R&D as a Value Creating Asset

R&D as a Value Creating Asset Emma Edworthy Gavin Wallis

Methodological Overview: Linking Tables • UK Business R&D linking Tables: MINUS PLUS PLUS BERD Capital expenditure on land and buildings and plant and machinery Acquisition of R&D to be used as input in R&D production Capital Services

Methodological overview: Freely available R&D • Canberra II group made the following recommendation: ‘In principle, freely available R&D should not be included as Capital formation, but in practice it may not be possible to exclude it. The assumption is that including freely available R&D would not lead to significant error’. • On the basis that it is too difficult to separate it out, the UK are going to include all freely disseminated R&D.

Methodological overview: Double Counting • Computer software: software development outside the computer industry is likely to be picked up in the BERD and own account software numbers • GFCF • 1. Estimates from surveys collecting data on GFCF (CAPEX, ABI) will include some intellectual property • 2. Not all expenditure by companies in the R&D industry will result in intellectual property. They will also invest in furniture and fittings etc.

Current Price GFCF

Current Price GFCF • We use three different methods for calculating the capital service flows from other asset classes: • Method 1: Consumption of Fixed capital (COFC) plus an assumed return • Method 2: Capital services estimated using rentals • Method 3: Capital services estimated using capital services growth rates

Current Price GFCF • Method one is a proxy estimate of Capital services • In methods two and three the capital service flow from the asset used in R&D is measured directly. • Capital services growth rate is a much more common output of statistical offices than estimated rental rates. • UK currently publishes capital services growth rates annually, but not rentals. • Methods two and three are preferred on theoretical grounds, as they directly measure capital services flows. Which is best?

Constant Price GFCF Data sources used:

Constant Price GFCF

Depreciation rate In calculating an R&D stock, we use the Perpetual Inventory model. • We made the following assumption about the net capital stock in the initial year, assuming a steady state.

Depreciation rate We estimated a depreciation rate for the whole economy using econometric methods. • Looked at the impact past R&D had on productivity (GVA at market prices) • We estimated the following:

Depreciation rate Our preliminary results were run for the period 1998-2003:

Depreciation Rate: • Suggest a life length mean of 5 years • Depreciation is calculated as follows: Where R is the declining balance rate (equal to 2) and T is the life length mean (5) • Implies a depreciation rate of 40% • We recognise that this is a very crude method. It is just an early investigation in to a possible approach. • The approach taken could provide sensible estimates of depreciation following more development

Results: Current price Business GFCF • The results from the three methods are quite similar

Results: Business R&D Capital stock

Preliminary Productivity Analysis: Firm Level Where: y: value added n: labour : tangible capital a: impact of external knowledge on the firm’s productivity : R&D e: error term D: Service industry dummy

Preliminary Productivity Analysis: *** significant at 1% level ** significant at 5% level * Significant at 10% level

Preliminary Productivity Analysis: • Our analysis considers the link between the level of value added and the level of R&D • By estimating the Cobb Douglas production function we obtained a coefficient on R&D that represents the elasticity of R&D with respect to TFP i.e. the % change in productivity for a % change in R&D • The estimates of R&D elasticity is 0.08. This implies that a 10% increase in BERD is associated with a productivity increase of 0.8%. • Average difference between the impact of services and manufacturing on productivity. Services firms are on average more productive.

Preliminary Productivity Analysis: • Interacting services and the R&D capital stock suggested that an increase in R&D capital stock leads to a bigger increase in productivity for Services than manufacturing. • Sector breakdown: An increase in the R&D capital stock in services and primary industries leads to a larger increase in productivity than manufacturing. • Whereas construction and energy have a negative impact compared to manufacturing.

Preliminary Productivity Analysis: • The addition of dummies for patented industries and foreign ownership showed that patented firms and UK firms add more to productivity. • R&D coefficient on R&D capital stock still remains significant after the addition of the patent dummy. • UK owned, manufacturing firms in the patent industry add most to productivity. • However, interacting the patent and foreign owned dummies with the R&D capital stock showed that there was no additional affect from being a UK firm or in a patent industry. • UK owned firms and US firms have an additional effect from an increase in the R&D capital stock on productivity over and above the rest of the world.

R&D as a Value Creating Asset