The role of tangibles and intangibles in explaining the productivity slowdown – an international perspective

This note is an evidence contribution to the UK Productivity Commission investigation on investment and productivity.

Summary and main observations

• Much of the blame for slowing growth in labour productivity has been put on the slowdown in total factor productivity growth – meaning less efficiency in how we are turning the factor inputs (capital and labour) into output. However, there is clear evidence that slower growth in the investment in capital has played an important role as well.
•  In analysing the role of investment and total factor productivity, it is important to make a distinction between tangible investment (machinery, equipment and structures) vis-à-vis intangible investment (including digitised information, innovative property and economic competencies).
• Across two EU sub-regions (Northwest and South), the UK and the US, we find that the share of tangible investment in value added in the market economy has fallen substantially since the Global Financial Crisis (GFC). In contrast, the value added share of intangible investment has slightly increased.
• For the UK, the value added share of those intangible assets already included in the national accounts (in particular software, databases and R&D) is relatively small, while the share of intangibles investment not (yet) included in the national accounts (e.g., financial product development, market research and branding and management competencies) is relatively large. In this respect, when only comparing the official national accounts-based measures, the share of investment in value added is somewhat understated for the UK in comparison to other countries.
• In all four regions/countries we find that the growth rates of capital services delivered by tangibles and intangibles assets have weakened since the GFC, though substantially more for tangibles than intangibles.
• The weakened growth rate of capital services from intangible assets has occurred despite the modest rise in the share of intangible assets in value added. This points at the possibility that intangible investments are not as effective as a driver of productivity as used to be the case before the GFC.
• For the UK, we observe a relatively sharp weakening in the growth rate of intangible capital services in Finance & Insurance, which accounts for a relatively large share in the value added of the economy. On the other hand, the growth of intangibles capital services from Trade, Transportation and Accommodation & Food Services accelerated since the GFC.
• Despite similar trends in the slowdown of capital services from tangible and intangible investment between regions/countries, the UK is an outlier in terms of a severe slowdown in the growth rate of labour productivity since the GFC. This has created the paradoxical situation that the role of intangibles in the UK has become bigger in the context of weaker productivity growth.
• The note identifies various channels that need to be further researched to explain why the “intangible-intensive” economy has lost much of its power to create productivity, including the malfunctioning of channels which typically create spillovers and complementarities.

Authors:  Bart van Ark (The University of Manchester), Klaas de Vries (The Conference Board), Abdul Erumban (University of Groningen)