Knowledge economy sold short

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The way UK productivity is calculated in official statistics may be selling UK businesses short, according to new research funded by the Economic and Social Research Council (ESRC).

The true impact of today's 'knowledge economy' is overlooked due to outdated forms of measurement found a study led by Professor Jonathan Haskel of Queen Mary, University of London, through an Advanced Institute of Management Research (AIM) Public Services Fellowship released late last week.

The study - which has also been supported by HM Treasury and the Office for National Statistics - found that, although the UK's productivity performance declined after 1995 despite major technology investment according to official statistics, when the 'intangible' assets of modern business activity are factored in, productivity is shown to rise.

Professor Haskel said the research findings were "striking," suggesting that in recent years, traditional measurement techniques may have considerably underestimated the importance of science, innovation and knowledge-based industries to the UK economy.

In 2004, business investment of £120 billion - or about 15 per cent of gross value added in the market sector of the economy - went on intangible assets such as software, research and development, design, training and branding. This sum equalled UK companies' total investment in 'tangible' assets like machinery.

When intangibles are included, the level of nominal market sector gross value added in 2004 rises by about 13 per cent and the share of nominal investment in UK gross domestic product (GDP) rises from 22 per cent in 1970 to 25 per cent in 2004, rather than remaining constant at about 16 per cent.

Researchers found that about half of intangible investment went on advertising and market research to support brands, training employees and boosting management expertise and 32 per cent on design. The other 18 per cent was spent on computerised information.

Haskel added: "When the British economy was based mainly on investments in tangible assets such as machinery, the methods used for calculating GDP were broadly fit for purpose.

"But in an economy increasingly investing in intangibles, we could be missing some key aspects of economic activity."

The Chancellor of the Exchequer Alastair Darling referred to the research findings in his pre-Budget report in October, where he told MPs that the new analysis showed that Britain could now be investing as much in intangible assets as the US.

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