Can Investment in Intangibles Explain the Swedish Productivity Boom in the 1990s?

After a severe crisis in the early 1990s, the Swedish economy experienced a boom in productivity growth. Economists have presented three explanations for the fast productivity growth in 1995–2004: market reforms, crisis recovery and the impact of information and communication technology (ICT). This paper offers an alternative view, emphasizing instead firms’ substantial investment in intangible assets such as R&D, design, and advertising. These investments are not classified as investment in the National Accounts, however, in which only tangible assets are defined as investment. This paper provides estimates of investment in intangible assets and uses the growth accounting framework to analyze the Swedish productivity boom. The results show that investment in intangibles was approximately 246 billion SEK in 2004 or 9 percent of GDP. Moreover, intangible capital accounted for almost 35 percent of labor productivity growth in the Swedish business sector in 1995–2004. Thus, the Swedish TFP growth that was one of the highest among OECD-countries was reduced substantially when investment in intangibles was included in the growth accounting analysis 1995–2004. In the period 1995–2000, TFP growth was only 0.4 percentage points—almost all labor productivity growth could be explained by factor inputs, while in 2000–2004 TFP growth was considerably larger. Financial support has been provided by the COINVEST project, www.coinvest.org.uk, funded by the European Commission Seventh Framework Programme, Theme 9, Socio-economic Science and Humanities, grant number 217512. * I am grateful for useful comments and suggestions from Jonathan Haskel, Henrik Jordahl, Annarosa Pesole and participants at the COINVEST seminar in Mannheim, OECD-workshop in Paris and seminars at the Research Institute of Industrial Economics in Stockholm. Financial support from the European Commission is also gratefully acknowledged. † Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden, Phone: +468-6654520, Fax: +46-8-6654599.