Crafting Policy for the Information Age: EU Research on Intangibles

Clark Eustace, Executive Chairman of PRISM, (an umbrella organization of European business schools that continues the work of the European Commission's High-Level Expert Group on the Intangible Economy), presented his organization's ongoing research on intangible assets and their impact on the economy. Not included on most companies' balance sheets, intangible assets such as organizational structure, company leadership, staff experience and training, ICT, and intellectual property (such as patents and research and development) often have a direct but thus far unquantifiable impact on their bottom lines.

Originally, the issue of intangibles was considered an accounting problem. After closer examination, the PRISM group found that intangible assets encompass larger, more serious issues with far greater implications for the economy beyond accounting concerns. For instance, Peter Hill, former chief statistician for the OECD (1980-94), has estimated that 10 percent of GDP goes unreported due to the inability to capture data on intangibles. Recognizing the broader nature and effects of intangible assets, PRISM focused on the evolving new theory of the firm, measurement issues, concerns for the key interest groups, particularly the accountants, bankers, and other market participants, and finally, EU policy implications.

Eustace noted the practical difficulties of capitalizing all expenses that go into intangible assets, including the way the accounts can be manipulated. Because of these and other concerns, full capitalization will probably never be accepted. Nevertheless, a better analysis of where the money is being spent (regardless of how it is treated for amortization purposes) would help overcome the lack of basic knowledge in the area as well as help dismiss false notions of a lack R&D spending in service industries.

The PRISM group found that a company's comparative advantage is now driven by factors of differentiation such as intangible assets instead of price factors. Eustace noted that hidden investment in business intangibles including R&D investment, ICT, training, and organizational change can take up to 100 percent of physical capital. The economy's shift in emphasis from products to services has translated into a need for more sophisticated intellectual property rights.

Eustace closed the session by noting that the discussion did not cover macro-intangibles – frameworks that national governments have, or have not, put in place to recognize and deal with the policy questions surrounding intangible assets. Macroeconomic comparisons of labor laws, tax bases, and other areas already exist but there is no such measurement capability for evaluating the quantity and effects of intangibles.