Why do Intangible Assets drive Growth?

According to national income accounting in both the USA and UK the capital services charges of Intangible Assets are roughly equivalent to those of Tangible Assets. It is important to bear in mind that depreciation rates between these two Asset classes are quite different. A new office building might be depreciated over 50 years whilst the investment in a new brand might be depreciated over three years. However, there are a number of reasons as to why Intangible Assets represent 90% of the value of S&P Firms. Three of these reasons are reviewed below.

Innovation

The Oslo Manual published by the OECD defines four types of innovation: product innovations, process innovations, marketing innovations and organisational innovations. This classification maintains the largest possible degree of continuity with the previous definition of technological product and process innovation used in the second edition of the Manual. Product innovations and process innovations are closely related to the concept of technological product innovation and technological process innovation. Marketing innovations and organisational innovations broaden the range of innovations covered by the Manual as compared to the previous definition. Data on firm level innovation is collected by all OECD Countries every two years using a standardised survey instrument which enables comparisons between industry Sectors and OECD countries. Some but not all of these innovations become intangible assets.

Knowledge

What happens to the innovations that don’t become intangible assets? The answer is that much of it becomes knowledge which can be re-used in other circumstances. Economics uses the concept of Adaptive Capacity to identify knowledge that makes firm more able to adapt to environmental challenges. More recent research identifies a new class of firms which are known as Knowledge-Intensive Innovative Entrepreneurship (KIE). These firms both create, combine and sell knowledge-based products and services across a wide range of sectors.

Combination

The third driver is the combination of innovation, knowledge and new business models. Manufacturing Firms have long taken advantage of Wrights Law (1936) to reduce costs by doubling production, but new firms are combining Wrights Law with Moore’s law (1965) which is the founding example of a technology cost curve. Moore’s law stated that the number of transistors on an integrated circuit could double every 18 months. The impact of Moore’s law is seen in every IPhone and Laptop. To these two ‘laws’ we can add Gates’ Law which states that whilst software is expensive to create, the distribution costs of software once written tend to zero. The Combination of Intangibles, Innovation, Knowledge enables Entrepreneurs to create disruptive innovations which turn existing industries upside down.

Further Reading

• How can intangible assets drive revenue growth?
• Intangible Asset Glossary — definitions of key terms used in this article