Investments in Intangible Assets and Australia's Productivity Growth

Investment in capital is important for economic growth. But capital is not just physical assets; firms also invest in 'soft' capital such as knowledge, firm-specific skills, and better ways of doing business. This investment results in accumulation of 'intangible assets'. Intangible assets have been categorised as computerised information, innovative property (including RD average annual growth in intangible investment has been about 1.3 times that of tangibles since 1974-75; including intangible investment in total investment largely removes the past downward trend in the market sector ratio of investment to output (gross value added); investments in organisational capital (strategic planning, adaptation and reorganisation) and computerised information have grown at relatively high rates — making up 27 and 13 per cent of intangible investment in 2005-06. Treating investment in intangible assets as capital raises measured final output and measured capital inputs and alters the capital-labour ratio, hence the effect on measured MFP growth is complex. However, in Australia, adjusting for intangible investment not currently included in the national accounts does not have a large direct effect on the level or pattern of conventionally-measured MFP growth. The views expressed in this paper are those of the staff involved and do not necessarily reflect those of the Productivity Commission.