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Behind the Numbers: US capital stock part II

by Patricia Buckley
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    15 June 2015

    Behind the Numbers: US capital stock part II

    16 June 2015
    • Patricia Buckley United States
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    Businesses are investing more in knowledge generation, but can private investment make up for less government investment?

    Explore

    View the Behind the Numbers collection, a monthly series from Deloitte’s economists.

    As noted in last month’s “Behind the Numbers,” business investment in structures has remained within a relatively narrow band over the last 35 years, even as the two other components of investment—equipment and intellectual property (IP)—were growing faster than the economy overall. This month’s post focuses on the faster-growing of those two components, IP, a category that includes investment in software, research and development (R&D), and “entertainment, literary, and artistic originals.” IP investment plays a critical role in generating the innovation that fuels economic growth—a huge topic that we will save for another day. For now, the focus is on amount of the investment in IP. Business investment in IP occurs primarily at the developmental stage, while the federal government is the primary source of investment in basic research and development.1 But a possibly problematic disconnect has developed: even as private IP investment continues to rise, government investment has been falling. Since investment in the development stage builds on basic research, the question becomes, will slower government investment eventually erode the capacity of businesses to innovate?

    Private IP investment

    The composition of US capital investment has changed dramatically in recent decades. With the real level of investment in nonresidential structures approximately the same as it was in 1980, its share of the total investment has fallen from 33 percent in 1980 to 23 percent in 2014. Even though equipment investment was growing over the period, its share also declined (53 percent to 46 percent), as much faster growth in IP investment drove up its proportion of business investment from 13 percent to 31 percent.

    Within IP, software replaced R&D as the largest category of IP investment in 2003 (see figure 1). However, the faster growth in R&D seen in recent quarters might soon reverse the order. In 2014, investment in R&D rose by 6.9 percent as compared to increases of 3.6 percent in software investment and 2.1 percent in the artistic category. In the first quarter of 2015, real R&D investment rose by an additional 12.4 percent (annualized). With some other GDP components, such as personal consumption and exports, showing weakness, this trend is a welcome vote of confidence in the US economy by the business sector.

    BTN_June15_Figure1

    Just over two-thirds of private sector R&D is conducted by manufacturing, with the largest investments being accounted for by pharmaceuticals (22.4 percent of total private sector R&D), semiconductors and other electronic components (11.5 percent), other computer and other electronic products (11.7 percent), motor vehicles (6.3 percent), chemicals (4.1 percent), and aerospace products (2.8 percent). The other funders of private sector R&D are services (16.0 percent) and nonprofit institutions serving households (7.4 percent).2

    Categories of software include custom, own account, and prepackaged—each accounting for roughly a third of software investment (although prepackaged is slightly smaller).3

    The entertainment, literary, and artistic originals are primarily movies, long-lived television programs, music and books, with movies and television accounting for over 75 percent of the investment in this category.

    Government IP Investment

    In 2013, the most recent data available, government investment in IP totaled $188.4 billion, of which the federal government accounted for 83 percent of the total. The comparable investment in the private sector was $647.1 billion. With the artistic category removed, since the government does not produce many movies or television shows (long-lived or otherwise)4, private investment in IP is still three times as large as government investment. In real terms, IP investment by the federal government fell by 4.4 percent and state and local investment rose by 3.0 percent in 2013 as compared to the 4.3 percent increase in private investment.

    Government investment at the federal level is heavily weighted toward R&D investment (84 percent of total IP investment valued at $156.2 billion), while state and local government investment is more equally weighted between R&D and software (57 percent and 43 percent, respectively of $32.2 billion). The decline in real investment by the federal government was in R&D. Investment in software remained flat.

    A look at the growth patterns of real investment in R&D of the federal government and the private sector in Figure 2 shows very disparate patterns. Private investment in R&D follows a cyclical pattern, with investment contracting during the recessions and increasing during expansions. As mentioned earlier, growth in 2014 was particularly strong—it was the fastest rate of increase since 1995. In contrast, annual increases to real federal investment in R&D have been declining since 2003, with investment actually contracting in the last three years. In 2013, the level of real federal investment in R&D was back to where it was in 2005.

    BTN_June15_Figure2

    What are our competitors doing?

    While direct international comparison are difficult because countries are only now moving to include capitalized R&D in their GDP statistics—the United States first did so only in 2013,5 looking at measures of R&D spending, the United States remains a world leader. In absolute dollar amounts, the US spends the most on R&D, although double digit spending increases by China is closing the gap: in 2010, China’s spending on R&D was equal to 52 percent of US spending. In just two years, China’s R&D spending was equal to 66 percent of US spending. Relative to GDP, US spending ranks high among the OECD countries, although countries including Israel, Korea, Japan, and the Nordics spend proportionally more.6

    However even with stellar overall statistics, this is not the time for complacency given the pace of technological change. While budget deficits remain a concern, the United States should continue to make investments that will provide the building blocks for innovation going forward. Our economic future depends on it.

    Credits

    Written by: Patricia Buckley

    Endnotes
      1. Science and Engineering Indicators 2014, Chapter 4. Research and Development: National Trends and International Comparisons. http://www.nsf.gov/statistics/seind14/index.cfm/chapter-4/c4h.htm View in article
      2. Bureau of Economic Analysis, NIIPA Table 5.6.5, Private Fixed Investment by Type. Data are for 2013 and asset types are defined by the type of funder. View in article
      3. Prepackaged software excludes software “embedded,” or bundled in computers or other equipment. View in article
      4. This is not to say that federal, state, and/or local government do not provide support to artistic endeavors—they do—but this is not tracked under government investment. Rather as output of the performing organizations. View in article
      5. Prior to 2013, R&D was assumed to be an intermediate cost of production, not a capital investment such as software, equipment, or structures. As of last year, only four other countries had completed capitalizing R&D in their national accounts: Australia, Canada, Israel and the United Kingdom. Francisco Moris, et al “R&D Recognized as Investment in U.S. GDP Statistics: GDP Increase Slightly Lowers R&D-to-GDP Ratio,” InfoBriefs 15-315, National Science Foundation, March 30, 2015. http://www.nsf.gov/statistics/2015/nsf15315/ View in article
      6. Organisation for Economic Co-operation and Development, Main Science and Technology Indicators, Volume 2014, Issue 2, March 2015, Tables 2 and 3. http://www.oecd-ilibrary.org/science-and-technology/main-science-and-technology-indicators_2304277x View in article
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    Patricia Buckley

    Patricia Buckley

    Director | Deloitte Services LP

    Patricia, Deloitte Services LP, is the managing director for Economics with responsibility for contributing to Deloitte’s Eminence Practice with a focus on economic policy. She regularly briefs members of Deloitte’s executive leadership team on changes to the US economic outlook and is responsible for the US chapter of Deloitte’s quarterly Global Economic Outlook and produces “Issues by the Numbers,” a data-driven examination of important economic policy issues.

    • pabuckley@deloitte.com
    • +1 703 254 3958

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