How much do companies invest in innovation?

How much do firms spend on innovation in the UK?  People say that its R&D, but of course spending on knowledge is more than that: its also spending on software, training, design, branding and organisational change.   So what are the numbers?  Very happy to say that my work for NESTA with Peter Goodridge and Gavin Wallis is out today and featured in the BIS Annual Innovation report, 2014, Chapter 3 and in the Economist.

The bottom  line is this.
1. UK intangible investment has held up much more over the recession than tangible.
2. When R&D is capitalised, on the official data, intangible investment (in software, R&D, artistic originals) will be the largest category of business investment.
3. Including other intangibles, like training, design, branding and organisational change, intangibles are more than all tangible investment combined.

Here are some details.

Start with the official data.   The most recent data show that, although it has moved around a bit, aggregate nominal market sector investment (national accounts: tangible & including some intangible, see below) is currently at about the same level it was in 2005.  See below chart:

Nominal business investment, £bn, ONS data

Within the aggregate, ONS breaks it into investment in tangibles and intangibles.  The graph shows the pattern.  Plant is at the same level it was in 2003, and investment in vehicles is declining.  All the growth in the 2000s came from two sources: 1) Buidlings and the commercial property boom; and 2) Intangibles (note, here we refer the official measure of intangibles as recorded in the national accounts (software, artistic originals and mineral exploration).  

We can also include R&D, which will be capitalised in the National Accounts next year.  The chart therefore also shows that once R&D is capitalised, intangibles will be the largest component of UK market sector investment in the national accounts, higher than buildings.   Note too that UK intangible investment has held up remarkably well over the recession.

Note, these are the official measures of intangibles so do not include other assets such as staff training, design, organizational change, branding etc.. The series “Additional intangibles in the next chart includes these other assets.

So, what's the lesson?  UK investment in intangibles has held up, relative to tangibles, remarkably well over the recession.  And its big, and getting bigger.  The knowledge economy is not going away.

 Note all this data is nominal (i.e. in current prices)

The sources are a working paper released by Imperial, here: https://spiral.imperial.ac.uk/bitstream/10044/1/12846/2/Haskel%202014-01.pdf

Funded by NESTA, here: http://www.nesta.org.uk/publications/uk-investment-intangible-assets

The ONS new treatment of Investment (wonkish)

Hats off to the ONS, who had a special session to the public on Wednesday on their new investment data (which the Bank of England have publicly cast aspersions on).  Here's my take.



First, off real investment is revised down, GFCF on the left, whcih includes dwellings and business invsetment on the right, which has not fallen so much.

Underlying this is a big chance in the distribution of nominal investment in the underlying assets, with a big rise in intangibles.


what's causing this?

1. software has been taken out of machinery and equipment.   Software is bundled with hardware and so this is hard, but if it's done right, then machinery/equip is now just hardware plus non-hardware machinery/equip.
2. there's a new method for calcualating artistic orginals, done by Peter Goodridge at Imperial.

Putting this together, gives a remarkable nominal investment picture:

Ignoring the jump in 1995 for intangibles, which is a data issue, we see that intangibles are now close to plant investment and closing on buildings.  Note that when R&D is captialised, in the summer, that will add about £15bn to intangibles which will push intangibles up to close to the highest item.

But what about real? Here there is a problem.  When software is taken out of plant its nominal share falls.  An overall investmetn price index is a nominal share weighted index of the underlying asset prices.  When software was in plant, it was then as if software prices were falling since plant prices are falling a lot.  But when software is taken out, then ONS have to give it a deflator. They have chosen one that is rather flat, not falling: the US have, more or less, an index that falls.  So if you think the software price is falling, then the old price index was right and the new one wrong, despite the improvement in the method.

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