares.
Unpublished ABS data have been used for all of the tangible assets as well as forthe intangible assets already capitalised in the national accounts (computer software,artistic originals and mineral exploration).1 The capital services indexes including
the new intangible assets (those not already capitalised in the national accounts)
have been constructed using the intangible capital stock series estimated as
described in chapter 4.

C.1

Construction of capital services indexes

To measure the impact of intangible investment on multifactor productivity (MFP)
growth, new estimates of capital services growth need to be constructed for themarket sector. Capital services reflect the amount of ‘service’ each asset provides
during a set period. For each asset, the services provided are directly proportional tothe asset's productive capital value. Aggregate capital services indexes are createdusing the volume index of the productive capital stock of each asset weighted using
rental prices.

1 All published and unpublished national accounts data used in the growth accounting in this paper
are from the dataset underlying ABS Australian System of National Accounts, 2006-07(Cat. no. 5204.0).
GROWTHACCOUNTING

155

The productive capital stock of an asset is the real stock of capital, adjusted for
efficiency losses related to age (according to the relevant age-efficiency profile).
The productive capital stock of each asset type is weighted and summed to form an
aggregate capital services measure. For the purposes of this paper, the real
economic capital stock (net capital stock) and the productive capital stock for new
intangible assets are assumed to be equal.2 The use of the net rather than productive
capital stock means that the capital stock for intangible assets is understated.
The weights used in the summation of productive capital stocks are based on therental prices for each asset type. Rental prices can be thought of as estimates of therates each asset type would attract if leased under a commercial agreement. The useof rental prices as weights assumes that the rental price reflects the marginal productof an asset, hence more productive assets have a higher rental price and therefore ahigher weight in the aggregate capital services measure. The compilation of rental
prices is discussed below.
Aggregate estimates of capital services for the market sector are formed by
combining estimates of the productive capital stock and rental price for each asset
type into a Tornqvist3 index of aggregate capital services. For some asset types4,
capital is also split by industry and institutional sector — this is not shown forsimplicity. The flow of aggregate capital services K equals the product of thechange in the capital stock of each asset K j , weighted by the rental price weight ofeach asset w j .
wj⎡ Kj ⎤
K& = ∏ ⎢⎥ −1
j ⎣⎢ K j (t −1) ⎦⎥(C.1)

The rental price weight for each asset is based on its share of total market sector
capital rent. Capital rent is the rental price rjt multiplied by the real productive
capital stock K j .

2 The productive value and the economic value of an asset are slightly different. The productive
capital stock represents an age-efficiency function while the net capital stock represents an ageprice function. Because an asset’s value depreciates faster than its productive capacity, the net
capital stock is invariably smaller than the productive capital stock (ABS 2000).
3 A Tornqvist index is the weighted geometric mean of the component growth rates.
4 For the tangible assets and the national account intangibles, assets are split by type, industry andinstitutional sector (corporate, unincorporated). Splitting the new intangibles by industry andinstitutional sector has not been possible due to data limitations.
156

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY⎛⎞⎜ rj .K j
rjt −1.K jt −1 ⎟+w j = 0.5* ⎜
⎟
Σ
r
.
K
⎜ j j ij Σj rjt −1.K jt −1 ⎟
⎝
⎠

(C.2)

This methodology differs from the ABS methodology because all assets in allindustries are aggregated in a single stage. The ABS constructs capital services
indexes for each of the twelve market sector industries separately, then weights
these indexes together using the gross operating surplus (GOS) of each industry as aweight (see ABS 2000, chapter 27 for further details). It has not been possible toestimate the intangible assets for each industry due to data limitations, so the single
stage aggregation had to be used. Because of this difference in methodology, thecapital services indexes used in this paper differ from published ABS estimates.
The new methodology has been used to construct new capital services indexes foreach of the three capital definitions described above — the existing national
accounts assets, tangible assets only and tangibles plus all intangible assets.
Constructing all the indexes using the new methodology allows a direct comparisonof the change in the growth rate of capital services due to the treatment ofintangibles as capital. The implications of changing the capital services
methodology are discussed in detail below.
Rental prices
The rental price of an asset is equivalent to the user cost of capital.5 It is the implicit
price for employing or obtaining the productive value of a unit of capital for one
period. Because the majority of capital is owned by its user rather than rented in themarket, the rental price for the asset is an estimate of what the market rental price of
the asset would be. The rental price includes most of the measurable costs incurredin the use of that asset. It covers the expected return on the asset, represented by theinternal rate of return; the loss in market value of the good due to ageing; the capitalgains or losses due to asset price inflation/deflation; a non-income tax parameterand adjustments for tax concessions made to correct for distortions in rental prices
due to differential tax treatment across capital items.

5 The rental price formula used in this paper is based on that used in the ABS’s standard
methodology for measuring capital services (see ABS 2000, chapter 27). This approach to themeasurement of rental prices may differ from that used elsewhere. For a discussion of alternative
rental price methodologies used in capital services measures see OECD (2001, chapter 9).
GROWTHACCOUNTING

157

The rental price is derived using the following formula
rj = T j (i. p j + d j . p j − p j + p j ( t −1) ) + p j .x

(C.3)

where for asset type j , the rental price r is a function of the income tax rate T ; theinternal rate of return i ; the price deflator p ; the depreciation rate d ; and thenon-income tax parameter x (which is assumed to be the same for all j).6
For existing tangible assets and the intangible assets currently capitalised in thenational accounts, most of the above data have been provided by the ABS.
However, capitalising the new intangible assets will change two of the parameters
for the tangible assets and existing intangibles — the internal rate of return and thenon-income tax parameter. The methodology used for calculating the rate of returnis discussed below.
Because there is very little existing data about the new intangible assets,
assumptions need to be made about the parameters to be used for them in the rental
price calculations. Assumptions have been made for the depreciation rate, theincome tax parameter, the deflator and the effective average non-income tax rate on
production.
In this paper, the depreciation rates used for the new intangible assets are those usedin Corrado, Hulten and Sichel (CHS 2006) and for the national accounts intangibles
the ABS rates are used (table C.1). These depreciation rates are relatively high,which reflects the assumption that intangible investment has a relatively shortproductive life.

6 There is some debate as to whether or not all of the functions in the rental price equation should
be included for intangible assets due to the nature of those assets. Sensitivity tests, detailed inappendix D, have been performed on several parts of the rental price equation for the new
intangibles.
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INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Table C.1

Rental price components for intangible assets
Average 1975-2006
Depreciation ratea

Income tax parameterb

Computerised information

0.2

1.51

Business R&D

0.2

0.85

Mineral exploration

0.1

1.52

Artistic originals

0.6

0.62

Financial product development

0.2

1.67

New architectural and engineering designs

0.2

1.67

Advertising

0.6

1.67

Market research

0.6

1.67

Firm specific human capital

0.4

1.67

Purchased organisational capital

0.4

1.67

Own account organisational capital

0.4

1.67

a Depreciation rates are constant for the new intangibles and vary over time for the intangibles alreadycapitalised in the national accounts (software, mineral exploration, and artistic originals). b A more detailed
discussion of the assumptions behind this parameter is in appendix D.
Sources: CHS (2006); authors’ estimates; ABS unpublished national accounts data.

The income tax parameter is calculated by using the corporate profit tax rateadjusted for depreciation allowances and other additional allowances (table C.1).
For most of the new intangible assets it has been assumed that the income tax
parameter is derived only from the corporate tax rate because there are currently no
additional tax allowances for most intangibles. However, for business expenditure
on research and development, an allowance has been included for the R&D tax
incentive scheme (Australian Government 2008a, 2008b). Adjusting the tax rate toreflect the R&D tax concession lowers the effective income tax rate on R&D
investment. (See appendix D for a discussion of the suitability of the tax parameterfor intangibles.)The deflator used for most intangible assets is the implicit price deflator (IPD) for
market sector gross value added. For financial product development investment, theFinance & insurance gross value added IPD has been used. For firm specific humancapital a wage price deflator has been used. These are the same deflators used incompiling the real capital stocks from the nominal investment series in chapter 3.
The effective average non-income tax rate on production is derived by the ABS by
dividing the total non-income taxes allocated to capital for the market sector by the
total net capital stock. The non-income tax parameter is therefore the same for every
asset. The total taxes will not change after the inclusion of intangible assets but the
total net capital stock will increase, hence the new non-income tax rate will belower. Non-income taxes include land tax, local government authority rates, stamp
GROWTHACCOUNTING

159

duties and other miscellaneous taxes (ABS 2000, chapter 27). Given the ABS
method for allocating non-income taxes, the non-income tax rate changes for all
assets when intangible capital is included — therefore rental prices for all tangible
and existing intangible assets will also change.
All new intangible capital is allocated to the corporate sector because the required
data are not available to split the intangibles between sectors. The corporate sector
is much larger than the unincorporated sector and is likely to represent the bulk ofinvestment in intangibles (if not all, in cases such as financial productdevelopment). However, it should be noted that the assumption that all intangible
investment is contained within the corporate sector will overstate the impact ofintangibles in the capital services index because rental prices for the unincorporated
sector are derived as a function of corporate rental prices and are invariably lower.
Rental prices for the unincorporated sector are derived by the ABS as a function of
the corporate rental price weighted by the ratio of unincorporated capital income toproprietors’ labour income. This methodology is maintained in this paper as there
will be no change in proprietors’ labour income and no change in theunincorporated capital because all intangibles were allocated to the corporate sector.
Occasionally, rental prices calculated using equation (C.3) can be negative. If thisoccurs the approach used by the ABS is to set these rental prices to a very small
positive number, usually 0.001. This is to prevent negative rental prices from
causing complications in the later growth rate calculations. This approach is also
followed in this paper. When calculating rental prices, only a limited number ofasset types, such as agricultural land, regularly display negatives. Of the intangible
assets, either national accounts or new, only software has a negative rental price inany year.
Internal rate of return
The rate of return represents the expected return on a unit of an asset after adjusting
for all other price factors, taxes and depreciation. Normally the ABS calculates therate of return for all assets in each particular industry, but for this paper a new rateof return had to be calculated for the entire market sector.7 The rate of return for themarket sector has been recalculated for each of the three definitions of capital, as
the treatment of intangibles as capital will change the rate of return for all assets.
7 The Jorgenson-Griliches methodology for estimating the rate of return as a common rate acrossall assets (both tangibles and intangibles) has been used. This assumes that businesses arbitrage
their investments across all types of capital, investing in each type until the rate of return for all
assets is equal (CHS 2006). This assumes there is no risk differential.
160

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITYThe rate of return for an asset can be either calculated or assumed. An endogenous
rate of return can be calculated by assuming that capital income, or adjusted grossoperating surplus, is equal to capital rent. Alternatively, an exogenous rate of returncan be used, usually based on an external variable such as the consumer price index(CPI). The ABS currently uses a hybrid system, using an endogenous rate of returnfor each industry, but with an exogenous floor rate of return of the CPI growth plus
4 per cent as a lower limit (ABS 2000). This paper uses the same lower limit when
deriving a rate of return for all market sector assets.
As mentioned above, under an endogenous model capital rent is assumed to equal
capital income. If an endogenous model was used for the rates of return, with nolower limit as used by the ABS, then the sum of the rental prices for each asset
multiplied by the productive capital stocks for each asset class would equal capitalincome.8Q = ∑ rj .K j

(C.4)

j

summed across assets j
Using this assumption, calculating the endogenous rates of return9 is simply a caseof reorganising the rental price equation to include capital income and the
productive capital stock.
i =Q − ∑ K j (T j (d j . p j − p j + p j ( t −1) ) + p j .x )j

∑ K .T . p
j

j

(C.5)

j

j

where Q is capital income (including non-income taxes attributed to capital) and K
is the real productive capital stock.10

8 Provided all the endogenous rental prices are positive, as a negative rental price forced to zerowould also affect the total capital income.
9 This rate of return takes account of taxes and capital gains/losses due to asset price inflation that
may not be included in rates of return calculated for other purposes.
10 ABS (2007, p. 107) notes that there is a question as to whether the productive capital stock or
the net capital stock should be used to estimate the endogenous rate of return. Currently the ABS
uses the real productive capital stock but has noted that it will consider changing its approach in
the future.
GROWTHACCOUNTING

161

Figure C.1

Internal rate of return for the market sectora, all intangibles
treated as capital

0.25

0.20

0.15

0.10

0.05

0.00
1974-75

1979-80

1984-85

1989-90

1994-95

1999-00

2004-05

a Using the ABS hybrid methodology, which is an endogenous rate with a floor of the CPI growth plus 4 percent. Because the endogenous internal rate of return (IRR) rarely rose above this floor rate for the market
sector in practice, the IRR is exogenous in most years.
Data sources: Authors’ estimates; ABS unpublished national accounts data.

This paper follows the ABS method of using the hybrid rate of return (figure C.1).
However, in practice this means that the paper uses mainly uses an exogenous rateof return as the endogenous rate only exceeds the exogenous rate in a few years(2004-05 and 2005-06 when all intangibles are treated as capital). The growthaccounting results were sensitivity tested using a purely endogenous rate of return(as used in CHS 2006) and the results are presented in appendix D, section D.1. The
rate of capital deepening, and hence the rate of MFP growth, is considerablychanged by the use of the endogenous rate of return. However, the use of theendogenous rate of return creates problems with negative rental prices and isinconsistent with existing ABS productivity estimates for Australia.
Methodological issues
The differences in methodology between this paper and the ABS national accounts
leads to different results for the market sector capital services index. As noted
above, the difference is caused by the use of a single stage aggregation process toconstruct a market sector capital services index, rather than using industry capital
services indexes aggregated using GOS weights.
There are several reasons for the difference in results between the two methods. The
first difference is the effect of the new internal rate of return used in this paper. The
162

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

rate of return used in the estimates in this paper is calculated as a single rate for themarket sector. This rate of return is generally equal to the minimum rate of return
under the ABS methodology. Because the ABS calculates a separate rate of returnfor each industry, some of these rates of return exceed the minimum rate in someyears. Therefore the average rate of return across all industries under the ABS
methodology will be higher than the rate of return used in this paper, which isnearly always equal to the minimum ABS rate. If the gap between the ABS averagerate of return and the minimum rate of return is increasing, then a capital services
index calculated using rental prices based on the minimum rate of return will growmore slowly than that using the ABS average rate. An analysis of the results shows
this to be the case, mainly due to strong growth in the internal rates of returncalculated for assets in Construction and Finance & insurance.
The second difference between the methodologies concerns the rental price weightof each asset in the aggregate market sector capital services index. The ABS
compiles indexes of capital services for each industry and then weights thesetogether using GOS weights. However, because the intangible assets cannot be split
between industries, in this paper the market sector capital services index is compiled
in a single stage. Under the ABS methodology the rental price weight of an asset in
the final market sector capital service index is equal to its weight in its relevant
industry capital services index multiplied by that industry’s GOS weight. Under the
new methodology an asset’s weight in the market sector capital services index isequal to its rental price weight in total industry capital income. The change of
weighting will change the growth rate of market sector capital services.
The change in the rate of return will also affect the relative weight of each asset in
the aggregate capital services index. Using a single rate of return across allindustries will mean that some assets have their rental price weight affected by thechange in the rate of return.

C.2

Growth accounting components

This section details the methodology and data sources used for the other (noncapital) parameters in the growth accounting framework.
Output
For the all intangibles case, output is equal to existing market sector gross value
added (GVA) plus investment in the new intangible assets. For each of the new
intangible assets expenditure series were constructed (as described in chapter 3) andthese expenditure series were then used to calculate an investment series for
GROWTHACCOUNTING

163

intangible assets. A new chain volume measure of value added for the market sector
was calculated by adding this investment series to current price GVA for the
existing market sector. This was then deflated using a market sector IPD andindividual price deflators for each intangible asset.
Output for the market sector including only the existing national accounts intangible
assets is equal to market sector GVA supplied by the ABS.
Output excluding all intangible assets was constructed by deducting current priceinvestment in the existing intangible assets from existing market sector GVA.11 The
result was then deflated using a market sector IPD.12
Income shares
The inclusion of intangibles investment increases the level of capital income, which
in turn increases the capital share of total income with an equivalent fall in thelabour income share. The impact on the income shares is outlined in more detail inappendix B, section B.2.
Total factor income as currently measured in the national accounts was provided by
the ABS.
•

Capital income in the ABS national accounts is gross operating surplus (GOS)
plus the capital share of Gross Mixed Income (GMI) and taxes.

•

Labour income is Compensation of Employees (COE) plus the labour share of
GMI and taxes.

•

Labour and capital income estimates were supplied with GMI and taxes alreadysplit between capital and labour income.

11 Current price gross fixed capital formation (GFCF) for the existing national accounts intangible
assets (computer software, artistic originals and mineral exploration) was used as the investment
estimate for the national accounts intangibles.
12 When market sector output was reinflated after the exclusion of current price investment in theexisting intangible assets, the market sector IPD was used to reinflate the output estimates. No
adjustment was made to the IPD to reflect the removal of those intangible assets. Sufficient data
were not available to construct an IPD for the reduced scope of output. However, testing was
performed to approximately measure the impact of removing these assets on the price deflator
using an adjustment based on the corporate sector asset price deflators only, without also
including the unincorporated sector asset deflators. The outcome of this testing showed that
adjusting for the removal of the existing intangible assets from the market sector price deflator
had little effect on the market sector IPD and therefore little effect on total market sector output.
It was therefore decided that using the original market sector IPD would be sufficient forcalculating real output for the market sector minus the national accounts intangible assets.
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INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Because this paper assumes all intangible assets are in the corporate sector, nochange to the split of GMI (income of the unincorporated sector) was required whentreating intangibles as capital.
Capital income for the three capital definitions are as follows.
•

For the case including all intangible assets, capital income is equal to national
accounts capital income (adjusted GOS) plus all investment in new intangibles.

•

For the existing national accounts definition of capital, capital income is GOS
adjusted for GMI and taxes (as outlined above).

•

For the case excluding all intangible assets, capital income is equal to national
accounts capital income minus GFCF in the national accounts intangible assets.

As detailed in chapter 5 and appendix B, investment in intangibles will increase
total factor income and capital income while labour income is unchanged. Therefore
treating intangibles as capital will decrease the labour income share while
increasing the capital income share. For the case excluding all intangible assets, thereverse is true.
Labour inputs
The labour inputs index used in the growth accounting is the growth in hours
worked for the market sector from the ABS national accounts. In chapters 5 and 6, alabour composition component has been included in the growth accounting results.
This is calculated using a quality adjusted labour inputs index (QALI) supplied by
the ABS for the period 1982-83 to 2005-06. This index is used to construct MFPestimates that are adjusted to take account of general improvements in theexperience, education and training of the workforce. The ABS constructs thisquality-adjusted index of hours worked by disaggregating total hours worked on thebasis of educational attainment and potential workforce experience and weighting
these hours by wages (see ABS 2001 and ABS 2005 for details).13
The contribution of QALI to MFP is included in tables 5.3, 6.3 and 6.4 from
1984-85. The contribution of QALI to MFP growth will stay constant with thetreatment of intangibles as capital — therefore as the total rate of MFP growth falls
with the treatment of intangibles as capital, the contribution of QALI to labour
productivity growth will also fall.

13 See chapter 3 for a discussion of the potential overlap between QALI and the firm-specifictraining intangible.
GROWTHACCOUNTING

165

D

Sensitivity testingThis appendix details the sensitivity testing undertaken on the growth accounting
results from chapter 5. The appendix is split into three sections. The first section
tests the results using a different methodology for calculating the internal rate of
return for the capital stock. The second section tests different values for otherparameters in the rental price equation. The third section tests the growthaccounting results with different investment estimates for the new intangible assets.

D.1

Internal rate of return

This paper applies the hybrid Australian Bureau of Statistics (ABS) methodology
for calculating the internal rate of return on capital (see appendix C). The
methodology uses an endogenous rate of return unless the rate falls below an
exogenous rate equal to consumer price index (CPI) growth plus 4 per cent. If therate falls below this floor level, the exogenous rate is used. In practice the rate of
return, which is constrained to be the same across all assets, fell below this mark inmost years when calculated for the aggregate market sector. Therefore, the rate of
return used in this paper is mainly exogenous. Because this differs from theCorrado, Hulten and Sichel (CHS 2006) methodology, which used an endogenous
rate of return, the Australian results have been re-estimated with an endogenous rateof return1 for the purposes of international comparison. This section compares theAustralian growth accounting results with an endogenous rate of return with thoseusing the ABS hybrid method (as reported in chapters 5 and 6).
There is a considerable difference between the exogenous rate of return and theendogenous rates calculated for the three definitions of capital (figure D.1). In
particular, the endogenous rate of return is negative for 1990-91 and 1991-92. The
figure also shows there is only a small difference between the average endogenous
rates of return for the three definitions of capital. Because the stock of intangibles issmall relative to tangibles (and intangible investment is a small share of total capital

1 It should be noted that the internal rates of return used in this paper relate to the specific context
of calculating rental prices and take into account factors (such as taxes and asset revaluations)that may not be included in rates of return calculated for other purposes (see appendix C).
SENSITIVITY TESTING

167

income), the capitalising of intangibles has only a small effect on the equalisinginternal rate of return across all assets.2
Figure D.1

Comparison of endogenous and exogenous rates of return

0.25
0.20
0.15
0.10
0.05
0.00
-0.05
1974-75

1979-80

1984-85

1989-90

1994-95

1999-00

2004-05

Endogenous (Treating national accounts intangibles as capital)
Endogenous (Treating all intangibles as capital)
Endogenous (Treating no intangibles as capital)
Exogenous rate of return aa Exogenous rate of return (CPI growth plus 4 per cent), used as the floor rate of return in the ABS hybrid
methodology (which is an endogenous rate unless it falls below an exogenous floor rate of return).
Data sources: Authors’ estimates; ABS unpublished national accounts data.

A change in the rate of return will alter the rental prices of all assets. And because
the rental prices are used as weights to aggregate together the growth rates in theindividual capital stocks to create an aggregate capital services index, a change inthe rental prices can also affect the growth rate of the capital services index.
Figure D.2 shows a comparison of capital services indexes using an endogenous
rate of return and an endogenous rate of return subject to an exogenous floor rate of
return. Using the endogenous rate of return increases the growth in the capital
services by an average of around 0.3 of a percentage point a year over the series forthe all intangibles case.

2 In CHS (2006, table 4) capitalising intangibles also changes the equalising rate of return for all
assets by only a small amount, slightly changing income accruing to tangible capital.
168

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Figure D.2

Capital services, alternative internal rates of return, allintangibles treated as capitalIndex 2005-06 = 100

Index

100

80

60

40

20
1974-75

1979-80

1984-85

1989-90

Exogenous floor rate of return a

1994-95

1999-00

2004-05

Endogenous rate of return

a The ABS hybrid methodology has been used, which is an endogenous rate with an exogenous floor of the
CPI growth plus 4 per cent. However, because in practice the endogenous IRR rarely rises above the floor
rate for the market sector, the IRR is generally exogenous.
Data sources: Authors’ estimates; ABS unpublished national accounts data.

The main reason a change in the rental price weights increases the growth in capital
services is that the use of the endogenous rate lowers the rental price for all assets
by an equivalent amount.3 Therefore, the weight of assets with lower initial rental
prices, such as land and non-dwelling construction, will decline by a relatively
larger amount than those assets with higher initial rental prices, such as ICT
equipment. The capital stock of assets with lower rental prices have tended to growat a slower rate than those with relatively high rental prices — so the shift inweighting in the aggregate capital services index towards these faster growing
assets increases growth in aggregate capital services.

3 The change to an endogenous rate of return increased the number of rental prices that had to be
adjusted because they fell below zero. Any rental price that drops below zero is adjusted to a verysmall positive number (0.001) to prevent the negative number distorting the weighting of theremaining assets. No adjustment has been made to the negative rates of return prior to theadjustment for negative rental prices. See appendix C for more information.
SENSITIVITY TESTING

169

Figure D.3

MFPa using alternate rates of return, all intangibles treated ascapitalIndex 2005-06 = 100

Index
110
100
90
80
70
60
1974-75

1979-80

1984-85

1989-90

Exogenous floor rate of return

1994-95

1999-00

2004-05

Endogenous rate of returna Includes labour composition change for comparability across periods.
Data sources: Published and unpublished ABS national accounts data; authors’ estimates.

Using the endogenous rate of return considerably increased the growth rate of thecapital services index (figure D.2), which had a corresponding downward effect on
the multifactor productivity (MFP) growth estimates. For the case including all
intangibles as capital, the change in the MFP index over the entire period was
10 per cent lower using the endogenous rate of return approach (figure D.3). The
use of the endogenous rate did not change the productivity growth cycles.
Under all three capital definitions the rate of MFP growth fell considerably using
the endogenous rate of return (table D.1) and capital deepening increased by anequivalent amount. The largest impact on MFP growth was with the all intangibles
case. This was due to the larger relative weight of capital in total factor income,leading to the change in the rate of capital services growth having a larger impact on
MFP growth.

170

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Table D.1

Comparison of MFP growth ratesa using alternative rates ofreturnPer cent per year
1974-75– 2005-06

1974-75– 1984-85

1984-85– 1994-95

1994-95– 2005-06

Exogenous floor

1.20

1.25

1.00

1.35

Endogenous

1.08

1.16

0.86

1.20

Exogenous floor

1.26

1.30

1.02

1.45

Endogenous

1.17

1.25

0.92

1.34

Exogenous floor

1.36

1.31

1.13

1.63

Endogenous

1.31

1.26

1.09

1.55

Including all intangibles assets

Including national accounts intangible assets

Excluding all intangible assets

a Includes labour composition change for comparability across periods.
Sources: Published and unpublished ABS national accounts data; authors’ estimates.

As mentioned in chapter 5, the reason for testing the results using a purely
endogenous rate of return is for comparability with the other country studies.
Table D.2 shows that the Australian results using an endogenous rate of return are
considerably closer to the US results than those using an exogenous floor rate of
return. The effect of treating all intangibles as capital (compared with nointangibles) is also closer between the two countries when using an endogenous
rate, both in absolute value terms and percentages changes.
However, it should be noted that the Australian results using an endogenous rate of
return may still not be directly comparable with the US results. It is not known
whether CHS (2006) found any negative rates of return or made any adjustment forthem — the negative rates of return in the Australian results have not beenadjusted.4

4 The US Bureau of Labor Statistics methodology (as reported in Dean and Harper 2001, p. 68) is
to assume a 3.5 per cent rate of return where the endogenous rate of return is negative and deductnothing for asset revaluation in the rental price calculation. However, this is done at the industry
level and mainly affects property industries. It is not known if CHS (2006) followed thismethodology at the aggregate economy level.
SENSITIVITY TESTING

171

Table D.2

International comparisons using endogenous rate of return
Per cent per year (Percentage share of total growth)

All intangible assets
LP growth
Decomposition:
Capital deepening
Tangible
Intangible
Labour composition
MFP growthc
No intangible assets
LP growth
Decomposition:
Capital deepening
Labour composition
MFP growthc

Australia (exog.)aAustralia (endog.)b

USA (endog.)

1994-95 –2002-03

1994-95 –2002-03

1994-95 –2002-03

3.01
(100)

3.01
(100)

3.09
(100)

1.36
(45)
0.81
(25)
0.57
(19)
0.24
(8)
1.41
(47)

1.54
(51)
0.90
(29)
0.67
(22)
0.24
(8)
1.23
(41)

1.68
(54)
0.85
(28)
0.84
(27)
0.33
(11)
1.08
(35)

2.90
(100)

2.90
(100)

2.78
(100)

0.92
(32)
0.27
(9)
1.71
(59)

1.02
(35)
0.27
(9)
1.61
(56)

0.98
(35)
0.38
(14)
1.42
(51)

a Using an exogenous floor rate of return (as in chapters 5 and 6). b Using an endogenous rate of return.
c MFP growth adjusted for labour composition change.
Sources: CHS (2006); authors’ estimates.

D.2

Growth accounting parameters

This set of tests relates to other parameters used in the calculation of the rental
prices. There is a question as to whether some of the standard components includedin the calculation of the rental prices are applicable to intangible assets, in particular
the income tax parameter and the capital gain/loss term.
Income tax rates for intangible assets

As part of the rental price equation, a parameter for income taxes is included toreflect the impact of these on the user cost of capital. For most tangible assets and172

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

intangible assets already capitalised in the national accounts, the corporate profit tax
rate is used by the ABS with adjustments made for depreciation allowances andother factors (ABS 2000, paras 27.61 – 27.71). For this paper, income tax rates forthe new intangible assets were assumed to be equal to the corporate income tax rate.
The exception to this was business R&D, where a tax adjustment was made tocompensate for the R&D tax incentive scheme.5 Because investment in intangibles
is currently treated as intermediate expenditure rather than being capitalised,
including a tax adjustment for intangibles might not be ideal.6 Therefore it is usefulto test the results using an unity tax parameter to see what impact this could
potentially have on the results.
Adjusting the income tax parameter to a neutral rate of one (no net taxes)7 for the
new intangible assets marginally decreases the growth rate of the aggregate capital
services index (table D.3). This has the effect of slightly reducing the impact of
capitalising intangibles on MFP growth. However, there is little difference in theaggregate MFP and capital deepening results due to the small size of intangibles intotal capital services growth.
Capital gain/loss term

There is a question as to whether a capital gain/loss term should be included forsome intangible assets. The purpose of this function is to adjust the value of an asset
to reflect holding gains. Because many intangibles are not tradeable, it could beargued that holding gains are irrelevant and therefore should not be included whenestimating the rental prices.
A sensitivity test was performed by removing the capital gain/loss term from therental price equation for the new intangible assets. The effect of removing thecapital gain/loss function was a slight increase in the growth rate of capital services.
As with the sensitivity test of income tax rates, the impact of this adjustment was
too small to appreciably change the final growth accounting results (table D.3).

5 Including an adjustment for the R&D tax incentive scheme lowered the average tax rate on
business R&D. For more information see appendix C.
6 Under current accounting rules, corporate investment in intangibles would come from pre-tax
income, not post-tax income. The tax treatment of intangible investment is important because
different tax treatments can potentially change the incentive to invest in intangibles.
7 The tax parameter for business R&D is therefore assumed to be less than one (a tax credit) due tothe R&D tax concession.
SENSITIVITY TESTING

173

Table D.3

Comparison of parameter sensitivity testing results, allintangibles treated as capital
Per cent per year
1974-75–2005-06

1974-75–1984-85

1984-85–1994-95

1994-95–2005-06

Capital services growth
Originala
Neutral income taxes for new intangiblesb
No capital gain/loss term for new intangiblesc

3.38
3.31
3.40

3.00
2.92
3.01

3.00
2.93
3.02

4.10
4.03
4.09

Combined inputs growth
Originala
Neutral income taxes for new intangiblesb
No capital gain/loss term for new intangiblesc

1.84
1.81
1.84

1.07
1.04
1.07

2.09
2.06
2.10

2.31
2.28
2.31

MFP growthd
Originala
Neutral income taxes for new intangiblesb
No capital gain/loss term for new intangiblesc

1.20
1.23
1.20

1.25
1.28
1.24

1.00
1.03
0.99

1.35
1.38
1.35

Capital deepening
Originala
Neutral income taxes for new intangiblesb
No capital gain/loss term for new intangiblesc

1.08
1.05
1.08

1.12
1.09
1.13

0.63
0.61
0.64

1.43
1.40
1.43

a These series are the main results as contained in chapter 5. b The neutral tax rate series uses all the same
assumptions as the original results but with the income tax parameter for all of the new intangibles (except
business R&D) set to one (no net taxes). c These series use all of the same assumptions as the original
results but with the capital gain/loss term removed from the rental price equation for each of the new intangible
assets. d Includes labour composition change for comparability across periods.
Source: Authors’ estimates.

D.3

Investment and capital stock size

As detailed in chapter 5, the estimates for investment in the new intangible assets
used in this paper are experimental. Therefore, the results have been tested for their
sensitivity to changes in the investment and capital stock estimates for the new
intangibles.
The alternative investment and capital stock estimates are based on three sets ofchanges:•changing the level of investment in all new intangibles by plus and minus 50 per
cent8

8 This alternative can be thought of in two ways: testing underestimation or overestimation of
intangible expenditure and therefore investment or, in the case of reducing investment by 50 per
cent, halving the proportion of expenditure on intangibles that is assumed to be investment (aslisted in table 3.1).
174

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

•

reducing the investment estimates for specific new intangibles (financial R&D,
architectural/engineering designs and purchased organisational capital) based onalternative data sources and assumptions9 to create ‘lower bound estimates’ for
new intangibles•

doubling the depreciation rate for all new intangibles (which changes the capitalstock but not the level of investment).

The effect of these alternative investment estimates for new intangibles on total
intangible investment is shown in figure D.4. For each alternative set of estimates,
the ratio of total intangible to tangible investment rises — average growth in total
intangible investment is higher than growth in tangible investment over the fullperiod examined. Lowering the estimates for new intangible investment raises thegrowth rate in total intangible investment because of the relatively high growth rateof investment in national accounts intangibles (the other component of total
intangibles).
Figure D.4

Real investment, alternative estimates for new intangibles,
market sector, 1974-75 to 2005-06
2005-06 dollars, chain volume measures$b
140

Av. annual
growth (%)

4.5

120
100
80

5.7

60

6.0

40

6.3
6.7

20
0
1974-75

1979-80

1984-85

1989-90

1994-95

1999-00

2004-05

tangiblesaintangibles (base case and double depreciation for new intang bles)
intangibles (+50% investment in new intangibles)
intangibles (lower bound investment estimates for selected new intangibles)
intangibles (-50% investment in new intangibles)

a The investment level is obviously unaffected by the depreciation rate, which affects the capital stock.
Data sources: Based on ABS national accounts data and authors’ estimates.

9 The specific adjustments are detailed below in the sub-section ‘Lower bound testing for selected
new intangibles’.
SENSITIVITY TESTING

175

Alternative estimates for investment in the new intangibles will obviously affect theratio of total investment (including all intangibles) to output (shown in figure 3.2).
However, for each of these alternative estimates the downward trend in the ratio ofnational accounts investment to output is moderated to some extent by the inclusionof investment in new intangibles.
The alternative estimates for new intangibles investment also change thecomposition of investment in total intangibles (figure D.5). Increasing the new
intangibles investment by 50 per cent shifts the share of investment away from thenational accounts intangibles, particularly computerised information, towards the
new intangibles. The opposite is the case for decreasing the new intangibles
investment by 50 per cent. The uniform percentage change in investment across all
new intangibles means the relative contributions within total new intangibles areunchanged. The use of the ‘lower bound estimates’, which reduces other productdevelopment by the most, shifts the share of investment away from innovative
property towards economic competencies and computerised information.
Figure D.5

Shares of nominal total intangible investment, by asset type,alternative estimates for new intangibles, 2005-06
Per cent

100%
80%

Economiccompetencies

60%
40%

Innovative
property

20%

Computerised
information

0%base case anddouble depreciation+50% investment in
new intang bles

-50% investment in
new intangibles

lower boundestimates forselected new
intang bles

Computerised information

BERD

Mineral exploration

Artistic originals

Other product development

Brand equity

Firm-specific human capital

Organisational capital

Data source: Authors’ estimates.

Figure D.6 shows the effect on the total intangible capital stock of the alternative
investment estimates and depreciation rates for new intangibles. Double
depreciation has a similar effect on the capital stock to the 50 per cent decrease in
176

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

investment. There is little change in average growth rate in the capital stock over thefull period in each case. This is because in most cases there is a uniform percentagechange over time (in either investment or depreciation rate). The ‘lower bound’ setof estimates is the exception (where data for two of the new intangibles are replacedwith alternative data rather than adjusted by a given percentage), although inpractice the actual change is also fairly uniform. Growth in capital services varies
slightly more because of differences in rental prices across intangible (table D.4).
Figure D.6

Total intangibles capital stock, alternative estimates for new
intangibles, market sector, 1974-75 to 2005-06
2005-06 dollars, chain volume measure

300

$b

Av. annual
growth (%)

250

5.3

200

5.4

150

5.5

100

5.6

5.6

50
0
1974-75

1979-80

1984-85

1989-90

1994-95

1999-00

2004-05

Base case+50% investment in new intangibles-50% investment in new intangibles
Double depreciation for new intangibles
Lower bound investment for selected new intangibles

Data source: Authors’ estimates.

Figure D.7 shows the difference in the composition of the service flow from
intangible capital with the alternative estimates for the new intangibles. As with thechanges for investment composition, the increase in investment in new intangibles
shifts the composition towards the new intangibles and away from the national
accounts intangibles. The opposite is the case for the decrease in investment. The
lower bound estimates shift the service flow composition away from innovative
property in particular. Doubling the depreciation rate for the new intangibles hasvery little effect on the composition of capital services because the lower capitalstock is partially offset by increases in the rental prices.

SENSITIVITY TESTING

177

Figure D.7

Composition of total intangible capital services, alternative
estimates for new intangibles, 2005-06
Per cent

100%
80%

Economiccompetencies

60%
40%

Innovative
property

20%

Computerised
information

0%base case+50%
investment in
new intangibles

Computerised information
Artistic originals
Firm-specific human capital-50%
investment in
new intangibles

lower boundestimates forselected new
intangibles

BERD
Other product development
Organisational capital

doubledepreciation for
new intangibles

Mineral exploration
Brand equity

Data source: Authors’ estimates.

The results of all these sensitivity tests on the components of the growth accounting
are summarised in table D.4. The main results of the growth accounting are robust
to these sensitivity tests. The direction of the effect of capitalising all intangibles,
compared with capitalising only national accounts intangibles, is unchanged in eachcase — measured LP growth is increased, measured capital deepening is increased
and measured MFP growth is decreased. As expected, the magnitude of thesechanges is affected by the estimated size of the investment and capital stock for the
new intangibles. This is mainly because changes in the level of investment/capitalstock for the new intangibles relative to the level of other outputs/inputs affects theweighting together of growth rates in the new intangibles and the other
outputs/inputs.10 However, within the bounds for which the estimates are varied,
the magnitude of the changes in the rate of capital deepening and MFP growth is notlarge in percentage point terms (although a sizeable share of the small percentage
point differences between the base case results for capitalising only national
accounts intangibles and for capitalising all intangibles). The following sections
discuss the growth accounting results for each sensitivity test in more detail.
10 In most cases, the alternative investment/stock estimates for each new intangibles had little
effect on the growth rate for that intangible because the alternative estimates were based on
uniform percentage changes over time.
178

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

Table D.4

Comparison of investment and capital size sensitivity testing
results, all intangibles treated as capital
Per cent per year
1974-75–2005-06

1974-75–1984-85

1984-85–1994-95

1994-95–2005-06

Total intangible capital services growth
Original – nat. a/cs intangibles treated as capitala
Original – all intangibles treated as capitala
50 per cent increase in new intangiblesb
50 per cent decrease in new intangiblesc
Lower bound for selected new intangiblesd
Double depreciation for all new intangiblese

9.25
5.83
5.53
6.49
5.97
5.85

8.89
5.08
4.83
5.69
5.19
5.21

10.29
6.35
5.94
7.22
6.37
6.42

8.62
6.03
5.79
6.55
6.32
5.93

Total capital services growth
Original – nat. a/cs intangibles treated as capitala
Original – all intangibles treated as capitala
50 per cent increase in new intangiblesb
50 per cent decrease in new intangiblesc
Lower bound for selected new intangiblesd
Double depreciation for all new intangiblese

3.15
3.38
3.47
3.28
3.30
3.39

2.83
3.00
3.07
2.92
2.93
3.02

2.72
3.00
3.10
2.88
2.88
3.01

3.83
4.10
4.19
3.98
4.02
4.07

Combined inputs growth
Original – nat. a/cs intangibles treated as capitala
Original – all intangibles treated as capitala
50 per cent increase in new intangiblesb
50 per cent decrease in new intangiblesc
Lower bound for selected new intangiblesd
Double depreciation for all new intangiblese

1.67
1.84
1.91
1.76
1.78
1.84

0.93
1.07
1.13
1.00
1.03
1.08

1.94
2.09
2.16
2.02
2.03
2.10

2.09
2.31
2.41
2.21
2.25
2.30

MFP growth
Original – nat. a/cs intangibles treated as capitala
Original – all intangibles treated as capitala
50 per cent increase in new intangiblesb
50 per cent decrease in new intangiblesc
Lower bound for selected new intangiblesd
Double depreciation for all new intangiblese

1.26
1.20
1.18
1.23
1.24
1.20

1.30
1.25
1.23
1.28
1.28
1.24

1.02
1.00
0.99
1.00
1.02
0.99

1.45
1.35
1.30
1.39
1.39
1.36

Capital deepening
Original – nat. a/cs intangibles treated as capitala
Original – all intangibles treated as capitala
50 per cent increase in new intangiblesb
50 per cent decrease in new intangiblesc
Lower bound for selected new intangiblesd
Double depreciation for all new intangiblese

0.91
1.08
1.15
1.00
1.02
1.08

0.99
1.12
1.19
1.06
1.08
1.13

0.48
0.63
0.70
0.57
0.58
0.64

1.20
1.43
1.52
1.32
1.36
1.42

a These series are the main results as presented in chapter 5. b Increased investment in new intangibles by
50 per cent. c Decreased investment in new intangibles by 50 per cent. d These series have been adjustedwith lower capital stock and investment estimates for some of the new intangible assets.e Doubled all
depreciation rates for all new intangible assets except brand equity. The depreciation rate for brand equity(advertising and market research) has been increased to 0.9.
Source: Authors’ estimates.
SENSITIVITY TESTING

179

Lower bound testing for selected new intangibles

The specific variations for the lower bound estimates are:•for financial product development, the CHS-based estimate of 20 per cent ofintermediate usage of the Finance industry is replaced by financial services R&Dfrom the ABS survey of business expenditure on R&D•

for architectural and engineering designs, it is assumed that all relevant
expenditure is already capitalised as part of the associated tangible assets so no
additional investment is included•

for purchased organisational capital, the proportion of the business management
services industry that is included is reduced from 77 per cent (which was to
exclude public relations) to 50 per cent (which aims to also exclude some otherservices that may not be within the scope of the CHS variable). Investment isstill assumed to be 80 per cent of this reduced expenditure.

These changes all reduce the size of total new intangibles investment — the degree
to which investment is reduced varies by type of intangible and over time.
•

Total nominal investment in new intangibles is reduced by around a quarter (25per cent in 1974-75 up to 28 per cent in 2005-06).

•

Financial product development investment is reduced by an average of around
93 per cent (a range of 98 to 83 per cent between 1974-75 and 2005-06).

•

Architectural and engineering designs investment (as separately identified) is
reduced by 100 per cent in each year (to zero). The amount of expenditure
already capitalised by the ABS as part of associated tangible assets cannot be
separately identified.

•Purchased organisational capital is reduced by 35 per cent in each year (since it
is a fixed percentage adjustment made in each year).

Incorporating these lower bound estimates into the growth accounting affects the
MFP growth results by a small amount (table D.5). Compared with the original all
intangibles case, the rate of MFP growth falls from 1.36 per cent a year whenexcluding all intangible assets, to 1.24 per cent a year rather than 1.20 per cent(a 3 per cent difference).
The change in MFP growth is small for two reasons:•180

the intangible investment series that are changed contribute only a small
percentage of total investment and capital services growth

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY•the reduction in these assets changes the individual asset weightings in theaggregate capital services index, but not by enough to appreciably alter thecapital services growth rate.

Table D.5

Comparison of MFP and capital services growth rates using
lower bound intangible estimates
Per cent per year
1974-75– 2005-06

1974-75– 1984-85

1984-85– 1994-95

1994-95– 2005-06

All intangible assets (original)

1.20

1.25

1.00

1.35

All intangible assets (‘lower bound’)

1.24

1.28

1.02

1.39

No intangible assets

1.36

1.31

1.13

1.63

All intangible assets (original)

3.38

3.00

3.00

4.10

All intangible assets (‘lower bound’)

3.30

2.93

2.88

4.02

No intangible assets

2.81

2.62

2.31

3.44

MFP growth

Total capital services growth

Source: Authors’ estimates.

Adjusting investment sizes for all new intangibles

Increasing investment by 50 per cent for new intangibles resulted in only a 0.09
percentage point increase in capital services growth (for the all intangibles case)over the full period. This is a result of a higher weighting of intangibles, which grewfaster than tangible assets, in the aggregate capital services index. Decreasing
investment in intangibles by the same amount had the reverse effect.
Table D.6 shows that increasing new intangibles investment by 50 per centincreases capital deepening attributable to new intangibles as a percentage of all
capital deepening from 22 per cent to 29 per cent. Capital deepening attributable toall intangibles also increases, from 37 per cent to 43 per cent. When new intangibles
investment is decreased by 50 per cent, capital deepening attributable to new
intangibles falls to 12 per cent and total capital deepening attributable to all
intangibles falls to 29 per cent.

SENSITIVITY TESTING

181

Table D.6

Contributions to capital deepening, all intangibles treated ascapital, 1974-75 to 2005-06
Per cent per year (Percentage share of total capital deepening)

All intangibles
National accounts intangibles
New intangibles
Tangibles
Total capital deepening

Originala

50 per cent increasein new intangiblesb

50 per cent decreasein new intangiblesc

0.41
(37)
0.17
(15)
0.24
(22)
0.69
(63)
1.08
(100)

0.51
(43)
0.16
(14)
0.35
(29)
0.67
(57)
1.16
(100)

0.29
(29)
0.17
(17)
0.12
(12)
0.71
(70)
1.00
(100)

a These series are the main results as contained in chapter 5. b Increased investment in new intangibles by
50 per cent. c Decreased investment in new intangibles by 50 per cent.
Source: Authors’ estimates.

When intangibles investment was increased by 50 per cent, MFP growth decreased
by 0.02 of a percentage point, or 2 per cent (an average of 1.20 per cent a year,
down from 1.23 per cent for the all intangibles case over the full period).
Decreasing intangibles investment increased MFP growth by a similar margin(table D.4).
The results from the higher and lower investment tests are as expected. A 50 per
cent increase in the level of new intangibles investment increases the capital
deepening effect and decreases the MFP growth effect (compared with the results inchapter 5). The reverse is true for a 50 per cent decrease.11
Increased depreciation rates

The results show that the growth accounting results are very robust to doubling
depreciation rates for the new intangibles. This is because smaller capital stocks12due to faster depreciation in the perpetual inventory method are counterbalanced byrental price increases. This is consistent with the findings of MHW (2007) —doubling the depreciation rates for intangibles had little impact on their growthaccounting results.

11 However, this ignores the issue of potential complementarities between intangibles and othercapital and labour inputs.
12 For 2005-06, the estimated real net capital stock of intangibles is $189 billion for the base caseand $131 billion when the depreciation rates for new intangibles are doubled (figure D.6).
182

INTANGIBLE ASSETSAND AUSTRALIA'SPRODUCTIVITY

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