Intangible Capital and Economic Growth

Research-Technology Management, Jan-Feb, 2007

Intangible Capital and Economic Growth; Carol Corrado, Charles Hulten and Daniel Sichel: National Bureau of Economic Research Working Paper 11948; Sept. 2006.

This study provides evidence that investments in intangible knowledge capital, which includes R&D and human competency, are having a much greater impact on measures of U.S. economic growth than heretofore recognized. That's because these investments are excluded from both firm-level and national income accounting practice, say Corrado, Hulten and Sichel. They estimate that approximately $1 trillion had been excluded from the conventionally-measured output of the non-farm business sector by the late 1990s, and that the business capital stock was understated by $3.6 trillion.

The authors find that the inclusion of intangible investment in the real output of the nonfarm business sector increases the estimated growth rate of output per hour by 10-20 percent over the period 1995-2003 relative to the base-line case which completely ignores intangibles. Thus, the inclusion of intangibles matters for labor productivity growth rates, although it has little effect on the acceleration of overall productivity in the mid-1990s, they write.

On the input side, intangibles were about as important as tangible capital as a growth source after 1995. When the two are combined, capital deepening supplants Multi-Factor Productivity (MFP) as the principal source of growth. Moreover, the majority of the contribution of intangibles comes from non-traditional categories.