Intangible Capital and Labor Productivity Growth: Panel Evidence for the EU from 1998–2005

Using new international comparable data on intangible capital investment by business within a panel analysis between 1998 and 2005 in an EU country sample, a positive and significant relationship between intangible capital investment and labor productivity growth is detected. This relationship proves to be robust to a range of alterations. The empirical analysis confirms previous findings that the inclusion of business intangible capital investment in the asset boundary of the national accounting framework increases the rate of change of output per hour worked more rapidly. In addition, intangible capital is able to explain a significant portion of the unexplained international variance in labor productivity growth, and becomes a dominant source of growth.     

INTANGIBLE INVESTMENT IN JAPAN: MEASUREMENT AND CONTRIBUTION TO ECONOMIC GROWTH

Following the approach of Corrado, Hulten, and Sichel (2005, 2006 ), we measure intangible investment and examine the contribution of intangible capital to economic growth in Japan. We find that the ratio of intangible investment to GDP in Japan has risen during the past 20 years and now stands at 11.1 percent, which is lower than the ratio estimated for the U.S. in the early 2000s. The ratio of intangible to tangible investment in Japan is also lower than equivalent values estimated for the U.S. In addition, we find that, in stark contrast to the U.S., where intangible capital grew rapidly in the late 1990s, the growth rate of intangible capital in Japan declined from the late 1980s to the early 2000s. Our conclusions regarding intangible investment in Japan remain largely unchanged even if, using data with respect to firm-specific resources, we take on-the-job training into account.     

Replacing the U.S. income tax with a progressive consumption tax: A sequenced general equilibrium approach

This paper examines the welfare consequences of changing the current U.S. income tax system to a progressive consumption tax. We compute a sequence of single period equilibria in which savings decisions depend on the expected future return to capital. In the presence of existing income taxes, the U.S. economy is assumed to lie on a balanced growth path. With the change to a consumption tax, individuals save more and initially consume less. As the capital stock grows, consumption eventually overtakes that of the original path, and the economy approaches the new balanced growth path with higher consumption and a greater capital stock. Both the transition and the balanced growth paths enter our welfare evaluations. We find the discounted present value of the stream of net gains is approximately $650 billion in 1973 dollars, just over 1 percent of the discounted present value of national income. Larger gains occur if further reform of capital income taxation accompanies the change. We examine the sensitivity of the results, both to the design of the consumption tax and to the values of elasticity and other parameters. The paper also contains estimates of the time required to adjust from one growth path to the other.     

THE TREATMENT OF INTANGIBLE RESOURCES AS CAPITAL

The author describes the results of his current research designed to measure total investment, tangible and intangible, and the derived capital stocks for the U.S., 1929–1966. With respect to total investment, the estimates show a marked increase in its ratio to GNP. All of the increase occurs in the intangible component comprising R & D, education and training, health, and mobility. The increase was concentrated in the government sector, although households increased the proportion of disposable personal income devoted to total investment.
Consistent with the relative investment trends, the stock of intangible capital grew considerably faster than the tangible stock. The growth of total capital stocks was somewhat less than that of GNP, however, in both current and constant prices. Thus, the rate of return on total capital rose somewhat over the period. Average rates of return on human and nonhuman capital were closely similar.
In real terms, the growth of total capital stocks accounted for two-thirds of the growth in real GNP, 1929–1966. One-third of the growth is attributed to residual forces, chiefly economies of scale, changes in inherent quality of human and natural resources, changes in values and motivations, and changes in rates of utilization of capacity.
The growth of the ratio of real intangible stocks to real tangible stocks accounted for less than half of the increase in total factor productivity 1929–1966. This is significantly less than the contribution of intangibles as estimated by Denison, and the author adduces several reasons why his estimates may understate the contribution. Nevertheless, it seems that the net effect of the residual forces enumerated above must also have made a substantial contribution to the growth of tangible factor productivity and real GNP over the 37-year period.     

Intangible capital in a real business cycle model

Recent empirical studies have shown that intangible capital plays an important role in explaining productivity gains that have occurred during the last two decades. By introducing intangible capital in an otherwise standard theoretical real business cycle model, this paper aims to provide a theoretical foundation of the empirical findings. Our results indicate that investment in intangible capital is pro-cyclical. Both transitory as well as permanent productivity shocks increase investment in intangible capital. However, in case of a permanent technology shock we learn that firms allocate more labor and physical capital to the creation of intangible capital which increases future profits at the cost of current profit. We also find that investment in intangible capital plays an important role in producing endogenous movements in productivity.     

Explaining Japan's Unproductive Two Decades

Using industry‐ and micro‐level data, this paper examines why Japan's productivity growth has been slow for such a long time and how it can be accelerated in the future. Japan's capital–gross domestic product ratio continued to increase after 1991, and this increase in the capital–gross domestic product ratio must have contributed to the decline in the rate of return on capital in Japan by decreasing the marginal productivity of capital. On the other hand, Japan's accumulation of information and communication technology capital and intangible investment was very slow. Compared with large firms, which enjoyed an acceleration in the total factor productivity growth in recent years, Japanese small‐ and medium‐sized enterprises were left behind in information and communication technology capital and intangible investment, and their productivity growth has been very low. Furthermore, as large firms expanded their supply chains globally and relocated their factories abroad, research and development spillovers from large firms to small‐ and medium‐sized enterprises seem to have declined.     

Japanʼs intangible capital and valuation of corporations in a neoclassical framework

This paper estimates the economic value in the 1980s and 1990s of corporate assets in Japan, including both tangible and intangible assets, based on the neoclassical framework of McGrattan and Prescott (2005). Our estimates use a new micro-data set that comprises the accounting statements of all listed, non-financial companies in Japan. We find that in 1980–1986, a period that immediately preceded Japan?s so-called “bubble economy”, our assessed value of corporate productive assets, net of the value of corporate debt, is approximately equal to the actual stock market value of Japanese corporate equity. The finding differs from previous results based on studies of aggregate data sets or based on studies of micro-data sets that neglected intangible capital. We also show that the Japanese ratio of the amount of intangible capital stock to the amount of tangible capital stock is comparable to the analogous ratios for the U.S. and U.K.     

Trade-mediated biotechnology transfer and its effective absorption: an application to the U.S. forestry sector

In this paper, we analyze the consequences of biotechnology innovations in the United States forest sector (logging) by modeling technology transfer embodied in trade flows and its absorption. A seven-region, seven-traded-commodity version of a dynamic computable general equilibrium model is used to achieve this task. A 0.63% Hicks-neutral biotechnological progress in the source region (U.S.) has differential impacts on the productivity of the log-using sectors in the domestic as well as in the recipient regions. Since recipient regions' ability to utilize biotechnology innovations depends on their absorptive capacity (AC) and structural similarity (SS), we construct the AC and SS indices based on multiplicity of factors such as human capital endowments, skill content and social appropriateness of the new innovations. The model results show that biotechnological innovations in the U.S. forest sector result in a significant increase in timber production. Following the productivity improvements and its embodied spillover, wood products and pulp and paper sectors in the U.S. register higher productivity growth. The role of AC and SS in capturing technical change is shown to be evident. In the face of growing regulations on timber production from public forests, increasing productivity through biotechnology may be the most effective way to meet the consumer demand for forest products.     

中美日三国经济增长质量比较:基于技术进步的角度

本文通过构造一个包含资本质量的柯布-道格拉斯形式的总量生产函数,对中美日三国1980—2007年的经济增长质量进行了详细的分析。分析结果表明,在整个考察期内,不同要素对于不同国家的经济发展所发挥的作用是不同的。但是,从总体上来看,全要素生产率的发展在三个国家的经济发展过程中均占据了非常重要的地位。同时,体现在资本质量上的技术进步对于不同国家则有不同的影响。尤其是对于日本经济而言,资本质量对日本经济发展发挥了关键性的作用,日本经济的资本质量状况长期阻碍了日本经济的发展,这一点能够为日本经济自20世纪90年代以来的长期低迷提供一种可能的解释。为了进一步分析三国的技术进步与经济增长之间的关系,本文同时又将整个考察期划分为三个子时期,并对三个子时期内不同要素对各个国家的经济发展贡献程度进行了考察,分析结果进一步确认了前面的结论。     

Intangible Investment and Changing Sources of Growth in Korea

We examine how intangible investments change the sources of growth in the Korean economy. After constructing a novel industry‐level data set on intangibles, we estimate the contribution of intangible‐intensive industries and other industries to aggregate productivity growth in 1981–2008. The contribution of intangible‐intensive industries to aggregate labour productivity growth has significantly increased, whereas that of other industries has substantially decreased. The increased contribution of intangible‐intensive industries is mainly associated with total factor productivity growth rather than with input growth. This suggests that innovations related to intangible investments in these industries might become a new key source of productivity growth in Korea.     

The effects of U.S. shocks on Canadian total factor productivity growth: The case of the electrical products industry

This paper examines the influence on domestic total factor productivity of foreign income and price variations. The underlying model is a temporary equilibrium model of a pricediscriminating monopolist, who faces two markets with different demand elasticities, a fixed capital stock and economies of scale. A reduced form decomposition of total factor productivity growth is derived. The model is estimated on the data of the Canadian electrical products industry from 1962 to 1981. The results indicate that foreign variables played only a minor role in the growth of total factor productivity but were partly responsible for its post 1973 recorded slowdown. The U.S. industry price rise retarded considerably the Canadian total factor productivity growth in the electrical products industry.     

HUMAN CAPITAL FORMATION AND CONTINUOUS TRAINING: EVIDENCE FOR EU COUNTRIES

This paper links data on continuous training from the EU Labour Force Survey (LFS) to information on skill levels and earnings from the EU KLEMS growth and productivity accounts, to examine the relative magnitudes of continuous workforce training versus human capital formation through the general education system in the European Union. The measurement methodology draws from the literature on measuring intangible investments by firms and sources of growth in an accounting framework. The results suggest that in the EU15 group of countries, intangible investments in continuous training represent just under 2 percent of GDP or about 35 percent of expenditure on general education. The share of GDP accounted for by training is less than a third as large in the new member states. A growth accounting method is employed to show that failure to account for continuous training leads to an underestimate of the impact of human capital on output growth in the EU.     

ESTIMATES OF INTANGIBLE INVESTMENT BY INDUSTRY AND PRODUCTIVITY GROWTH IN JAPAN

In estimating intangible investment in Japan at the industry level, we find a high intangible investment/gross value added ratio in the information technology (IT) sector and negative growth rates in intangible capital in 13 industries over the decade from 2000. When we examine the impacts of intangible investment on total factor productivity growth, we find a significant and positive effect on total factor productivity growth in the market economy. In a revised estimation that considers intertemporal knowledge spillovers, the estimated rate of return on intangibles in the IT sector is quite high after the IT revolution. The results imply that intangible assets have been underinvested in the IT sector.     

ICT and Growth: The Role of Rates of Return and Capital Prices

We revisit the widely discussed contribution of investment in ICT to economic growth, focusing on differences in productivity and quality of ICT across countries and time. In a growth accounting approach, we look at the way rates of return and rates of asset price decline measure these aspects. Conducting a sensitivity analysis with data from the EU KLEMS database for the years 1990–2007, we introduce a constant rate of return and a constant rate of ICT price decline. Both alternative measurements somewhat downplay the role investment played relative to growth in multifactor productivity in the U.K. and the U.S. during 1995–2000. Moreover, we show that more than half of the ICT contribution to labor productivity growth results from changes in capital quality and composition rather than from quantity.     

Are ICT Spillovers Driving the New Economy?

Some observers have raised the possibility that production spillovers and network effects associated with information and communications technology (ICT) are an important part of the "New Economy." Across U.S. manufacturing industries, however, ICT capital appears correlated with the acceleration of average labor productivity (ALP) growth as predicted by a standard production model, but not with total factor productivity (TFP) growth as these New Economy forces imply. Once one allows for productivity differences across industries, measured TFP growth is uncorrelated with all capital inputs, including ICT capital. This provides little evidence for a New Economy story of ICT-related spillovers or network effects driving TFP growth throughout U.S. manufacturing.     

WHAT HAPPENED TO THE KNOWLEDGE ECONOMY? ICT,INTANGIBLE INVESTMENT,AND BRITAIN'S PRODUCTIVITY RECORD REVISITED

Despite the apparent importance of the "knowledge economy," U.K. macroeconomic performance appears unaffected: investment rates are flat, and productivity has slowed. We investigate whether measurement issues might account for this puzzle. The standard National Accounts treatment of most spending on "knowledge" or "intangible" assets is as intermediate consumption. Thus they do not count as either GDP or investment. We ask how treating such spending as investment affects some key macro variables, namely, market sector gross value added (MGVA), business investment, capital and labor shares, growth in labor and total factor productivity (TFP), and capital deepening. We find: (a) MGVA was understated by about 6 percent in 1970 and 13 percent in 2004; (b) instead of the business investment/MGVA ratio falling since 1970 it has been rising; (c) instead of the labor share being flat since 1970 it has been falling; (d) growth in labor productivity and capital deepening has been understated and growth in TFP overstated; and (e) TFP growth has not slowed since 1990 but has been accelerating.     

Technology–Policy Interaction in Frictional Labour-Markets

Does capital-embodied technological change play an important role in shaping labour-market outcomes? To address this question, we develop a model with vintage capital and search-matching frictions where irreversible investment in new vintages of capital creates heterogeneity in productivity among firms, matched as well as vacant. We demonstrate that capital-embodied technological change reduces labour demand and raises equilibrium unemployment and unemployment durations. In addition, the presence of labour-market regulations (unemployment benefits, payroll taxes, and firing costs) exacerbates these effects. Thus, the model is qualitatively consistent with some key features of the European labour-market experience relative to that of the U.S.: it features a sharper rise in unemployment and a sharper fall in the vacancy rate and the labour share. A calibrated version of our model suggests that this technology–policy interaction could explain a sizeable fraction of the observed differences between the U.S. and Europe.     

CAN INVESTMENT IN INTANGIBLES EXPLAIN THE SWEDISH PRODUCTIVITY BOOM IN THE 1990s?

In the early 1990s the Swedish economy experienced a severe economic and financial crisis which resulted in a substantial GDP decrease. Even though the crisis was not a complete surprise for many economists, almost no one expected that the Swedish economy would be prospering with booming productivity growth only a few years later. Economists have presented three explanations for the fast recovery and productivity growth in 1995–2006: market reforms, crisis recovery, and the impact of ICT. This paper offers an alternative view, emphasizing instead firms' substantial investment in intangible assets such as R&D, design, and advertising. Based on the growth accounting framework, intangible capital accounted for more than 30 percent of the labor productivity growth in the Swedish business sector from 1995 to 2006. Thus, Swedish TFP growth, one of the highest among OECD countries, is reduced substantially when investment in intangibles is included in the growth accounting analysis.     

Income Polarization of the U.S. Working Class: An Institutionalist View

We provide an institutional insight into the trend of income polarization within the U.S. working class. In contrast to the previous industrial waves, the current and ongoing industrial revolution is characterized by the replacement of “creative destruction” with jobless growth. Instead of replacing the lost jobs with new ones, new disruptive technologies eliminate more jobs in traditional labor and capital-intensive sectors than create jobs in new idea-intensive sectors. By examining the relationship between the income share of the bottom 50 percent, the middle 40 percent, and the top 10 percent and technological progress, we obtain robust econometric results. According to our results, the income polarization among U.S. workers can be associated with the shift of R&D activities from the public to the corporate sector. The concentration of innovations by corporate capital limits the power of society to reduce inequality and to provide greater social stability through “the incredible productivity” of technological progress.     

U.S. immigration regulations and India's information technology industry

The export-led growth of India's information technology (IT) industry has been nothing short of phenomenal over the past half-dozen years. Other studies have provided a number of explanations for the growth. This paper proposes that a significant factor has been overlooked or understated in prior explanations. Specifically, the Indian IT industry has utilized U.S. immigration regulations for competitive advantage to accelerate its growth. The importance of this factor is estimated through quantitative data analysis at the macro and firm levels. The analysis helps to explain why India's IT industry grew while that of other developing countries, with similar human capital resources and wage rates, did not. The U.S. Congress is currently debating U.S. immigration policies and may change them in the near future. Any changes will have significant effects on the future growth pattern of the Indian IT industry. Many developing countries have recognized India's success, and policymakers in those countries are implementing strategies to replicate it. The results from this study may help those policymakers better understand a key factor of India's success in exporting IT.