Innovation, Knowledge Spending and Productivity Growth in the

UK

Jonathan Haskel and Annarosa Pesole Imperial College Business School, Imperial College London

j.haskel@ic.ac.uk

Project funded by the European Commission under the Seventh Framework Programme

Grant No 217512www.coinvest.org

Broad questions

Better understanding of the “new” or “knowledge” economy: data, facts, policy

Popular discussion:“Old economy”: tangible capital

traditional machines, production lines etc

“New Economy”: intangible captialSoftware, hardware, ICTMove to knowledge-intensive activitiesRise of the service sector

Innovation as a key economic driver

Sources of growth with intangibles

/ : ln ln ln ln

: ln

TAN

TANL K

Growth a c V s L s K TFP

Innovation index II TFP

/ : ln ln ln ln ln

: ln ln

TAN INTAN

INTAN

INTAN TAN INTAN INTANL K K

INTAN INTAN

K

Growth a c V s L s K s K TFP

Innovation index II s K TFP

Excluding intangibles:

Including intangibles:

Innovation = contribution to growth of freely available knowledge plus the contribution of knowledge/intangible capital

Lessons: a. productivity growth changes

b. TFPG changes

c. “innovation” changes

Types of intangibles, details

A. Computerised information

Method and data sources

Computerised information

Computer softwarePurchased: via surveys. Own account: labour force data on software professionals. Source: National Accounts

Computerised databases Included

B. Scientific and creative propertyInnovative property

Scientific R&DCurrent expenditure on R&D from BERD. R&D in computer industry subtracted

Mineral explorationMainly R&D in mining and spending on mineral exploration. National Accounts

Copyright and license costsSpending on creation of originals e.g. TV, movies, books. National Accounts

Other product development, design and research

New product development costs in the financial industry

Occupation-based estimates

New architectural and engineering designs

Sales of architecture and design industry SIC 742, ABI data. Own account using labour costs data.

R&D in social science and humanitiesNo broad statistical information. Estimated as twice industry revenues of social science and humanities R&D industry

C. Economic competenciesBrand equity

Advertising expenditureTotal spending on advertising as reported by Advertising Association, less expenditure on classified ads

Market researchTwice revenues of the market and consumer research industry as reported in ABI.

Firm-specific human capital

NESS05, survey of employer provided training. Includes: A) Direct firm expenses (in-house trainers, outside trainers, tuition reimbursement, and outside training funds) B) Wage and salary costs of employee time in training.

Organizational structure

PurchasedData on revenues of managment consulting industry from Management Consulting Assocation.

Own accountNo broad statistical information. Estimated as 20% of value of executive time using ASHE data on wages in executive occupations, excluding software occupations.

0 .05 .1 .15 .2 .25share of investment

Training

Software

Organisational capital

Mkt research & Adv

Min&Cop

AED & FinProd

R&D

20082000

20082000

20082000

20082000

20082000

20082000

20082000

(% of total)Intangible investment

Intangible and tangible investment (£bn)Year 1990 1995 2000 2008

All tangibles 67 62 87

Intangible categorySoftware 6 10 16 22

R&D 8 9 12 16

Design 13 13 15 23

Minerals & Copyrights 3 3 2 4

Branding 5 7 12 15

Training 14 17 24 30

Organisational 9 12 17 31

All intangibles 57 70 98 141

Trends in intangible spend

Tot

Sof

R&D

InnProp

EC

.05

.1.1

5

1980 1990 2000 2010year

ecomp+innov+soft ecomp+innovecomp+innov-R&D ecomp

Intangible investment (% of MGVA)

Computers tangible contribution halved wrt prev estimates due to revision on hardware capital stock

Takeaways:

1. LPG changes, particularly in 1990s

2. TFPG reduced

Lab Prod Growth

Contrib. of Lab. Quality

Contrib. of Computers per hour

Contrib. of Other Tang K, per hour

Contrib. of Intang K per hour

TFP Growth

1 2 3 4 5 6 7

DlnV/H sDln(L/H)sDln(K/L) cmp

sDln(K/L) othtan

sDln(K/L) intan DlnTFP

Memo: sLAB

Without intan1990-95 2.88% 0.20% 0.20% 0.86% 1.63% 0.661995-00 3.35% 0.29% 0.45% 0.33% 2.28% 0.642000-08 2.34% 0.19% 0.24% 0.56% 1.35% 0.66

With intang1990-95 2.92% 0.17% 0.17% 0.74% 0.68% 1.15% 0.571995-00 3.60% 0.25% 0.38% 0.26% 0.67% 2.03% 0.552000-08 2.31% 0.16% 0.20% 0.42% 0.48% 1.04% 0.57

More intangible categories1 2 3 4 5 6 7 8 9

DlnV/H sDln(L/H)sDln(K/L) cmp

sDln(K/L) othtan

sDln(K/L) software

sDln(K/L) innov prop (less R&D)

sDln(K/L) R&D

sDln(K/L) econ comp DlnTFP

1990-95 2.92% 0.17% 0.17% 0.74% 0.18% 0.10% 0.06% 0.34% 1.15%1995-00 3.60% 0.25% 0.38% 0.26% 0.23% -0.02% 0.04% 0.42% 2.03%2000-08 2.31% 0.16% 0.20% 0.42% 0.10% 0.09% 0.04% 0.26% 1.04%

Detail on intangible categories…software, design, training, organisation important

5 6 7 8 9 10 11 12

sDln(K/L) software

sDln(K/L) min & cop

sDln(K/L) design

sDln(K/L) r&d

sDln(K/L) adv & mr

sDln(K/L) training

sDln(K/L) org DlnTFP

1990-95 0.18% 0.02% 0.08% 0.06% 0.07% 0.13% 0.15% 1.15%1995-00 0.23% 0.00% -0.02% 0.04% 0.13% 0.16% 0.13% 2.03%2000-08 0.10% 0.00% 0.08% 0.05% 0.02% 0.08% 0.15% 1.04%

Results: %s of ALPG (1)Without intangibles, %, 90-95, 95-00 & 00-08

6.9%

6.9%

29.9%

56.6%

100.0%

8.7%

13.4%

9.9%

68.1%

100.0%

8.1%

10.3%

23.9%

57.7%

100.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

sDln(L/H) sDln(K/L)cmp

sDln(K/L)othtan

DlnTFP DlnV/H sDln(L/H) sDln(K/L)cmp

sDln(K/L)othtan

DlnTFP DlnV/H sDln(L/H) sDln(K/L)cmp

sDln(K/L)othtan

DlnTFP DlnV/H

Results: %s of ALPG (2)With intangibles, %, 90-95, 95-00 & 00-08

5.8%5.8%

25.3%

23.3%

39.4%

100.0%

6.9%

10.6%

7.2%

18.6%

56.4%

100.0%

6.9%

8.7%

18.2%

20.8%

45.0%

100.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

sDln(L/H) sDln(K/L)cmp

sDln(K/L)othtan

sDln(K/L)intan

DlnTFP DlnV/H sDln(L/H) sDln(K/L)cmp

sDln(K/L)othtan

sDln(K/L)intan

DlnTFP DlnV/H sDln(L/H) sDln(K/L)cmp

sDln(K/L)othtan

sDln(K/L)intan

DlnTFP DlnV/H

Robustness: it’s not all just software…..

1 2 3 4 5 6

DlnV/H sDln(L/H)sDln(K/L) cmp

sDln(K/L) othtan

sDln(K/L) intan DlnTFP

With intang

1990-95 2.92% 0.17% 0.17% 0.74% 0.68% 1.15%

1995-00 3.60% 0.25% 0.38% 0.26% 0.67% 2.03%

2000-08 2.31% 0.16% 0.20% 0.42% 0.48% 1.04%

only software

1990-95 2.97% 0.20% 0.19% 0.86% 0.20% 1.52%

1995-00 3.44% 0.28% 0.43% 0.33% 0.27% 2.12%

2000-08 2.37% 0.18% 0.24% 0.54% 0.12% 1.30%

software and rd

1990-95 2.93% 0.19% 0.19% 0.84% 0.27% 1.44%

1995-00 3.45% 0.28% 0.43% 0.32% 0.30% 2.12%

2000-08 2.34% 0.18% 0.23% 0.52% 0.15% 1.26%

2) Including i) just software ii) just software and R&D

Robustness: depreciation not key…

1 2 3 4 5 6

DlnV/H sDln(L/H)sDln(K/L) cmp

sDln(K/L) othtan

sDln(K/L) intan DlnTFP

With intang

1990-95 2.92% 0.17% 0.17% 0.74% 0.68% 1.15%

1995-00 3.60% 0.25% 0.38% 0.26% 0.67% 2.03%

2000-08 2.31% 0.16% 0.20% 0.42% 0.48% 1.04%

halve dep rates

1990-95 2.92% 0.17% 0.17% 0.78% 0.83% 0.97%

1995-00 3.60% 0.25% 0.38% 0.26% 0.69% 2.02%

2000-08 2.31% 0.16% 0.20% 0.41% 0.62% 0.92%

double dep rates

1990-95 2.91% 0.17% 0.17% 0.72% 0.56% 1.29%

1995-00 3.60% 0.25% 0.38% 0.27% 0.71% 1.98%

2000-08 2.31% 0.16% 0.21% 0.44% 0.38% 1.12%

3) Altering Depreciation rates