Spending on ‘intangibles’ fosters firm growth but doesn’t boost productivity

Sep 26, 2016

New Zealand scores notoriously low on productivity measures and there is a big push to discover why. The most recent research into productivity from Motu Economic and Public Policy Research Trust looks at the possible importance of intangible investment – elements such as R&D, employee training, marketing and organisational restructuring – to see what effect investment in these areas has on a firm’s performance.

The OECD recently found that investment in intangible assets is rising, and even exceeds investment in machinery and equipment in several OECD countries.

“Though researchers have found positive effects of intangible investment in other countries, we found no evidence that intangible investment increases productivity in New Zealand.,” said Adam Jaffe, Director of Motu and senior researcher on this project. “We don’t know if this is because of weakness in the data or real differences between New Zealand firms and those abroad.”

The figure below shows which types of firms invest in the different types of intangible investment.

Employee training and computer-ware are the most common, with around 70 - 80 percent of firms reporting such investments across different years. R&D spending occurs less than 10 percent of the time in most firms. Manufacturing is the exception, with a proportion of nearly 30 percent.

“The bigger a firm was the more it spent on intangible investment and the older a firm was the less it spent,” said Dr Jaffe. “Importantly, this kind of spending doesn’t seem to be related to past firm growth – investing firms are neither struggling nor flourishing.”

The study did find evidence that intangible investment is associated with increased spending on capital and labour inputs and firm revenue. Firms that invest also report an improvement in customer and employee satisfaction.

“So what we found is that if productivity improvement is the goal, encouraging intangible investment is unlikely to be a powerful tool,” said Dr Jaffe. “There are probably areas other than productivity that are more important in measuring intangible investment success.”

The Longitudinal Business Database contains financial data, merchandise and trade data, information on business practices and outcomes, along with demographic characteristics, business activity and performance. The research looked at 13,000 firms from 2005 to 2013 and their investment in research and development, employee training, marketing and organisational restructuring alongside measures of firm performance and activity.

“There is, of course, much more to investigate around what kind of investment leads to an increase in productivity, particularly around understanding how intangible investment translates or fails to translate into intangible assets,” said Dr Jaffe.

The independent report Intangible Investment and Firm Performance by Adam Jaffe and Nathan Chappell was funded through the Productivity Hub and Queensland University of Technology.