Extending the asset boundary to include

Research and DevelopmentIssues 9 and 10

Charles Aspden

OECD

Presentation

• Canberra II and NESTI Groups

• Current situation in the 1993 SNA

• Why is the way it is?

• Obstacles to change

• Issues addressed by Canberra II

• Next steps

• Recommendations

Canberra II and NESTI Groups

• Canberra II Group has discussed this issue at every one of its five meetings

• Close cooperation with the NESTI Group – particularly Soli Peleg and Pablo Mandler

from Israel.

• Comprehensive consideration of conceptual and practical issues

• Further cooperation with NESTI if proposals accepted

Current situation in the 1993 SNA

• Expenditures on R&D not GCFC, despite recognition that they are inherently investment in nature.

• Instead, SNA recognises ‘patented entities’, which are non-produced and appear in the other changes in assets account.

Current situation in the 1993 SNA

• In effect, the SNA – recognises those assets created by R&D

which generate an income flow between units– but denies their connection with R&D

production, and– does not recognise R&D assets whose

services are consumed by their owners

Current situation in the 1993 SNA

• 1993 SNA differs from 1968 SNA in that income flows associated with patented entities are recorded as income from sales and use of a service, rather than property income.

• Clearly, the authors of the 1993 SNA thought that patented entities were really produced assets.

Why is the 1993 SNA the way it is?Explanation in para 6.163

• Need to have clear criteria for delineating R&D from other activities.

• Be able to identify and classify the assets produced.

• Be able to value the assets and depreciate them.

Issues addressed by Canberra II Group

• Scope of R&D GFCF

• Definition of R&D

• Measurement of GFCF

• Avoidance of double counting

• Constant price estimation

• Measurement of capital stock, capital services and consumption of fixed capital

Scope of R&D GFCFShould all of R&D be included?

• Nearly all Canberra II members think expenditures on R&D should be recorded as GFCF.

• The majority favour including all of it either for conceptual reasons, or because the parts they think should be excluded (esoteric R&D) are so small that it is better not to try to exclude them.

• A minority would like to exclude R&D output made freely available.

Scope of R&D GFCFShould all of R&D be included?

• Reasons for including all R&D– R&D is thought to be one of the principal

drivers of output growth. It is important for productivity analysis across time and across countries that R&D data be fully integrated in the national accounts.

– From an economic theory point of view, all R&D expenditure qualifies as capital formation because consumption is foregone for the sake of future benefits.

Scope of R&D GFCFShould all of R&D be included?

• It is important to include all forms of R&D, including basic research - some of which may be undertaken without any specific goal in mind. Without such research technological progress would be restricted to improving existing technologies and technological leaps would occur by chance. Clearly, those who finance basic research do so in the belief that their will be future benefits. If we exclude it, we could be excluding an important factor influencing economic performance.

Scope of R&D GFCFShould all of R&D be included?

• Units that make their R&D output freely available often undertake the R&D with the expectation of gaining future benefits, e.g.– Medical research to provide more cost-

effective treatments– Studies of genetics to identify people at risk of

illness or prone to criminality.

Scope of R&D GFCFShould all of R&D be included?

• Both private and public sectors make some R&D output freely available and protect the rest. Although the proportions differ.

• Government institutions, such as universities often take out patents.

• Defence R&D is kept secret.

Scope of R&D GFCFShould all of R&D be included?

• In practice it would be very difficult to exclude R&D made freely available accurately, and attempting to do so could add substantially to the estimation costs. One could expect reduced comparability over time and across countries.

• It would be very crude to try to exclude R&D made freely available by excluding all general government R&D.

Scope of R&D GFCFShould all of R&D be included?

• The SNA recommends that non-market output should not be valued by the amount of income received. This extends to the freely available services of public roads, whose asset values are determined on the basis of cost.

• Canberra II believes this recommendation should include the services of R&D assets made freely available.

• The definition of an asset should be clarified to cover such assets.

Measurement of GFCF

• As most R&D is conducted on own account, it is proposed to use expenditure data collected as per the Frascati Manual as the principal data source.

• 89 countries have R&D data on the UNESCO database, mostly time series.

• Request submitted to NESTI for changes to FM to better accommodate SNA needs.

Definition of R&D

• The FM defines ‘research and experimental development to comprise creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and use of this stock of knowledge to devise new applications.’

Definition of R&D

• The 1993 SNA does not give an explicit definition of R&D and the closest it comes to doing so is in paragraph 6.163 ‘research and development are undertaken with the objective of improving efficiency or productivity or deriving other future benefits so that they are inherently investment – rather than consumption – type activities’.

• However, various paragraphs in the 1993 SNA that mention R&D imply a definition that is somewhat broader and more akin to the FM’s definition and coverage of market and non-market activities, including, for example, R&D activities that are mixed with education (paragraph 9.89).

Other issues

• Avoidance of double counting: solutions have been found to major problems.

• Constant price estimation: research is being undertaken to develop output price indexes for R&D, but well-constructed input price indexes will suffice.

• Capital stock, etc.: Much work has been done to estimate asset lives and depreciation rates, but more work needed.

Practicality of implementation

• A number of Canberra II members have compiled R&D accounts in order to determine the practicality of doing so and to identify problem areas.

• This work has shown that it is feasible to compile R&D estimates in the national accounts of adequate quality.

• Planned future work is aimed at improving the quality.

Next steps if recommendations accepted

• Canberra II to work with NESTI to change or augment R&D surveys to better meet SNA needs. First meeting tentatively set for early 2006. Also need to work on improving the measurement of international trade in R&D.

• Canberra II Group to undertake further research on asset lives and depreciation rates for R&D.

• NESTI Group working on the development of output price indexes for R&D.

Recommendations

1. The 1993 SNA should be changed to recognise the outputs of R&D as assets, and the acquisition, disposal and depreciation of R&D fixed assets should be treated in the same way as other fixed assets.

2. All R&D output should be treated as an asset, irrespective of its nature or whether it is made freely available. In the latter case, the asset should be recorded on the balance sheet of the owner of the original and be regarded as providing a free service until it becomes obsolete.

Recommendations

3. The definition of an asset should be reviewed to ensure it covers the assets of non-market producers adequately.

4. The definition of R&D given in the Frascati Manual (FM) should be adopted in the SNA.

Recommendations

5. The Frascati system provides the best means of deriving estimates of R&D statistics, principally gross fixed capital formation (GFCF). However, there are shortcomings in the Frascati data and the FM should be amended to better support the needs of the SNA. (NESTI has indicated a willingness to do this.)

6. Most R&D output is produced over several periods and the SNA recommendations for the production of other assets should apply. Most R&D production is on own account, which implies recording it as GFCF as it occurs under the current recommendations.

Recommendations

7. Patented entities should no longer be recognised as assets in the system.