The Organisation for Economic Co-operation and Development (OECD) is an international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade.
The OECD defines itself as a forum of countries committed to democracy and the market economy, providing a setting to compare policy experiences, seek answers to common problems, identify good practices, and co-ordinate domestic and international policies. Its mandate covers economic, environmental, and social issues.
The pro-longed nature of the global crisis, public debt crises in developed economies, bad macro-economic conditions in many OECD economies and weak labour markets all increase the importance of finding new sources of growth.
Rapidly ageing populations, combined with natural resource constraints, mean that the future of growth, especially in in advanced economies, will increasingly depend on productivity-raising innovation, developing knowledge capital.
A knowledge-based economy will help countries compete and grow, as well as facing up to major challenges such as social exclusion and climate change.
On October 10th, OECD published a report titled Supporting Investment in Knowledge Capital Growth and Innovation. The report has been based on a two year research project on new sources of economic growth and it concludes that business investment in knowledge based capital is a key to future productivity growth and living standards.
The main conclusion is that most OECD member countries use tax incentives to encourage businesses to invest in research and development (R&D) to boost innovation and drive economic growth. Other governments like China, India and South Africa, are doing the same.
However, over a third of public support for R&D is delivered via tax incentives, with multinationals, rather than domestic SMEs benefitting the most.
Innovation is a key to business success, but where innovation comes from is changing. Today’s firms are looking beyond research and development (R&D) to drive innovation. They invest in a wider range of intangible assets, such as data, software, patents, designs, new organisational processes and firm-specific skills. Together these non-physical assets make up knowledge-based capital (KBC).
Business investment in KBC has been increasing faster than investment in physical capital such as machinery and buildings for a number of years in many OECD countries, and in some countries business investment in KBC now significantly exceeds investment in physical capital. Furthermore, overall investment in KBC has been relatively resilient during the global crisis.
But how much do KBCs contribute to growth, and could it do even more? The report aims to provide evidence of the economic value of knowledge-based capital, and to help meet the policy challenges it raises in the areas of innovation, taxation, entrepreneurship, competition, corporate reporting and intellectual property.
The key findings of the report are:
Business investment in KBC helps boost growth and productivity. Studies for the European Union and the United States show business investment in KBC contributing 20% to 34% of average labour productivity growth.
KBC is transforming what makes firms competitive. For instance, in the automotive sector, software is increasingly prominent in the cost of developing new vehicles, with high-end vehicles relying on millions of lines of computer code.
Countries that invest more in KBC are also more effective in reallocating resources to innovative firms. As a share of gross domestic product (GDP), the United States and Sweden invest about twice as much in KBC as Italy and Spain, and patenting firms in the United States and Sweden attract four times as much capital as similar firms in Italy and Spain.
Overall tax relief for R&D, when factoring in cross-border tax planning by Multinational Enterprises (MNEs), could well be greater than governments foresaw when their R&D tax incentives were designed. Countries may be losing tax revenue on the output from subsidised R&D and also losing out on domestic knowledge spill overs associated with production.
Firms that are not part of a multinational group of companies, often small and young firms, may be placed at a competitive disadvantage, relative to MNEs, in undertaking and exploiting R&D. In addition, more data are needed to estimate the amounts of income being shifted to low and no-tax countries through MNE tax planning involving KBC.
Industries founded on KBC raise new issues for competition policy, particularly in the digital economy, where competition differs in some respects from other sectors.
Intellectual property rights (IPR) are an increasingly important framework condition for investing in KBC. But IPR rules have not always kept pace with technological change – many copyright systems, for instance, were designed for a world of paper and print and may inhibit new digital services.
Across countries, there is a positive correlation between the market value of firms and investment in KBC. But corporate financial reports provide limited information on companies’ investments in KBC. This may hinder corporate finance and impair corporate governance.
A fuller understanding of innovation and growth, and better policy, require better measurement of KBC and common measurement guidelines.
Growing business investment in KBC amplifies the importance of getting human capital policies right. Human capital is the foundation of KBC: software, for example, is essentially an expression of human expertise translated into code.
The rise of KBC also has profound implications for employment and earnings inequality. A KBC-based economy rewards skills and those who perform non-routine manual and cognitive tasks, but may also reward investors (who ultimately own much of the KBC) over workers.