Page 27 - Intangible value

pany acquisitions and internal development is a good example.8 Company acquisitions create business value which must be recorded in the balance sheet. But record- ing business value created through the company's inter- nal activities in the balance sheet is not considered to be in line with generally accepted accounting principles. Therefore the nancial statement often does not give suf- cient details about intangible capital or its value.9 There are also measuring problems at the level of the national economy because the suf cient information is not avail- able even at the level of companies. These challenges do not mean, however, that intangible investments could not be studied. Instead, the challenges reveal that precise information about the amount or output of intangible in- vestments is currently not available.
Intangible investments are poorly visible in the GNP. It has therefore been suggested that the of cial GNP gures are too low. For example, the USA's gross national product (GNP) in 2006 would increase by more than 10 per cent if intangible investments were taken into account better.10 This gure is approximately the same (9%) as the estimat- ed gure in Finland.11 Some of these underestimated GNP gures were corrected in 2014 when the national account- ing in Finland was reformed. Consequently, R&D invest- ments were taken into account as investments and not as intermediate products, which increased Finland's GNP by almost 4 per cent.12 However, the majority of other intangi- ble investments still remains outside the GNP.
WHAT DO INTANGIBLE INVESTMENTS INCLUDE
What is it that intangible investments comprise? No unambiguous definition exists; there is always at least some variation in the content of intangible investments in different studies. However, many studies have used the same definition as the study carried out on the USA.13 The make-up of intangible capital in the USA is somewhat different from other countries.
More than one fifth (22%) of USA's intangible capi- tal consists of art, entertainment and copyrights. Their share in Finland, Sweden and Germany is only around a few per cent. Instead, in the USA the share of intangible capital created in research and product development is clearly smaller than in the other countries in the above diagram. This share is the largest in Finland, which is the result obtained in earlier studies, too.14
There are two important channels through which in- tangible investments may affect the productivity and growth of the national economy.
* Investments in intangibles, such as software that controls production or developing a new business concept, create an expenditure when the invest- ment is made just like tangible investments do. The difference is that after the initial investment, soft- ware, for example, can be copied and edited with rel- atively low costs. The end product, such as software or a brand, does not wear down as the number of users grows. This kind of intangible assets may have almost unlimited scale bene ts and a signi cant ef- fect on productivity.
* Investments in research and product development, management systems and other intangible capi- tal almost always creates external effects, in which intangible capital spreads outside the company bene ting other companies in addition to the company that made the investment. This spread of information may take place, for example, as em- ployees change jobs or in a conversation between employees from two different companies. Direct investments abroad also involve intangible invest- ments and spread of information almost without exception. For example, a novel business or man- agement model brought to the target country by a foreign company may spread to other companies for instance through the mobility of employees.
There have been attempts to measure benefits from intangible investments from many different angles. In studies in the field of economics, measuring benefits has been related especially to productivity. In a study made in the United Kingdom, intangible capital account- ed for almost one fifth of the increase in the productiv- ity of work during 2000–2008.15 In Finland, as well as in many other European countries, the share has been similar and even clearly more in the United States.16 By studying more precise material from company level, it has been found out that even relatively small changes in management practices may lead to improvements of even 10 per cent in production.17 In some cases, the pre- condition for an impact on production is that intangible investments complement each other. For example, ben- e ts from investing in information systems will be wast- ed if the possibilities to improve productivity provided by new technology cannot be made use of in manage- ment practices and on different organisational levels. A study carried out on material from the USA revealed that the increase of revenue and productivity in companies which had invested in utilisation of software to analyse large amounts of data and expertise in their business operation had been 5–6 per cent higher than in other similar companies.18
27