The reality may be - as the following article explains - that technology has changed the focus of institutional resource allocation strategy. Acquiring vast tangible assets like factories or hardware is no longer deemed the optimal means of generating dominant competitive advantage. That is now more likely to be derived from intangibles like brand, design, 'look and feel,' intellectual capital and other intangibles which neither existing accounting conventions or national economic statistical metrics were designed to measure.
The result may be under-reporting of business investment and the creation of misleading data on the actual trend in productivity, innovation and other crucial economic indices. JL
Nina Adam reports in the Wall Street Journal:
Businesses have increased expenditures on intangible assets, such as research, skills and patents, which aren’t fully reflected in all the official statistics. Digitalization has prompted a huge shift toward greater flexibility and speed.
Past global economic expansions, especially the really robust ones, have tended to bring a sharp upswing in corporate investment in new machines, factories and technologies.
The latest expansion is showing no such boom. Economists and policy makers on both sides of the Atlantic point to lackluster long-term investment to explain paltry productivity gains and meek economic growth.
But many economists say the trend may not be as alarming as it looks. Data showing weak corporate investment, they argue, fail to capture powerful new trends in technology and business practices. They also say the nature of production has changed: Technology and connectivity are making machines more efficient. Software and data processing also are reducing the need for traditional capital-goods equipment.
“Digitalization has prompted a huge shift toward greater flexibility and speed,” said Rainer Hundsdörfer, chairman of EBM-Papst Group, a German company that makes electric motors and fans.
Businesses have increased expenditures on intangible assets, such as research, skills and patents, which aren’t fully reflected in all the official statistics, economists say. A recent Federal Reserve paper noted another force depressing investment growth, especially in IT equipment and software: price trends have increasingly failed to capture quality gains in high-tech equipment.
The phenomenon of lackluster investment growth is particularly striking in Germany, home to some of the world’s most capital-intensive companies. If business investment were to snap back anywhere in the world, then surely it should be in Europe’s industrial—and export-driven—powerhouse.
Official data, however, show that while machinery investment picked up in the first quarter of this year, it remains 12% below its 2008 peak. Weak capital spending also undermined Germany’s economic recovery in the second quarter, the country’s statistical office Destatis said Friday.
Official data, however, show that while machinery investment picked up in the first quarter of this year, it remains 12% below its 2008 peak. Weak capital spending also undermined Germany’s economic recovery in the second quarter, the country’s statistical office Destatis said Friday.Official data, however, show that while machinery investment picked up in the first quarter of this year, it remains 12% below its 2008 peak. Weak capital spending also undermined Germany’s economic recovery in the second quarter, the country’s statistical office Destatis said Friday.
Net capital expenditures, which take account of depreciation, in Germany’s private sector was 2.4% of gross domestic product in 2014, down from 3.4% in 2007, before the global financial crisis, and about 8% in the early 1990s, according to Destatis.
One reason for the drop could be the increasing penetration of information technology in the production process, said Goldman Sachs ’s chief German economist, Dirk Schumacher.
Having analyzed German business investment over the past 20 years, Mr. Schumacher cites evidence that rising investment in software is crowding out machinery investment. Business managers say technology, software and data help make machines more flexible and keep them running around the clock.
For instance, machines that are used to manufacture air-bag capsules for cars can be refitted with new tools with little effort within a few hours—compared with a process that could take up several days in the 1990s—reducing both capital expenditure and costly downtimes, said Carl Martin Welcker, the managing director at Schütte GmbH, a German machine tool maker.
Businesses are also getting savvier at outsourcing key functions. The surge in cloud computing—in which company data is processed on a server elsewhere—highlights an accelerating trend that is starting to eat into traditional business spending on desktop computers and other IT equipment.
Some companies push outsourcing to extremes by tapping into nonbusiness assets originally purchased for consumption, such as having employees use private cellphones or tablets for business.
But with all those trends leading to an increased efficiency in production and innovation, it is even more puzzling that productivity measures aren’t picking up in any meaningful way.
In 2014, the growth rate of total factor productivity, which measures how efficiently additional capital and labor are being used, was near zero both in the U.S. and the eurozone, according to the Conference Board, a private research group.
Ellen McGrattan, a University of Minnesota economist who researches this subject, said she has found an explanation in the way official measures of economic activity are compiled.
Despite international efforts to include research and development, national accounts still fail to measure many investments in intangibles, including R&D, software, patents and advertising, all of which are vital to a company’s performance, she said.
“In other words, innovation by firms—which is fueled in large part by their intangible investments—may be evident everywhere but in the productivity statistics,” she said.
The Organization for Economic Cooperation and Development, following a two-year project titled “New Sources of Growth,” said companies now tend to invest as much or more in knowledge-based capital as they do in physical capital, such as machinery and equipment. That, according to the OECD, is creating “new challenges for policy makers, for business and for the ways in which economic activity is measured.”
When Germany last year added R&D to its investment statistics for the first time, it led to a “noticeable” upward shift in gross-domestic-product levels, according to Destatis.
While German companies pulled back on machinery investment during the crisis, R&D spending continued to rise. “Other investments,” which largely represent R&D spending, were up 9% in 2014 from 2008, according to Destatis.
And if recent economic research and the rise in R&D are anything to go by, the future could be brighter than thought—and productivity higher than currently estimated.
Net capital expenditures, which take account of depreciation, in Germany’s private sector was 2.4% of gross domestic product in 2014, down from 3.4% in 2007, before the global financial crisis, and about 8% in the early 1990s, according to Destatis.
One reason for the drop could be the increasing penetration of information technology in the production process, said Goldman Sachs ’s chief German economist, Dirk Schumacher.
Having analyzed German business investment over the past 20 years, Mr. Schumacher cites evidence that rising investment in software is crowding out machinery investment. Business managers say technology, software and data help make machines more flexible and keep them running around the clock.
For instance, machines that are used to manufacture air-bag capsules for cars can be refitted with new tools with little effort within a few hours—compared with a process that could take up several days in the 1990s—reducing both capital expenditure and costly downtimes, said Carl Martin Welcker, the managing director at Schütte GmbH, a German machine tool maker.
Businesses are also getting savvier at outsourcing key functions. The surge in cloud computing—in which company data is processed on a server elsewhere—highlights an accelerating trend that is starting to eat into traditional business spending on desktop computers and other IT equipment.
Some companies push outsourcing to extremes by tapping into nonbusiness assets originally purchased for consumption, such as having employees use private cellphones or tablets for business.
But with all those trends leading to an increased efficiency in production and innovation, it is even more puzzling that productivity measures aren’t picking up in any meaningful way.
In 2014, the growth rate of total factor productivity, which measures how efficiently additional capital and labor are being used, was near zero both in the U.S. and the eurozone, according to the Conference Board, a private research group.
Ellen McGrattan, a University of Minnesota economist who researches this subject, said she has found an explanation in the way official measures of economic activity are compiled.
Despite international efforts to include research and development, national accounts still fail to measure many investments in intangibles, including R&D, software, patents and advertising, all of which are vital to a company’s performance, she said.
“In other words, innovation by firms—which is fueled in large part by their intangible investments—may be evident everywhere but in the productivity statistics,” she said.
The Organization for Economic Cooperation and Development, following a two-year project titled “New Sources of Growth,” said companies now tend to invest as much or more in knowledge-based capital as they do in physical capital, such as machinery and equipment. That, according to the OECD, is creating “new challenges for policy makers, for business and for the ways in which economic activity is measured.”
When Germany last year added R&D to its investment statistics for the first time, it led to a “noticeable” upward shift in gross-domestic-product levels, according to Destatis.
While German companies pulled back on machinery investment during the crisis, R&D spending continued to rise. “Other investments,” which largely represent R&D spending, were up 9% in 2014 from 2008, according to Destatis.
And if recent economic research and the rise in R&D are anything to go by, the future could be brighter than thought—and productivity higher than currently estimated.
Net capital expenditures, which take account of depreciation, in Germany’s private sector was 2.4% of gross domestic product in 2014, down from 3.4% in 2007, before the global financial crisis, and about 8% in the early 1990s, according to Destatis.
One reason for the drop could be the increasing penetration of information technology in the production process, said Goldman Sachs ’s chief German economist, Dirk Schumacher.
Having analyzed German business investment over the past 20 years, Mr. Schumacher cites evidence that rising investment in software is crowding out machinery investment. Business managers say technology, software and data help make machines more flexible and keep them running around the clock.
For instance, machines that are used to manufacture air-bag capsules for cars can be refitted with new tools with little effort within a few hours—compared with a process that could take up several days in the 1990s—reducing both capital expenditure and costly downtimes, said Carl Martin Welcker, the managing director at Schütte GmbH, a German machine tool maker.
Businesses are also getting savvier at outsourcing key functions. The surge in cloud computing—in which company data is processed on a server elsewhere—highlights an accelerating trend that is starting to eat into traditional business spending on desktop computers and other IT equipment.
Some companies push outsourcing to extremes by tapping into nonbusiness assets originally purchased for consumption, such as having employees use private cellphones or tablets for business.
But with all those trends leading to an increased efficiency in production and innovation, it is even more puzzling that productivity measures aren’t picking up in any meaningful way.
In 2014, the growth rate of total factor productivity, which measures how efficiently additional capital and labor are being used, was near zero both in the U.S. and the eurozone, according to the Conference Board, a private research group.
Ellen McGrattan, a University of Minnesota economist who researches this subject, said she has found an explanation in the way official measures of economic activity are compiled.
Despite international efforts to include research and development, national accounts still fail to measure many investments in intangibles, including R&D, software, patents and advertising, all of which are vital to a company’s performance, she said.
“In other words, innovation by firms—which is fueled in large part by their intangible investments—may be evident everywhere but in the productivity statistics,” she said.
The Organization for Economic Cooperation and Development, following a two-year project titled “New Sources of Growth,” said companies now tend to invest as much or more in knowledge-based capital as they do in physical capital, such as machinery and equipment. That, according to the OECD, is creating “new challenges for policy makers, for business and for the ways in which economic activity is measured.”
When Germany last year added R&D to its investment statistics for the first time, it led to a “noticeable” upward shift in gross-domestic-product levels, according to Destatis.
While German companies pulled back on machinery investment during the crisis, R&D spending continued to rise. “Other investments,” which largely represent R&D spending, were up 9% in 2014 from 2008, according to Destatis.
And if recent economic research and the rise in R&D are anything to go by, the future could be brighter than thought—and productivity higher than currently estimated.
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