Indeed, there has been a strong trend in the composition of investment by firms, moving away from physical capital, such as buildings and machinery, towards what is called intangible capital, such as research and development, software, databases and branding. Measuring investment in intangible assets is challenging. So, although national accounts methodologies are continually improving, existing approaches might be missing part of firms’ investment. That would result in an over-estimation of the observed return on capital and, in turn, the wedge. [21] This issue can be partly addressed using newly-available data covering a broader range of intangible assets that are currently not included in the national accounts. These data can be used to construct more comprehensive measures of net investment rates and the wedge between the return on capital and risk-free rates. Adjusting for intangibles, by re-running the regressions on a measure of the wedge constructed using the new data, reduces the size of the missing-investment puzzle as shown in Chart 8. It  Page 13  shows the deviation of the observed investment rate from the rate predicted by its estimated historical relationship with the wedge: what I have identified as the puzzle. The chart compares this deviation when the historical relationship is estimated using two alternative data sources. The orange line shows the case when unadjusted data are used and the blue line shows the case when the relationship is estimated using data adjusted for intangibles. When the adjusted data are used, the gap is smaller throughout the period and almost disappears in recent years.

Chart 8: Accounting for intangibles reduces the missing-investment puzzle  Note: The orange line shows the investment puzzle using industry-level data, and the shaded area around it is the 95% confidence intervals. The line shows the estimated year fixed effects from an industry-level regression of investment rates on the wedge, including industry fixed effects, and standard errors clustered at the industry level. See Appendix B to Bailey et al. (2022) for full details. The blue line shows the same statistic from the regressions in which both investment rates and the wedge are adjusted to include intangibles. See Appendix A.2 to Bailey et al. (2022) for a discussion of the adjustment. Source: ONS, KLEMS, Jordà et al. (2017) Macrohistory Database and authors' calculations. The remaining puzzle is mostly concentrated immediately after the global financial crisis, and so it is possible this is not driven by structural factors, but rather the lingering impact of the global financial crisis, for example related to the sluggish demand recovery or financial frictions. [22] While the results suggest an important role for intangibles in explaining the missing-investment puzzle, a few notes of caution are in order. It could be that certain drivers of investment, such as financial frictions, are captured more accurately only at more granular level, such as in firm-level data. Moreover, there could be large non-linearities related to the nature of the global financial crisis that cannot be captured by the simple regression framework used above.