BEA BRIEFING Toward Better Measurement of Innovation and Intangibles

WHILE all countries account for investment in tangible assets in their gross domestic product (GDP) statistics, no country currently includes a com­ prehensive estimate of business investment in intan­ gible assets in their official accounts. Most economists agree, however, that intangible assets—which repre­ sent an important input into the innovative process—are critical components of the modern economy. In the United States, some have suggested that invest­ ment in intangible assets now roughly equals invest­ ment in tangible assets. Understanding the role of intangible assets—and thus the role of innovative activity in general—is criti­ cal to understanding the modern economy. This article updates the ongoing efforts at the Bureau of Economic Analysis (BEA) to better measure investment in vari­ ous intangible assets. BEA has a history of continuously improving its GDP statistics to account for major shifts in the econ­ omy (chart 1). Indeed, some intangible investments are already included in the GDP accounts. Expendi­ tures on software, for example, have been treated as in­ vestment in the core accounts since 1999. And in 2006, BEA launched a research and development (R&D) sat­ ellite account, to explore investment in R&D and its larger economic effects. BEA is currently exploring the feasibility of creating satellite accounts that would report investment in a va­ riety of other intangible assets. Although there are thorny conceptual issues to consider, the binding con­ straint on progress remains measurement, which is ex­ tremely difficult because of the paucity of source data and lack of firm evidence supporting the assumptions required for measurement. A satellite account refers to a set of accounts that al­ lows for experimental measurement in a framework consistent with GDP but separate from the official ac­ counts. Satellite accounts typically allow for a more de­ tailed look at specific parts of the economy, measures based on new methodologies and source data, and new estimation approaches. The R&D satellite account, for example, provided a means of exploring the impact of capitalizing R&D spending on GDP growth and a framework through which various methodological and conceptual issues can be worked out. As of now, BEA’s main efforts to measure innovative activity have focused on its R&D account, which was produced in partnership with the National Science Foundation (NSF). The most recent version of the R&D account, released in 2007, provides statistics for 1959–2004 on R&D investment and the impact of treating R&D as investment on GDP statistics and other aggregates. The account was also expanded to in­ clude detail about the effects on BEA’s industry, re­ gional, and international accounts. In the satellite account where R&D is properly treated as investment, investments in R&D contribute approximately 0.2 per­ centage point to the 3.3 percent growth rate of GDP in 1995–2004.1 Although budget reductions prevented the provi­ sion of updated statistics in 2008, BEA has continued the necessary research to incorporate R&D investment into core GDP accounts in 2013.2 Methodological is­ sues still remain. Estimates of real investment in R&D require the use of a deflator, and there is not yet a con­ sensus on how to construct this deflator. BEA is con­ ducting research and hopes to work with the Bureau of Labor Statistics (BLS) on this issue in the future; BEA is also exploring improved measures of depreciation for the R&D stock. In addition to R&D, investment in artistic origi­ nals—mainly motion picture and sound record­ ings—is scheduled to be incorporated into the GDP accounts in 2013. Currently, there are no plans to include investment in any other types of intangible assets in the core accounts. However, BEA will continue to work with the NSF in its efforts to expand the NSF survey beyond technological innovation and R&D and to explore the potential impact on macroeconomic aggregates of treating these other asset classes as investment. Beyond