Sources of country-sector productivity growth:total factor productivity and intangible capital in the EU15

and the US

C. Corrado, (The Conference Board), New YorkJ. Haskel, (Imperial College, CEPR and IZA), London

C. Jona-Lasinio, (LUISS Lab and ISTAT), RomeM.Iommi, (LUISS Lab and ISTAT), RomeM.O’Mahony (King’s College), London

Society for Economic Measurement Annual Conference6-8 July 2016, Thessaloniki, Greece

This project has received funding from the European Union’s Seventh Framework Programme forresearch, technological development and demonstration under grant agreement No. 612774

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Outline

• New country-industry (market and nonmarket) productivitydatabase (SPINTAN and INTAN-Invest)

• It makes possible to develop new analysis on intangibles alongmultiple dimensions:• Theoretical and empirical investigation of the transmissionmechanisms through which intangible capital affects totaleconomy productivity growth.

We analyze this issue looking at both the direct and indirect channelsthrough which intangibles foster productivity growth across countries andbetween/within industries.

• Investigate capital reallocation in a framework that includesintangible capital.

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Aim

• Sources of growth analysis for the total economy with acomplete accounting for intangible capital inputs:market and nonmarket productivity performances.

• Investigate the main factors that influenced capital reallocationover the financial crisis in a framework accounting for NA andNon NA Intangibles capital.

• A central allegation levelled at the financial system since the financial crisis isthat it is no longer functioning in a manner that allocates capital such thatproductivity can grow.

• Whilst this suspicion is widespread, it has proved difficult to gather evidence toexamine it.

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Data

• Database with multiple dimensions: country, industry,institutional sector, time

• Tangible and intangible assets (NA, INTAN Invest and SPINTAN)• 20 industries (A-U Nace Rev 2), 1995-2013, so far 12 countries:

• US• Big Northern Europe: DE, FR, UK• Scandinavian: DK FI, SE• Small Europe: AT, CZ, NL• Mediterranean: ES, IT

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Market and nonmarket intangibles:adjusted value added shares (2013)

Overall (market and nonmarket) intangible investments account for 14% to 6% of valueadded with market and nonmarket sectors accounting on average for 8% and 1.5%respectively.

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Tangible and intangible investment:adjusted value added shares (2013)

In most advanced economies intangibles account for a larger value added share thantangibles, the opposite holds for the less advanced. The differences in intangible intensityacross countries mirror the industrial structure of the economies .

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Tangible and intangible investment over the business cycle:EU+US

After the crisis, tangible investment experienced a prolonged slowdown while intangibleinvestment a small downturn and went back quickly to pre-crisis levels.

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Tangible and intangible investment over the business cycle:EU vs US

The speed of recovery varied between EU and US.:• Intangibles were relatively resilient during the crisis.• Intangibles recovered faster in the US and tangibles lagged behind in the EU.

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Sources of growth

∆lnQ(a)c,i,t = s

L(a)c,i,m,t∆lnLc,i,m,t +s

K(a)c,i,m,t∆lnKc,i,m,t +s

R(a)c,i,m,t∆lnRc,i,m,t +∆lnAc,i,m,t

where:

• c=country, i=industry, m=market-nonmarket sector, t=time• s = (PxX/PqQ) shares consistent with capitalized assets• L is labor input, K is tangible capital and R is intangible capital• TFP is a residual

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Sources of growth (1999-2013):Non-farm business sector (i.e. excluding Agri, Ed, Health, PA)

In FI, UK and US intangible capital provided relatively higher growthcontribution than tangible capital.

Country DlnQ ConDlnL ConDlnKNonICT ConDlnKICT ConDlnKintan DlnTFPAT 2.2% 0.3% 0.4% 0.3% 0.5% 0.7%CZ 2.9% -0.2% 1.2% 0.4% 0.3% 1.2%DE 1.4% 0.0% 0.5% 0.2% 0.3% 0.4%DK 1.1% 0.1% 0.3% 0.3% 0.4% 0.1%ES 1.4% 0.5% 1.1% 0.3% 0.3% -0.8%FI 2.3% 0.3% 0.1% 0.1% 0.4% 1.3%FR 2.0% 0.3% 0.4% 0.1% 0.5% 0.7%IT 0.3% 0.1% 0.3% 0.2% 0.2% -0.3%NL 1.9% 0.2% 0.4% 0.1% 0.4% 0.7%SE 3.2% 0.3% 0.6% 0.4% 0.6% 1.3%UK 1.6% 0.0% 0.3% 0.1% 0.8% 0.3%US 2.3% -0.1% 0.4% 0.4% 0.8% 0.9%

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Sources of growth (1999-2013): deviations from the US

All countries but UK show smaller growth contributions of intangiblecapital than the US, even if at a different pace.

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Sources of growth (1999-2013):Nonmarket sector (i.e. PA, Ed, Health)

Contribution of intangible capital more relevant than contribution oftangible capital both in UK and US.

DlnQ ConDlnL ConDlnKNonICT ConDlnKICT ConDlnKintan DlnTFPAT 1.2% 0.6% 0.1% 0.3% 0.2% 0.1%CZ 0.0% -0.2% 0.7% 0.2% 0.1% -1.9%DE 1.1% 0.2% 0.4% 0.1% 0.2% 0.2%DK 0.5% 0.5% 0.2% 0.1% 0.1% -0.3%ES 2.8% 1.5% 0.9% 0.3% 0.2% -0.1%FI 0.5% 0.7% 0.4% 0.1% 0.0% -0.7%FR 1.2% 0.2% 0.2% 0.0% 0.1% 0.6%IT 0.2% 0.0% 0.3% 0.1% 0.1% -0.3%NL 1.8% 1.1% 0.2% 0.1% 0.2% 0.2%SE 0.7% 0.6% 0.4% 0.2% 0.1% -0.5%UK 1.8% 1.2% 0.5% 0.0% 0.6% -0.2%US 1.6% 1.2% 0.1% 0.0% 0.6% -0.3%

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Capital reallocation Jorgenson and Schreyer (2010)

• We follow Jorgenson and Schreyer and use their accountingframework, that directly links the reallocation of capital betweenindustries and (total factor) productivity growth.

• We do this using data from 11 countries, 1997-2013 and so cantry to provide both cross-country evidence and data before andafter the financial crisis.

• The main concern is that capital is somehow not being allocatedto the "right" sectors and this is impeding productivity growth.

• To evaluate the degree of misallocation, a "benchmark" forproductivity growth has to be identified (if capital were beingallocated efficiently) and compare that to the current capitalallocation.

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Productivity growth and inputs reallocation

• TFPt = (DWTFP) + REALLK + REALLL

Define ContKben the contribution of capital obtained when K isallocated the "right" sectors, that is computed assuming rates ofreturn across industries are equalised.Define ContKac the contribution of capital obtained assuming rates ofreturn across industries varies.• REALLK = ContKac + ContKben

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Capital reallocation: intuition

• We not expect the economy to be at the benchmark point all thetime.

• Rather, theory suggests that if the market system is working well,capital will be drawn away from low return industries towardsindustries where rates of return are highest and this will equalisereturns back towards the benchmark.

• By contrast, a malfunctioning economy would be where capital iseither moving towards low return industries, or is not beingreallocated away from low return industries.

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Capital reallocation: intuition

• The main assumption is that if K Reallocation is > 0 this can beinterpreted as if capital is growing in high rate of return industriesand slowing in low return industries.

• So the industries attracting capital will then deliver high capitalservices (a high product of capital rental payments and changes incapital) and industries losing capital low capital services, relativeto the benchmark case.

• In the benchmark case, all industries have the same rate of return.• Thus if REALLK is > 0 the expanding industries deliver relativelyhigh capital services relative to the benchmark, since their capitalgrowth is being calculated at a relatively high rate of return.

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Capital reallocation: all intangibles capitalised

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Capital reallocation: only NA intangibles are capitalised

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Investigating the drivers of capital reallocation

We investigate possible drivers of capital reallocation estimating thefollowing specification:

K(reall)c,t = α1δln(Intrate)c,t + α2Crisis + α3Exp

jc,t + α4Z

ic,t + γc + εc,t

where Intrate is long term interest rate, Crisis is a dummy variable for2008, Expj are indicators of economic sentiment, with j=ESI, Factorsinfluencing investments (demand (Dem) and financial (Fin) , Z i areother controls for government support to investment and γc arecountry dummies.

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Capital reallocation: empirical results

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

1997-2013 1997-2007 1997-2013 1997-2007

VARIABLES

Interestrate -0.0016*** 0.0003 -0.0019*** -0.0036 -0.0018*** -0.0013** -0.0008* -0.0032*** -0.0025*** -0.0010(0.0005) (0.0016) (0.0005) (0.0024) (0.0005) (0.0006) (0.0005) (0.0007) (0.0007) (0.0009)

ESI 0.0026*** 0.0025 0.0032*** 0.0034* 0.0032*** 0.0036*** 0.0037*** 0.0063*** 0.0075*** 0.0052***(0.0009) (0.0016) (0.0009) (0.0018) (0.0009) (0.0009) (0.0009) (0.0013) (0.0012) (0.0015)

GOS_GDP -0.0058** -0.0072** -0.0078*** -0.0102*** -0.0069** -0.0110*** -0.0127*** -0.0080* -0.0158*** -0.0166***(0.0023) (0.0030) (0.0026) (0.0035) (0.0027) (0.0024) (0.0025) (0.0042) (0.0038) (0.0039)

Crisis -0.0007*** -0.0006*** -0.0006*** -0.0005*** -0.0005***(0.0001) (0.0002) (0.0002) (0.0002) (0.0002)

Igrants_GDP 0.0003* 0.0003 0.0002 0.0008*** 0.0004* 0.0002(0.0002) (0.0002) (0.0002) (0.0002) (0.0002) (0.0004)

Demandconditions 0.0002* 0.0007***(0.0001) (0.0002)

Financialconditions 0.0001* 0.0002*(0.0001) (0.0001)

Observations 187 121 170 110 169 129 116 109 79 70Standarderrorsinparentheses

***p<0.01,**p<0.05,*p<0.1

1997-2007 1997-2013

ExcludetheUSIncludetheUS

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Conclusions

• Creation of a country-industry-sector database for productivityanalysis that allows to account for the role of tangible andintangible capital in the total economy (private and public).

• Intangible and tangible investment show different sensitivity to thebusiness cycle and across countries: by 2011, intangible growthpaths in both EU and US had returned to pre-crisis levels whiletangible growth rates recovered more slowly in the US . In the EUtangible gross fixed capital formation is still below pre-crisis levels.

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Conclusions

• In most advanced economies intangible capital provides largecontribution both in the market and nonmarket sectors. It is a keyvariable for the recovery.

• Reallocation terms indicate differing effects of financial crisis:positive reallocation suggests the presence of industries wherecapital grew relatively faster than the aggregate economy.

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