Intangibles count, says productivity report

THE way productivity is calculated may be selling UK firms seriously short, according to a new study.

Research funded by the Economic and Social Research Council (ESRC) suggests that the true impact of today's “knowledge economy” is hidden by out-dated forms of measurement.

The report's authors said that while investment in knowledge type activities is increasingly important, innovations such as the use of iPods and increased use of sophisticated software, have been ignored by UK economic performance indicators.

They claim that when the 'intangible' assets of modern business activity are factored into calculations productivity rises.

According to the study, UK firms spent £120bn on intangible assets such as software, research and development, training, and branding in 2004 equal to the sum spend on tangible assets such as machinery.

However, when intangibles were brought into the equation, the level of nominal market sector gross value rose by about 13%.

The new calculations also showed that the share of nominal investment in Gross Domestic Product (GDP) increased from 22% in 1970 to 25% in 2004, rather than remaining constant at 16%.

Professor Jonathan Haskel, of Queen Mary, University of London who led the research, agreed that when the British economy was based on investments in tangible assets such as machinery, the methods used for calculating GDP were broadly fit for purpose.

But he added that in an economy increasingly investing in intangibles, analysts could be missing some key aspects of economic activity.

“We set out to research their contribution to productivity and growth and the results were striking,” he said.

“Our findings suggest that in recent years traditional measurement techniques may have considerably underestimated the importance of science, innovation and knowledge-based industries to the UK economy.”

According to official statistics, the UK's productivity performance declined after 1995 despite major investment in information and communication technology.

Meanwhile, US productivity growth has accelerated leaving the EU behind, and in particular the retail sector.

The UK government recently acknowledged Britain's productivity gap. Chancellor Alastair Darling in his October pre-budget speech said that Britain could now be investing as much in intangible assets as the US, with almost £250bn a year going into the priorities essential for future prosperity.