At the start of 2011 the OECD began work on a two-year project entitled New Sources of Growth: Knowledge-based Capital. While this programme of work has numerous intellectual antecedents, its immediate inspiration was a finding highlighted in the OECD’s Innovation Strategy, published in 2010, that many innovating firms do not invest in R and D. Instead, their innovation efforts are driven by investments in a broader range of intangibles assets, from software and large data sets to designs, firm-specific human capital and new organisational processes. These intangible assets are referred to in this book as knowledge-based capital (KBC). The work on KBC has set out to: provide evidence of the economic value of KBC as a new source of growth; and to improve understanding of current and emerging policy challenges.

Innovation is a key to business success, but where innovation comes from is changing. Today’s firms are looking beyond research and development (R and D) to drive innovation. They invest in a wider range of intangible assets, such as data, software, patents, designs, new organisational processes and firm-specific skills. Together these non-physical assets make up knowledge-based capital (KBC).

Achieving higher and sustained growth is essential for OECD economies. Business investment in knowledge-based capital (KBC) is increasing and is already a significant source of growth. But KBC is poorly measured and its many policy implications require further assessment. This chapter provides an overview of the OECD’s recent work on KBC and, specifically, how KBC pertains to resource allocation and innovation, tax policy, competition policy, measurement, global value chains, knowledge networks and markets, corporate reporting, and “big data’.

Investment in knowledge-based capital (KBC) – assets that lack physical embodiment, such as computerised information, innovative property and economic competencies – has been rising significantly. This has implications for innovation and productivity growth and requires new thinking on policy. The returns to investing in KBC differ significantly across countries and are partly shaped by structural policies, which influence the ability of economies to reallocate scarce resources to firms that invest in KBC. Well-functioning product, labour and venture capital markets and bankruptcy laws that do not overly penalise failure can raise the expected returns to investing in KBC by improving the efficiency of resource allocation. The same is true for lower barriers to international trade and investment, which also stimulate innovation through greater market size and knowledge diffusion across borders. While structural reforms offer the most cost-effective approach to raising investment in KBC, there is a role for innovation policies to raise private investment in KBC towards the socially optimal level(s). Indeed, R and D tax incentives and, as a finding that contrasts with previous research, direct support measures can be effective, but design features are crucial in order to minimise the fiscal cost and unintended consequences of such policies. Well-defined intellectual property rights (IPR) are also important to provide firms with the incentive to innovate and to promote knowledge diffusion via the public disclosure of ideas. However, such IPR regimes need to be coupled with pro-competition policies to ensure maximum effect while the rising costs of the patent system in emerging KBC sectors may have altered the trade-off inherent to IPR between the incentives to innovate and the broad diffusion of knowledge.

Effective tax rate measures of the tax burden on investment in R and D typically focus on the tax treatment of R and D expenditure, including the availability of R and D tax credits or allowances. This chapter reports work on identifying common cross-border tax planning strategies used by MNEs to avoid tax on returns from R and D, and incorporating these strategies in a new effective tax rate (QETR) model analysing effects of domestic and international tax policies on the tax burden on R and D, firm behaviour and tax revenues.

This chapter explores the relationship between knowledge-based capital (KBC), innovation and competition policy, beginning with an assessment of the theoretical underpinnings and the empirical evidence available to explain the link between market concentration and innovation, including the concept of the inverted U. Two broad recommendations for policymakers emerge: unnecessarily anticompetitive market regulation should be abolished, and effective enforcement of competition law is required to support innovation and economic growth. The chapter then considers the role of intellectual property rights (IPR) in the development and use of KBC. IPR are used heavily in many KBC-focused markets and are often considered to be critical for technological development. Yet the abuse of IPR can discourage or prevent innovation and raise competition concerns. Potential problems include patent ambush in standard-setting, certain exclusionary licensing arrangements, and the strategic accumulation of standard-essential patents by individual firms. Finally, the chapter addresses the question of competition policy within the digital economy, which has much to do with the growing importance of KBC to economic activity.

This chapter describes recent advances in the measurement of knowledge-based capital (KBC) and the contribution of the OECD to this work. Important areas of progress relate to the international harmonisation of estimates and methodologies and the publication of comparable figures at the macroeconomic and industry levels. The OECD has also addressed the measurement of assets for which guidelines do not exist, and proposed an experimental task-based methodology to estimate investment in organisational capital (OC). Results suggest that investments in OC are almost twice as large as previously estimated and that many occupations, in addition to managers, contribute to its accumulation. OECD work on research and development (R and D) has focused on aligning the various existing measures of investment and on proposing output-based measures that capture the economic and technological value of inventions through the use of patent data. The results point to the sources of differences in investment estimates and show that the quality of R and D output varies substantially within and across technologies and industries. Finally, the OECD has estimated depreciation rates for R and D and OC and found that these assets remain valuable for longer than previously assumed. Overall, the estimates suggest the growing importance of investments in KBC assets and their relation to productivity growth, although causal links, complementarities and spillover effects remain to be addressed.

The rise of global value chains (GVCs) has changed the nature of global competition. Economies and firms increasingly compete for high value-added activities within GVCs rather than for high value-added industries. The value created within a GVC is unevenly distributed among participants, and is concentrated in firms engaging in technologicallysophisticated, highly original activities that determine the total value the GVC can create. This chapter explores the role of knowledge-based capital (KBC) as the firm-specific resource that establishes the competitive advantage of economies and firms in those “high value-added” activities within GVCs.

Rising investment in knowledge-based capital and the unprecedented accumulation of information and intellectual property rights have driven a widespread search for mechanisms to help individuals, businesses and organisations navigate increasingly complex innovation systems. Knowledge networks and markets (KNMs) are the set of systems, institutions, social relations, networks and infrastructures that enable the exchange of knowledge and associated intellectual property rights. KNMs provide services to actors in the innovation system ranging from facilitation of the search for, and matching to, relevant counterparties, to evaluating, executing and enforcing agreements. This chapter reviews the different types of KNM – including aspects of the market for skilled workers – their rationale, modus operandi, and what is known about best policy practice. Emphasis is placed on the complexity of policy analysis and evaluation. The challenges of measuring relevant knowledge flows are also examined. The

Corporate reporting has been much debated in recent years, with diverging views on how to enhance its quality and usefulness. Enhancing reporting on intangible assets (or KBC) has been an important part of this debate. Corporate financial reports provide limited information on companies’ investments in KBC. This may hinder access to corporate finance and quality of decision making. Prevailing accounting standards do not require disclosure of KBC in most cases. Frameworks to enhance KBC management and disclosure have proliferated in recent years. Most have been pioneered by private-sector organisations and some by governments in the form of voluntary guidelines. Nonetheless, a lack of standardisation in reporting is a challenge. Governments might consider: i) supporting better corporate disclosure by establishing voluntary recommendations and guidelines; ii) creating mechanisms to facilitate companies’ reporting of investments in KBC; iii) introducing frameworks for auditors; iv) engaging in international coordination to improve international comparability of data and information supplied by companies; and v) promoting the establishment of asset classifications that would increase consistency in data collection and reporting.

Several technological and socioeconomic trends, including the migration of social and economic activities to the Internet, and the falling costs of data collection, transport, storage and analytics, are leading to the generation of huge volumes of data – often referred to as big data. Big data now represents a core economic asset that can create significant competitive advantage for firms and drive innovation and growth. This chapter considers five sectors in which the use of data can stimulate innovation and productivity growth: online advertisement, health care, utilities, logistics and transport, and public administration. Overall, the benefits that big data can create in these sectors include: the development of new data-based goods and services; improved production or delivery processes; improved marketing (by providing targeted advertisements and personalised recommendations); new organisational and management approaches, or significantly improved decision-making within existing practices; and enhanced research and development. Optimal public policy in this sphere has still to be identified. However, it is clear that to unlock the potential of big data, OECD governments need to develop coherent policies and practices for the collection, transport, storage and use of data. Among others, these policies cover issues such as privacy protection, open data access, the supply of skills and infrastructure, and measurement (better capturing the value of data in economic statistics).