What is knowledge-based capital (KBC)?

What is knowledge-based capital (KBC) ? Computerised information Innovative property Economic competencies 1 What is knowledge-based capital (KBC...
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What is knowledge-based capital (KBC) ? Computerised information

Innovative property

Economic competencies

1

What is knowledge-based capital (KBC) ? Computerised information Software and databases

Innovative property

Economic competencies

2

What is knowledge-based capital (KBC) ? Computerised information

Innovative property Copyrights, patents, trademarks, designs

Economic competencies

TM 3

What is knowledge-based capital (KBC) ? (brand equity, firm-specific human capital, business networks, organisational know-how that increases enterprise efficiency, etc.) information Computerised

Innovative property

Economic competencies

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Investment in KBC is growing in importance Business investment in KBC and tangible assets in the United States (% GDP, 1972-2011) 18%

Investment in KBC

Investment (% of adjusted GDP)

16%

14%

12%

10%

Investment in tangibles 8%

6%

4% 1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

5

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

KBC investment as a percentage of value added

...and growing in importance elsewhere too.. Australia, France, Japan: Investment in KBC as a percentage of GDP (1981-2010)

16%

14%

12%

10%

8%

6%

4%

2%

0%

Australia France Japan

KBC accounts for near to or over half of all business investment in several countries Business investment in KBC and tangible assets (% adjusted GDP, 2010) 35% 30% 25%

20% 15% 10% 5% 0%

Tangible capital

Computerised information

Innovative Property

Economic Competencies

Source: OECD calculations based on INTAN-Invest, Eurostat and multiple national sources.

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And the value of many companies is largely KBC

At the start of 2009, physical assets accounted for only about 5% of Google’s worth.

Nestle’s value (2011) = CHF 186 bn ********* KBC = 87% Tangible assets = 13%

Microsoft: physical assets about 4% of total assets (2006).

KBC positively associated with GDP per capita (2000-10) KBC Investment (% of value added)

14%

Sweden United Kingdom

United States

Japan* Denmark France Belgium Netherlands Finland

12%

10%

Germany Austria Australia

8% Italy Spain

Ireland

25000 30000 35000 GDP per capita (PPP$)

40000

Portugal 6%

4% Greece 2% 10000

15000

20000

45000

50000

Source: Source: OECD National Accounts Main Aggregates, INTAN-Invest, Eurostat and multiple national sources. 9

And KBC has spillover effects (selected OECD countries, 1995-2007) MFP growth (% change)

MFP growth (% change)

3.0

3.0

SVN

SVN FIN

2.5

FIN

2.5

IRL

IRL

2.0

2.0

1.5

CZE AUT

1.0 0.5

1.0 0.5

FRA

0.0

ITA

-1.0 0.1

0.2

0.3

0.4

0.5

0.6

USA DEU

FRA

0.7

0.8

KBC deepening contribution

0.9

DNK ITA

-0.5

Correlation coefficient: 0.46*

ESP

GBR

NLD

0.0

DNK

-0.5

BEL

USA

1.0

CZE

SWE

AUT

GBR

NLD BEL

DEU

1.5

SWE

ESP

Correlation coefficient: 0.21

-1.0 0.1

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

Tangible capital deepening contribution

Source: Corrado et al (2012) 10

2.1

Many products becoming more knowledgeintensive

Chevrolet Volt has 10,000,000 lines of code.

Automotive manufacturers view leadership in control software as vital

Selected Policy Implications • Update framework conditions: – They must suit a world of knowledge-capital.



Innovation: – Adopt an enlarged concept of innovation – beyond the view in which R&D is preeminent.

• Entrepreneurship and business development: – Countries that invest more in KBC are more effective in reallocating resources to innovative firms.

Selected Policy Implications • Update framework conditions: – They must suit a world of knowledge-capital.



Innovation: – Adopt an enlarged concept of innovation – beyond the view in which R&D is preeminent.



Data, new business processes and design also drive innovation may be affected by specific barriers and Entrepreneurship andand business development: policies. – Countries that invest more in KBC are more effective in reallocating resources to innovative firms. A renewed emphasis on programmes such as technical extension services that aid the diffusion of KBC to firms ? Redesign of some long-standing innovation programmes - a move from STEM to STEAM (in innovation vouchers, know-how funds and technical extension services).

-Make it easy for firms to implement new ideas and experiment with growth opportunities.

Selected Policy Implications

-Need well-functioning systems of debt and early-stage equity finance.

-Investment in KBC positively correlated with debtor-friendly bankruptcy codes.

• Update framework conditions: -Countries with more stringent regulations in product and labour markets invest in KBC. – tend Theyto must suit less a world of knowledge-capital.



-Reductions in tariffs on intermediate inputs are associated with significant productivity growth in downstream manufacturing sectors.

Innovation:

-Lowering restrictions on FDI from the relatively high levels of Poland to – those Adoptof anGermany enlarged concept of innovation – beyond the view inby which R&D2%. is precould increase aggregate productivity around eminent.

-Policy stability – keeping uncertainty to a minimum – is also important.

• Entrepreneurship and business development: – Countries that invest more in KBC are more effective in reallocating resources to innovative firms. Patenting firms in the USA and Sweden can attract four times as much capital as firms in Italy and Spain.

-Make it easy for firms to implement new ideas and experiment with growth opportunities.

Selected Policy Implications

-Need well-functioning systems of debt and early-stage equity finance. -Investment in KBC positively correlated with debtor-friendly bankruptcy In US, financing estimated at USD 3.3 billion in 2007-08. codes. framework • royalty-based Update conditions: witha more stringent regulations in product and labour markets – -Countries They must suit world of knowledge-capital.

tend KBC to invest less in KBC. While still rare, is also used as loan collateral. -Reductions in tariffs on intermediate inputs are associated with • Innovation: significant productivity growth in downstream sectors. the Governments can facilitate such developments in variousmanufacturing ways, from monitoring

– -Lowering Adopt an enlarged concept of innovation – beyond the view inlevels whichofR&D is prerestrictions FDI from the relatively high Poland to broader array of securities laws on and regulations and how they affect KBC-based eminent. those of Germany couldmarket increasefor aggregate productivity around 2%. financing, to ensuring a robust intellectual propertybyand institutional arrangements that stability minimise as to ownership claims for -Policy – uncertainty keeping uncertainty to a minimum – isKBC also important.

• Entrepreneurship and business development:

– Countries that invest more in KBC are more effective in reallocating resources to innovative firms. Patenting firms in the USA and Sweden can attract four times as much capital as firms in Italy and Spain.

Selected Policy Implications • Intellectual Property Rights (IPR): An increasingly important framework condition. Aspects of IPR systems have not kept up with technological change.

• Tax policy: Overall tax relief for R&D by multi-national enterprises (MNEs) could be greater than governments foresaw when R&D tax incentives were designed.

• Competition Policy: Faces new challenges in industries founded on KBC, particularly in the digital economy, where: never before have leading firms grown so large so quickly, and the nature of competition may differ from other sectors.

Selected Policy Implications • Intellectual Property Rights (IPR): An increasingly important framework condition. Aspects of IPR systems have not kept up with technological change.

• Tax policy: Overall tax relief for R&D by multi-national enterprises (MNEs) could be greater than governments foresaw when R&D tax incentives were designed.



-Potential annual revenue cost from income shifting by US-based MNEs may be as high Policy: as USD 60Faces billion, new with possibly half in of this due to Competition challenges industries aggressive pricing of KBC-related transactions. founded ontransfer KBC, particularly in the digital economy, where: never -Targethave R&Dleading tax credits pure so domestic firms that don’t havenature crossbefore firmsongrown large so quickly, and the tax planning opportunities. ofborder competition may differ from other sectors. -Need to recognise risk that international competition to increase tax support for R&D could increase revenues foregone without commensurate increases in innovation.

Selected Policy Implications • Corporate Reporting: Benefits could be had from better corporate disclosure of investments in KBC.

• Measurement: Governments should do more to properly measure investments in KBC and agree common measurement guidelines. • Creating economic value from data: Governments could do more in the fields of privacy protection, open data access, ICT infrastructure and skills.

Selected Policy Implications • Corporate Reporting: Benefits could be had from better corporate disclosure of investments in KBC.

• Measurement: Governments should do more to properly measure -Some evidence that industries more dependent on external finance investments in KBC and agree common measurement guidelines. grow faster in countries with higher-quality corporate disclosure. •

-In sectors more reliant on external finance, R&D expenditure as a share of value added in countries with Creating economic value also fromgrows data:faster Governments could dohighermore disclosure. in thequality fieldscorporate of privacy protection, open data access, ICT -Could improve internal risk management and decision making and infrastructure and skills. increase overall stakeholders.

transparency

for

shareholders

and

other

Selected Policy Implications • Corporate Reporting: Benefits could be had from better corporate disclosure of investments in KBC.

• Measurement: Governments should do more to properly measure investments in KBC and agree common measurement guidelines. Many challenges: • Creating economic value from data: Governments could do more

in the fields of privacy protection, open data access, ICT

-Firm-specific training and design – not included in official statistics. infrastructure andinvolves skills. assumptions that need refinement (e.g. the share o -Organisational capital management time used to effect lasting changes in a firm’s productivity). -Obtaining consistent industry-level depreciation rates for R&D investments. -Assessing how KBC relates to productivity also requires more information on asset prices, so as to accurately capture the quantity of the assets purchased.

Selected Policy Implications Lisbon Agenda’s 3% of GDP guideline for national R&D

• Corporate Reporting: Benefits could be had from better corporate spending – these should include the wider innovation disclosure of investments in provided KBC. by KBC. indicators

• Measurement: Governments should do more to properly measure investments in KBC and agree common measurement guidelines. Many challenges: • Creating economic value from data: Governments could do more

in the fields of privacy protection, open data access, ICT

-Firm-specific training and design – not included in official statistics. infrastructure andinvolves skills. assumptions that need refinement (e.g. the share o -Organisational capital management time used to effect lasting changes in a firm’s productivity). -Obtaining consistent industry-level depreciation rates for R&D investments. -Assessing how KBC relates to productivity also requires more information on asset prices, so as to accurately capture the quantity of the assets purchased.

Selected Policy Implications • Corporate Reporting: Benefits could be had from better corporate disclosure of investments in KBC.

• Measurement: Governments should do more to properly measure investments in KBC and agree common measurement guidelines. • Creating economic value from data: Governments could do more in the fields of privacy protection, open data access, ICT infrastructure and skills.

Selected Policy Implications

-In the US, firms that base significant decisions on data analytics have levels of out productivity 5-6% higherBenefits than would be expected other investments • and Corporate Reporting: could be had given from their better corporate use of information technology. in KBC. disclosure of investments

-Global data creation is projected to grow by 40% a year, compared with 5% ye in worldwideGovernments IT expenditure.should do more to properly measure • growth Measurement:

investments in KBC and agree common measurement guidelines.

-Large public sector benefits.

• Creating economic value from data: Governments could do more in the fields of privacy protection, open data access, ICT infrastructure and skills.

Selected Policy Implications

• Education and training: – Growing business investment in KBC amplifies the importance of getting human capital policies right. – And the rise of KBC has profound implications for employment and for earnings inequality.

New Sources of Growth: Knowledgebased Capital

More information available at: www.oe.cd/kbc

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