Correlation Between Intangible Investment & Productivity

By Shruti Indoria

“The four largest companies today by market value do not need any net tangible assets. We have become an asset-light economy.” – Warren Buffett

The global events of 2020 have not only changed the way people think but also the way life is perceived. This stands true in the corporate world as well; it has opened the doors to, what was previously not given much thought, intangible investment. Corporate success has been inextricably linked to less visible and intangible components of value such as reputation, brand, customer satisfaction, data inter alia. In other words, the world has changed and 2020 is the rebuttal to anyone who still disagrees with the fact that intangibles are the biggest asset for a company.

Intangible Investment and Types

Intangible investments are expenditures that companies incur on activities like R&D, brand, computerized information like softwares and databases to raise the future output.

Although internally developed intangibles created do not appear on the company’s balance sheet and have no recorded book value, they are assets nevertheless. They have the potential to generate future economic benefits for an organisation. In the bygone era, physical capital was used to a larger extent to produce things. However, in today’s knowledge economy, value is driven by information, ideas and relationships.

Intangibles are the lifeblood of a company. These are important for an innovative start-up. They provide a competitive edge to a company and are central to creating customer value.

Classification of intangibles

Intangibles can normally be classified into the following-

Digitized/Computerized Information- Also called IT capital, it majorly includes software and databases. It helps to improve the efficiency, consistency and quality of business activities.

Innovative Property – Earlier including only scientific R&D, now it also includes R&D in the non-scientific sector as well. This is particularly important with the continued growth of the service sector.

Economic Competencies – Defined as “the value of brand names and other knowledge embedded in a firm’s specific human and structural resources”, it includes advertising, brand, etc. It also includes firm specific resources such as investment in human capital (employer-provided training) and organizational structure (management).

Correlation between intangible investing and productivity

Researchers have suggested that economies having growing intangible investment are also experiencing growth in total factor productivity and therefore, long term economic growth. The statistics from INTAN-Invest database revealed that there is a direct link between investment in intangibles and gross value added (GVA) growth at the sector level. Sectors that invest most in intangibles achieve higher growth in GVA , reportedly, 28% higher than other sectors.

In fact, top growth companies within specific sectors have been known to invest more.in intangibles comparatively. Top players usually invest 2.6 times more in intangibles than the bottom players across sectors.

Additionally, companies that invest across all categories of intangibles are ahead in the journey of digitization. Those are less likely to be disrupted because they are highly innovative, thus capable enough to attract top talent and retain it.

A key element that is essential for countries to compete in high value added activities is the capability to produce and develop sophisticated products, which is closely linked with their endowment of intangibles.

Impact on Labor Productivity

Evidence has confirmed that intangible investing leads to an increase in the labour productivity and TFP (total-factor productivity) growth. With an increase in the number of intangibles to work with, output per hour of employees increases. The digitized information generates additional information and reorganization of production processes increases the underlying productivity.

Studies by Corrado et al. have indicated that the inclusion of intangible capital in a sources-of-growth analysis accounts for 20-33% of labour productivity growth in the market sectors of the US and EU economies.

Exploding Growth

Intangible investing has truly exploded over the past several decades, along with an increasingly digitized economy, according to a research report by Ponemon Institute.

In the year 2020, according to The Brand Finance Global Intangible Tracker study which ranks the top global companies by their total intangible value, the intangible value of the top 10 companies in the world surpassed USD 10 Trillion for the first time.

Source: Brand Finance.com

The Near Future

Given our increasingly digital post pandemic new normal, the share of intangibles can be expected to go higher regardless of the GDP.Tech-enabled digital platforms are expected to further outperform the broader market whether they operate in health care, retail, autos or beverage manufacturing.

Intangible investment has a huge potential on a firm’s productivity and overall economic growth. To fully drive growth, intangibles need to be properly deployed and implemented to create a competitive advantage. It is the deployment and implementation of intangibles that differentiates top growth companies from the bottom growth companies. It is mainly due to the ways the major players develop new capabilities that go on to deliver on growth.

Deploying intangibles is an essential target. As businesses invest in intangibles, they will need to analyse not only the successful areas today but also the areas and fields they need to prioritise for growth in future years.

Your Mindset Matters

Investment in tangibles is not the same as investment in intangibles. Intangible investment is often associated with more risk than investment in tangibles. For example, you can resell a property you purchased for your business, but an investment in software may not be recovered. Therefore, intangible investing requires a risk taking approach, an approach to test and learn.

But since the benefits arising are commendable, the risks taken are worth the benefit.

Emerging technological paradigm, based on information and communication technologies (ICTs), involves innovative and creative mechanisms of knowledge creation and diffusion, changes in firms’ organisation within and across countries and new skills development. Therefore, companies need to unravel the potential of the intangibles by not only investing in them but also executing and implementing them in the day-to-day business activities to maintain the correlation between intangible investment and productivity.

REFERENCES

Mary Ò Mahony (February 12, 2020) Intangible Capital, productivity and labor markets

https://www.bbvaopenmind.com/en/articles/intangible-capital-productivity-and-labor-markets/

Cecilia Jona-Lasinio, Valentina Meliciani (March 2018)

Productivity Growth and International Competitiveness: Does Intangible Capital Matter?

https://www.intereconomics.eu/contents/year/2018/number/2/article/productivity-growth-and-international-competitiveness-does-intangible-capital-matter.html

Will Kenton (May 29, 2020)

Intangible Asset

https://www.investopedia.com/terms/i/intangibleasset.asp

Irving Wladawsky Berger (January 2019)

Why intangible assets matter

https://medium.com/mit-initiative-on-the-digital-economy/why-intangible-assets-matter-1a6c53488d30