Global Investment Outlook: Part III

Executive Summary

In the third installment of our series on global investment trends, we look at the state of intellectual property spending. Overall investment spending in advanced economies is growing closely in line with its historic trend at present. One area where investment has been weak, however, is intellectual property. Spending on intellectual property products (IPP), which captures the intangible investment businesses make, is currently 4.5 percent below its long-run trend. IPP investment therefore is likely to be one area that continues to fuel the global expansion. Beyond the current cycle, the unique characteristics of intellectual property make it key to raising productivity and economic growth on a prolonged basis. 

Defining the Intangible

Intellectual property products (IPP) capture the physically intangible investments companies make. With a more wonky name than “equipment” or “structures” prescribed to this category, it is perhaps easiest to understand IPP by its subcomponents. The first major component of IPP is software. Like a new piece of equipment, the latest and greatest software can make workers’ jobs easier and allow them to produce more. Software investment includes both pre-packaged products and in-house developments that are not sold on the market. The second major component of IPP is research and development. Historically, R&D was categorized as an expense. Increasingly, however, R&D is being recognized and accounted for as investment. The United Nation’s System of National Accounts, which sets international standards for GDP accounting, defines R&D investment as “creative work undertaken on a systematic basis to increase the stock of knowledge, and use of this stock of knowledge for the purpose of discovering or developing new products, including improved versions or qualities of existing products, or discovering or developing new or more efficient processes of production.” As such, R&D is like a new piece of machinery that creates products or improves the production process. In addition to software and R&D, IPP also includes “entertainment, literary and artistic originals.” While movies, books and music may not strike one as “investment,” it represents a relatively small share of IPP. In the United States for example, where the entertainment industry benefits from a relatively global reach, this type of “investment” accounts for only about 10 percent of IPP. In some countries, mineral exploration is also incorporated in IPP. In others, however, such as the United States, mineral exploration is categorized under structures. Where possible, we exclude mineral exploration from our measure of intellectual property investment and move it to the structures component of investment spending. The countries most affected by this change are Canada and Australia, where mineral exploration has at times during our sample period accounted for more than 25 percent of IPP.

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