The Economic Importance of Intangible Assets

Patrizio Bianchi

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9780815397687
• eBook ISBN: 9781351146982
• Topic: Business
• Subtopic: Business General
• Index: Business

This book is the result of a two-year interdisciplinary research programme named PRISM (Policy making, Reporting and measuring, Intangibles, Skills development and Management), financed by the European Commission and aimed both at understanding better how these assets are created and developed and what the policy implications of their growing importance in economies are. The book focuses on the policy issues raised by the increasing importance of intangible assets in a country's growth and competitiveness. The main idea is that the value of intangible assets, which is imperfectly captured by current economic indicators and imperfectly formalized in economic theory, lies in their being the cumulative elements that keep the economy together - the glue of the system. This argument leads to the focus on networks and social capital as drivers of the development of intangible assets and is illustrated by the case of EU innovation and knowledge diffusion policy.

Chapter 1
The Intangible Economy: Overview of PRISM Research Findings

Clark Eustace

The PRISM initiative started in January 2000 with the establishment of a High Level Expert Group (HLEG) on the intangible economy. In so doing, the European Commission's express intention was to go beyond the borders of conventional academic research and conduct a market-centric programme of enquiry to identify the key issues for the business community and frame them.

Our first report, published in October 2000, presented new evidence on the influence of business intangibles on corporate performance and productivity, together with an assessment of the implications for companies, financial markets, public institutions and regulators.

Following on from this, a wide-reaching research programme was launched with the aim of expanding the initiative and bringing together the diverse interest groups in the business, academic and policy communities working in the area. The research agenda was also designed as a response to some of the economic and measurement issues thrown into sharp relief by the ambitious Lisbon and Barcelona accords.

By mixing macro and micro studies, academics and practitioners, the PRISM group has created a unique learning machine that helped integrate some of the previously fragmented interest groups and expand the collective academic and business mindsets engaged on the subject. Its leitmotif is to stretch and extend the boundaries of our understanding of the intangibles phenomenon, and the instruments for dealing with the issues, rather than simply to reduce the issues to what we can comprehend and measure now.

This book represents the culmination of a two-year programme of research, case study and often spirited debate aimed at gaining a deeper understanding of the socio-economic issues resulting from the influence of intangibles in the modern economy. Its focus was guided by an Advisory Council, whose views were actively courted and ascertained via a series of interdisciplinary, business-led forums and Delphi sessions. We are indebted to the senior executives and officials of the organisations listed at Appendix I, who contributed so freely and openly to the research and dissemination process.

In order to provide a context for the economic and policy chapters that follow, the opening chapter sets out a synthesis of some of the key research findings. It begins with a market-centric view of some of the transformations that are taking place in the economy today and the implications for measurement theory and practice at the macro, meso and micro levels. It is structured in line with two of PRISM's main research themes: The emerging new theory of the firm and measurement implications.

The research presented in chapters 2 to 7 is based on a collation of studies commissioned by the Economics Faculty at the University of Ferrara under the auspices of PRISM. The Ferrara work lays out a very useful analysis of the policy implications of the intangible economy and a strategy for dealing with them. In an attempt to provide a more comprehensive policy perspective, chapter 8 presents the results of Ferrara's research on the implications for corporate accounting, while the special issues for the credit analysis in the provision of debt and venture capital finance are tackled in the final chapter.

The overriding policy message pointed out by the editors of the book is that intangible assets have taken increasing importance in today's economies, and this makes the shift in policy from direct and specific intervention to 'providing the conditions for' even more essential. Providing the conditions essentially means creating the linkages between economic actors, hence favouring networks (especially concerning policy towards innovation and knowledge diffusion). What the Ferrara research suggests is that in order for the policy favouring networks to be more effective, a better understanding of how networks function is needed, and we suggest that one step forward might be made by considering the social capital¹ that allows a network to function.

1. The Emerging New Theory of the Firm

How Does the Modern Knowledge Economy Differ from What We Had Before?

Despite a huge research effort on both sides of the Atlantic, there is no a priori theory or all-embracing model that even begins to explain the workings of today's services-dominated intangible economy. However, what is becoming clear to many of us is that:

• talk of a 'new economy' was more intuitive than rational, fuelled in no small part by a paucity of hard empirical data, to the uncertainties created by the unparalleled growth in the use and versatility of ICT and the speed at which this has taken place;
• rather, a gradual shift has been taking place for many years within our economy, within the drivers of growth and productivity;
• what may have seemed like a sudden and dramatic intervention by computers and micro-chips was, probably, more like the result of a long, cumulative and path-dependent development of knowledge and technology, spanning many years. Such developments took place outside the scope and capabilities of the System of National Accounts (SNA) and therefore we missed it;
• while there are many incremental changes, with influence that is more-or-less pervasive, the central, unexplained paradox lies in the issue of sustained economic growth without inflation. A possible explanation, at any rate in the US, is that this may be the outcome of long-term, sustained investment in ICT and other business intangibles;
• a number of transformations are at work in the modern economy. While there are many incremental changes, with influence that is more or less pervasive, the central, unexplained paradox lies in the issue of sustained economic growth without inflation. A possible explanation, at any rate in the US, is that this may be the outcome of long-term, sustained investment in ICT and other business intangibles;
• on balance, the evidence points to the conclusion that the advanced economies have witnessed a significant, but largely undetected, shift in the mode of wealth creation. The principal source of economic value is no longer the production of material goods alone, but lies in the creation, acquisition and exploitation of business intangibles (typically identified with R&D and proprietary know-how, intellectual property, workforce skills, digitally-enabled supply networks, software and brands);
• the rise of intangibles challenges the existing policy/regulatory conventions and has exposed the weakness of governing today's knowledge-based economy with tools of the industrial era;
• measuring intangibles is not a specialist niche: it is central to a holistic understanding of wealth creation;
• the policy community has relied on the new economy paradigm to light the way for new policy orientation and levers. This has collapsed. As a result, the policy community is confused: there is a vacuum of ideas.

As pointed out by Bianchi and Labory in chapter 2, the implications of the phenomenal rise in importance of intangible assets in the economy have to be analysed within the context of the deep changes arising in the economy in recent decades. Not only has there been a growth in the volume of international trade and finance, but firms have been changing products more frequently and have changed their organisations, location and cultures. The penetration of information and communications technologies (ICT) has also accelerated, inducing many commentators to view these technologies as the origin of all the observed changes.²

The overwhelming weight of evidence would suggest that the productive economy has undergone a significant, but largely undetected, shift in the mode of wealth creation. Economic growth today is influenced less by investments in physical capital (land, machinery, stocks of goods) than by knowledge, which is now a critical factor in the productive application and exploitation of physical capital. Consequently, competitive success today requires a critical capacity to develop, manage, measure and control the flow of knowledge and intangibles.

The overwhelming weight of evidence would suggest that the productive economy has undergone a significant, but largely undetected, shift in the mode of wealth creation. Economic growth today is influenced less by investments in physical capital (land, machinery, stocks of goods) than by knowledge, which is now a critical factor in the productive application and exploitation of physical capital. Consequently, competitive success today requires a critical capacity to develop, manage, measure and control the flow of knowledge and intangibles.

With the benefit of hindsight it is increasingly clear that while the global economies are undoubtedly experiencing as rapid an era of change as at any time in history, the economic fundamentals remain in place. In particular, the classic dichotomy between market incumbents and innovative upstarts (and the changing tension between them) is still the main driver of market power in open competitive markets.

Macro Level: Transformations at Work in the Modern Economy

While the fundamentals of business economic theory appear to have withstood the hubris of the 'new' economy challenge, as outlined here and developed in the later chapters of this book we are still left with a number of unexplained factors, some apparently new. Whereas there are many incremental changes, and their influence is more-or-less pervasive, the central, unexplained paradox lies in the issue of sustained economic growth without inflation. A possible explanation, at any rate in the US, is that this may be the outcome of long-term, sustained investment in ICT and other business intangibles. However, it is also clear that a number of transformations are at work in the economy:

Firstly, we are in economies of surplus, in the sense that consumers' basic needs are essentially satisfied. Faced with increasing global competition and struggling to get to grips with the exhaustion of the old mass production model, Europe's industrial and service companies are being forced to respond to demands for mass-customisation³ by consumers whose basic needs are now commoditised. As a result:

• the modern economy is characterised by mature markets for goods and services;
• as markets have become increasingly mature ('commoditised'), so firms are having to compete harder for monopoly profits or comparative advantage;
• this forces firms to intensify their search for new strategic assets to eliminate effective competition as well as unique factors of differentiation and market leverage. This is apparent not only in the so-called 'new economy' sectors, but in mature industries struggling to keep their business models evolving at least at the pace of the market;
• therefore, they are trying to create, maintain or invade monopolies, whether or not founded on intangibles;
• corporate strategy, as a result, is increasingly focused on 'non-price' factors of competition. Hence the critical importance of quality reputation and branding, and 'lock-on' strategies aimed at creating or stretching the market window (monopoly rent). Typical responses include raising switching costs through the deployment of proprietary 'platform' technologies and the creative use of intellectual property rights.

Secondly, the digital revolution in information and communications technology (ICT) has induced profound changes in the economics of production. T...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Contributors
• Preface
• 1. The Intangible Economy: Overview of PRISM Research Findings
• 2. The Political Economy of Intangible Assets
• 3. EU Policies for Innovation and Knowledge Diffusion
• 4. Clustering of Intangibles
• 5. Why is Social Capital a 'Capital'? Public Goods, Co-operative Efforts and the Accumulation of Intangible Assets
• 6. Public Intervention to Increase Collaboration between Innovative Agents
• 7. Dynamic Networks in Innovation-Intensive Industries
• 8. Intangibles and Intellectual Capital: An Overview of the Reporting Issues and Some Measurement Models
• 9. Towards a More Effective Investment Analysis of Intangibles Sensitive Companies
• Index