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  1. Hannu Piekkola / InnodriveCOINVEST conferenceIntangible capital: can they explain the unexplainedFIRST ROUND OF RESULTS (TO BE REVISED)Istituto Superior TecnicoLisbon – March 18-19, 2010 This presentation is part of the INNODRIVE project financed by the EU 7th Framework Programme, No. 214576 ENDS FEBRUARY 2011

  2. www.innodrive.org

  3. 17.9.2014 3

  4. Value Producing Intangible Capital • The appropriate production function? • Organisation capital: Hellerstein, Neumark and Troske (1999) Augmenting Labor Productivity • Model the firm’s output as a function of organization capital instrument, physical capital K, organization capital-adjusted labor L, RND (representing other intangible assets) and material M • Return on the share of OC workers, used as an instrument • R&D and ICT assets: perpetual inventory method • Results • Share of intangiblesfromsales in six EU countries • Growthaccounting • Decomposition: withing, entry, exit • Intangibles and globalisation • Intangibles explaining market value over book value of the firms listed in stock exchange (Finland) University of Vaasa | Department of Economics| INNODRIVE

  5. Valuation of Organization Capital: therelative productivity of organization workers(Hellerstein and Neumark) 17.9.2014 University of Vaasa | Department of Economics| INNODRIVE 5

  6. Organization Capital: estimation equation 17.9.2014 University of Vaasa | Department of Economics| INNODRIVE 6

  7. R&D and ICT assets • RND (research and development) and ICT (information and communicationtechnology) evalutatedfromemployeecompensations in respectiveoccupations • Depreciationdis 0.2 in RND and 0.33 in ICT 17.9.2014 University of Vaasa | Department of Economics| INNODRIVE 7

  8. Innodrive LEED data Finland, Norway, Germany, Czech Rep., Slovenia, UK • Finland (UNIVAASA) 1995-2008 • 2300 firms 2.1 million obs (Sample of firms with average sales above 2 million €) • Half employed in manufacturing • Norway (NORSTAT) 1999-2006 • 6,202 firms and 21,816 firm-year observations for the period 2003–2006 • UK (NIESR) 1997-2005 • Annual Business Inquiry (ABI) micro data 1997-2005 census for firms with over 250 employees, for firms under this threshold participation is based on a stratified sample of the Inter-departmental Business Register. • Matched at the 3-digit industry level Labour Force Survey data on shares of workers with five skill categories University of Vaasa | Department of Economics| INNODRIVE

  9. Innodrive LEED data Finland, Norway, Germany, Czech Rep., Slovenia, UK • Germany (DIW) 1999-2003 • Social Security Dataset (SSD) about 35 million workers over three years and a true panel for the period 1999–2001 • CzechRepublic (CERGE–EI) 2000-2007 • National employer survey: 2,000 firms and over 1 million workers annually • AMADEUS database • Slovenia (IER) 1994-2004 • 1) balance sheet data for Slovenian firms, 2) income tax statements at the individual level and 3) the Statistical Register of Employment (SRDAP) • up to 500,000 workers in 26,000 firms across 11 years University of Vaasa | Department of Economics| INNODRIVE

  10. Figure 1. Occupational shares LEED data • Oganisation worker share (management, marketing) varies between 13% and 18% • R&D workers represent a rather notable share at around 7%, low 5% in Germany University of Vaasa | Department of Economics| INNODRIVE

  11. Figure 2. Share of Organisation Workers • The share of organisational workers has not increased over time, except in Slovenia and Germany University of Vaasa | Department of Economics| INNODRIVE

  12. OC worker productivity = Organization Worker Share c1 / Log employment b1 Finland Norway 17.9.2014 University of Vaasa | Department of Economics| INNODRIVE 12

  13. MICRO and MACRO Intangibles heterogeneous • MACRO: new intangibles (excl. software, database) 2-7% of GDP, EU27 average 4.8% , micro estimates likely higher • MACRO: • 1995-2000 - the most dynamic countries are the Eastern European Economies; • 2000-2005 - all the Old European economies but Austria recorded a decrease of the GDP share of intangibles • Economic competencies account for the largest share of intangibles, from 45 % to 75% of all intangibles • Organization capital in MICRO (incl. other categories as advertising in MACRO) account for the biggest share of economic competencies

  14. Intangibles per Sales Finland and Norway FINLAND NORWAY • R&D assetsexceed OC capital, slightincrease in OC capital per sales in Finland

  15. Intangibles per Sales Germany and UK UK GERMANY • Little organisation capital butlarge effect on productivity growth? • OC capital increased sharply over time • OC capital exceeds R&D asset

  16. Intangibles per Sales Slovenia SLOVENIA • Little organisation capital? • R&D asset per salesdecreasedsharply

  17. Growth Accounting • MACRO: The relative contribution of capital deepening and TFP to labour productivity growth changed considerably after the inclusion of all intangibles, with the rate of capital deepening increasing and the growth of TFP decreasing. • MICRO and MACRO hypothesis: intangibles have not grown at the same pace in 2000s as before

  18. Growth Accounting • On average labour productivity has grown 2.9% but large variation between the countries. Labour productivity has exhibited strong growth in Czech Republic and Germany, while productivity growth has been small in Finland (due to 2007 ) or even negative in Slovenia. • Intangibles have had relatively little effect on productivity growth except for organisation capital in Germany and R&D capital in Norway.

  19. Decomposition • Total reallocation (sum of between, entry and exit effects) account for most of the growth induced by R&D. Here the between and exit effects have stimulated R&D asset growth. Exit effects are positive also in organisation capital and ICT asset growth.

  20. Stock prices, Residual Income and Unaccounted Organization Capital MV=market value, FE =analysts’ forecast, r= discount rate, BV=book value, IC=intangible capital, (12)

  21. Intangible Capital and Market Value in Finland Market Value less Book Value Data 90 firms listed in Helsinki Stock Exchange 1998-2008 (12) University of Vaasa | Department of Economics| INNODRIVE Kick-off meeting

  22. Equity Valuation

  23. Average intangiblesand book value in service and non-durable consumer goodsproductionin Finland 1998-2006Intangibles on average70% of BV in large firms189% of BV in SMEs 17.9.2014 23

  24. Conclusions • Valuation using instruments • Intangible capital share of Sales: 24% (FIN), 19% (NOR) 13% (GER), 28% (UK) • Organization capital from 2% of sales (GER) to 16% (UK) • MACRO and MICRO: economic competencies incl. organisational capital account for a notable share of economic competencies • Growth in intangibles • Contributed little to labour productivity growth in 2000s except • Organization capital in Germany • R&D assets in Norway • Total reallocation (esp between and exit effects) account for most of the growth induced by intangibles

  25. Intangible capital and growth • Intangible capital substitutes tangibles as an engine for growth • Globalized firms have more of it • Promotes use of R&D and ICT personnel assets • Especially in services • Intangibles and equity valuation • Explains unaccounted part of earnings flow • Potential for use in market valuation: firm-level, industry-level

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