Extending the asset boundary to
include
Research and Development
Issues 9 and 10
Charles Aspden
OECD
Presentation
•
•
•
•
•
•
•
Canberra II and NESTI Groups
Current situation in the 1993 SNA
Why is the way it is?
Obstacles to change
Issues addressed by Canberra II
Next steps
Recommendations
Canberra II and NESTI Groups
• Canberra II Group has discussed this
issue at every one of its five meetings
• Close cooperation with the NESTI Group
– particularly Soli Peleg and Pablo Mandler
from Israel.
• Comprehensive consideration of
conceptual and practical issues
• Further cooperation with NESTI if
proposals accepted
Current situation in the 1993 SNA
• Expenditures on R&D not GCFC, despite
recognition that they are inherently
investment in nature.
• Instead, SNA recognises ‘patented
entities’, which are non-produced and
appear in the other changes in assets
account.
Current situation in the 1993 SNA
• In effect, the SNA
– recognises those assets created by R&D
which generate an income flow between units
– but denies their connection with R&D
production, and
– does not recognise R&D assets whose
services are consumed by their owners
Current situation in the 1993 SNA
• 1993 SNA differs from 1968 SNA in that
income flows associated with patented
entities are recorded as income from sales
and use of a service, rather than property
income.
• Clearly, the authors of the 1993 SNA
thought that patented entities were really
produced assets.
Why is the 1993 SNA the way it is?
Explanation in para 6.163
• Need to have clear criteria for delineating
R&D from other activities.
• Be able to identify and classify the assets
produced.
• Be able to value the assets and depreciate
them.
Issues addressed by Canberra II
Group
•
•
•
•
•
•
Scope of R&D GFCF
Definition of R&D
Measurement of GFCF
Avoidance of double counting
Constant price estimation
Measurement of capital stock, capital
services and consumption of fixed capital
Scope of R&D GFCF
Should all of R&D be included?
• Nearly all Canberra II members think
expenditures on R&D should be recorded as
GFCF.
• The majority favour including all of it either for
conceptual reasons, or because the parts they
think should be excluded (esoteric R&D) are so
small that it is better not to try to exclude them.
• A minority would like to exclude R&D output
made freely available.
Scope of R&D GFCF
Should all of R&D be included?
• Reasons for including all R&D
– R&D is thought to be one of the principal
drivers of output growth. It is important for
productivity analysis across time and across
countries that R&D data be fully integrated in
the national accounts.
– From an economic theory point of view, all
R&D expenditure qualifies as capital
formation because consumption is foregone
for the sake of future benefits.
Scope of R&D GFCF
Should all of R&D be included?
• It is important to include all forms of R&D,
including basic research - some of which may be
undertaken without any specific goal in mind.
Without such research technological progress
would be restricted to improving existing
technologies and technological leaps would
occur by chance. Clearly, those who finance
basic research do so in the belief that their will
be future benefits. If we exclude it, we could be
excluding an important factor influencing
economic performance.
Scope of R&D GFCF
Should all of R&D be included?
• Units that make their R&D output freely
available often undertake the R&D with the
expectation of gaining future benefits, e.g.
– Medical research to provide more costeffective treatments
– Studies of genetics to identify people at risk of
illness or prone to criminality.
Scope of R&D GFCF
Should all of R&D be included?
• Both private and public sectors make
some R&D output freely available and
protect the rest. Although the proportions
differ.
• Government institutions, such as
universities often take out patents.
• Defence R&D is kept secret.
Scope of R&D GFCF
Should all of R&D be included?
• In practice it would be very difficult to
exclude R&D made freely available
accurately, and attempting to do so could
add substantially to the estimation costs.
One could expect reduced comparability
over time and across countries.
• It would be very crude to try to exclude
R&D made freely available by excluding all
general government R&D.
Scope of R&D GFCF
Should all of R&D be included?
• The SNA recommends that non-market output
should not be valued by the amount of income
received. This extends to the freely available
services of public roads, whose asset values are
determined on the basis of cost.
• Canberra II believes this recommendation
should include the services of R&D assets made
freely available.
• The definition of an asset should be clarified to
cover such assets.
Measurement of GFCF
• As most R&D is conducted on own
account, it is proposed to use expenditure
data collected as per the Frascati Manual
as the principal data source.
• 89 countries have R&D data on the
UNESCO database, mostly time series.
• Request submitted to NESTI for changes
to FM to better accommodate SNA needs.
Definition of R&D
• The FM defines ‘research and
experimental development to comprise
creative work undertaken on a systematic
basis in order to increase the stock of
knowledge, including knowledge of man,
culture and society, and use of this stock
of knowledge to devise new applications.’
Definition of R&D
• The 1993 SNA does not give an explicit definition of R&D
and the closest it comes to doing so is in paragraph
6.163 ‘research and development are undertaken with
the objective of improving efficiency or productivity or
deriving other future benefits so that they are inherently
investment – rather than consumption – type activities’.
• However, various paragraphs in the 1993 SNA that
mention R&D imply a definition that is somewhat broader
and more akin to the FM’s definition and coverage of
market and non-market activities, including, for example,
R&D activities that are mixed with education (paragraph
9.89).
Other issues
• Avoidance of double counting: solutions
have been found to major problems.
• Constant price estimation: research is
being undertaken to develop output price
indexes for R&D, but well-constructed
input price indexes will suffice.
• Capital stock, etc.: Much work has been
done to estimate asset lives and
depreciation rates, but more work needed.
Practicality of implementation
• A number of Canberra II members have
compiled R&D accounts in order to
determine the practicality of doing so and
to identify problem areas.
• This work has shown that it is feasible to
compile R&D estimates in the national
accounts of adequate quality.
• Planned future work is aimed at improving
the quality.
Next steps if recommendations
accepted
• Canberra II to work with NESTI to change or
augment R&D surveys to better meet SNA
needs. First meeting tentatively set for early
2006. Also need to work on improving the
measurement of international trade in R&D.
• Canberra II Group to undertake further research
on asset lives and depreciation rates for R&D.
• NESTI Group working on the development of
output price indexes for R&D.
Recommendations
1. The 1993 SNA should be changed to
recognise the outputs of R&D as assets, and
the acquisition, disposal and depreciation of
R&D fixed assets should be treated in the
same way as other fixed assets.
2. All R&D output should be treated as an asset,
irrespective of its nature or whether it is made
freely available. In the latter case, the asset
should be recorded on the balance sheet of
the owner of the original and be regarded as
providing a free service until it becomes
obsolete.
Recommendations
3. The definition of an asset should be
reviewed to ensure it covers the assets
of non-market producers adequately.
4. The definition of R&D given in the
Frascati Manual (FM) should be adopted
in the SNA.
Recommendations
5.
6.
The Frascati system provides the best means of
deriving estimates of R&D statistics, principally gross
fixed capital formation (GFCF). However, there are
shortcomings in the Frascati data and the FM should
be amended to better support the needs of the SNA.
(NESTI has indicated a willingness to do this.)
Most R&D output is produced over several periods and
the SNA recommendations for the production of other
assets should apply. Most R&D production is on own
account, which implies recording it as GFCF as it
occurs under the current recommendations.
Recommendations
7. Patented entities should no longer be
recognised as assets in the system.