Economics Catch Up on Ignored Value of Research and Knowledge, Trillions in Shadow Capital

Economic growth and the current GDP are actually higher than the usual statistics show, because intangibles such as knowledge and research are not accounted for!

Investing in intangibles such as knowledge, research, development, education, innovation and information technology is very important for driving smart growth, but it is quite difficult to quantify this soft capital and put nominal numbers on it. An EU-funded research project, 'Intangible capital and innovations: Drivers of growth and location in the EU' (INNODRIVE), now sought to investigate the capacity of intangible capital to generate growth at corporate and national levels. It defined intangibles to include innovative property, scientific and non-scientific research and development (R&D), licences or patents, software, spending on reputation (advertising), firm-specific training and organisational capital.

Among the most striking findings related to the impact of intangibles on the economy, the project team found that gross domestic product (GDP) in the EU was 5.5 % higher after including all intangible investments. With an offical GDP of 13 trillion euros ($16.57 trillion USD) according to Eurostat, the largest economy in the world is under-valued by a whopping 700 billion euros due to the unaccounted intangibles. Another effect of this is that labour productivity growth is underestimated by 10–20 %.

In addition, the project team developed new data on intangibles at the company level using expenditure and performance-based estimates of intangible capital. This has yielded a much clearer picture of intangible assets, narrowing the notable gap between market values and book values of assets. The project shows that company-level organisational capital produced by management and marketing usually exceeds company’s own R&D effort.

Noting that innovation is much more than R&D, the project emphasised how investment in intangibles such as a firm's competencies including organisational investment reflect a more accurate measure of innovation intensity. In this sense, a key message emerging from the project is that the diversity of intangible capital should be emphasised so that policies do not promote R&D investment alone.

For comparison, the project team looked at intangibles in specific EU countries including Belgium, Czech Republic, Germany, France, Hungary, Netherlands, Finland, Sweden and the United Kingdom. It also studied Portugal, Italy, Greece and Spain, whose investment policies notably rely more on tangible than on intangible investments. These countries have suffered more in relative terms from the transition of production to beyond Europe's borders, especially Asia. Acknowledging this phenomenon revealed insightful trends that could further enhance policymaking.