Managing the Intangible Shift: Positioning Canada to compete in an intangible economy

Managing the Intangible Shift: Positioning Canada to compete in an intangible economy

Canada’s future competitiveness, and the well-being of individuals and communities, depends on how well businesses and policymakers understand and manage the shift to an intangible economy
Managing the Intangible Shift: Positioning Canada to compete in an intangible economy
Creig Lamb
Senior Policy Analyst
December 4, 2019
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Over the past several decades, the Canadian economy has experienced a major transformation in the ways that people work and companies generate value—one that we can no longer afford to ignore. Across all sectors, from manufacturing to technology to natural resources, a rising share of economic growth and prosperity is being driven by intangible investments and assets, such as data, digital services, brands, design, marketing and firm-specific training—and a declining share by tangible investments and assets, such as buildings, machinery, equipment and product inventories. We call this transformation the intangible shift.

Firms and countries that understand and adopt strategies to meet the new realities of an intangible economy can position themselves for robust growth. Canada’s future competitiveness, and the well-being of individuals and communities, depends critically on how well businesses and policymakers understand and manage the intangible shift. Yet, in many cases, Canadian economic policies have not paid sufficient attention to the rise of intangibles, and we lag peer economies in making and benefiting from intangible investments.

Urgent action is required across multiple policy domains—including financing, data governance, intellectual property, foreign direct investment, education and skills, and inclusion and distribution—to enable, capture and fairly distribute new forms of value creation in Canada. The Brookfield Institute plans to embark on a research initiative to help Canada understand the concrete policy options that are needed to enable, manage, and benefit from the intangible shift. Our research and communications activities will contribute to a robust, evidence-based understanding of intangibles and their unique properties; examine implications for productivity, growth, employment, and income and wealth distribution; and identify pressing policy needs and concrete, implementable policy options to ensure that Canadian governments and firms are prepared to compete effectively.

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Unlike tangible assets that are used up over time, intangibles can be used repeatedly without being depleted. For example, a smartphone app might require substantial time and energy to develop, but once completed, it can be sold and licensed to users almost without limit...

What are intangibles + what makes them different?

Intangibles are investments and assets that do not have a concrete physical existence but which generate, or have the potential to generate long-term economic value.[1] They include things like software and data, digital services, brands, design and marketing, research and development, relationships, and expertise. Moreover, they are investments that can benefit sectors across the economy, from high-tech firms to mineral and resource extraction operations. But intangibles exhibit unique properties and behaviour that must be understood and managed if their potential benefits are to be realized and captured by firms and people.[2] These include:

  • Scalability
    Unlike tangible assets that are used up over time, intangibles can be used repeatedly without being depleted. For example, a smartphone app might require substantial time and energy to develop, but once completed, it can be sold and licensed to users almost without limit, since each additional unit requires no additional resources to produce. The upshot is that economies based on intangibles will see some firms scale and profit quickly, often with minimal labour needs and costs. While this provides promising new sources of economic growth, it can decouple economic and employment growth, generate extreme first-mover advantages and winner-take-all dynamics, and concentrating wealth in fewer and fewer hands.  
  • Sunkeness
    Tangible assets like buildings, equipment, and product inventories have general use value and therefore can be sold to firms other than the firm that initially created or bought them. By contrast, intangible assets like data, brands, and firm-specific knowledge are difficult to sell because they frequently have value only to the firm that created them. This “sunkeness” feature of intangible investments means that they are less useful as collateral when firms want to raise capital for other business activities. As such, they are riskier to make, leading some firms to underinvest in intangibles even when their long-term success depends on making them.  
  • Skills Sensitivity
    Intangibles tend to require different skills and expertise than tangible assets. Design, data analysis, digital product development, marketing, and R&D require advanced analytical, technical, and quantitative skills, as well as high-level creativity and communication. Moreover,
    given the unique legal, financial, risk assessment, and management challenges intangibles can present, specialized legal, and financial skills are also important. In some cases, these skills may be in short supply, hindering a firm’s ability to compete in the intangible economy. At the same time, changes in the kinds of skills that are needed in intangible economies could leave workers without ways to participate in and benefit from intangible economy opportunities.
  • Synergies 
    Intangible assets often work best when combined with other intangible and tangible assets. Firms that develop sophisticated databases and digital capacity to improve marketing of their existing products and services, for example, achieve significant performance advantages.
    [3]  The implication is that business leaders and policymakers should pursue innovation and growth opportunities both for new businesses, as well as existing firms that can complement their existing product and service offerings with intangible assets.

Although Canada is experiencing an intangible shift, we lag other advanced economies on the extent and intensity of the shift, leaving us poorly positioned to compete effectively in the global economy....

How does Canada perform in the intangible economy?

Canada’s intangible economy is large and growing fast. Between 1976 and 2008, business sector investment in intangibles grew from 5 to 13 percent of economic output in Canada, reaching a total value of $151 billion. Meanwhile, investments in tangible assets fell from 27 to 16 percent of output. Canadian firms exhibit particular strength in investments in branding, talent, and organizational improvements. Roughly 60 percent of Canada’s intangible investments ($87 billion in 2008) were in economic competencies, including organizational design and improvements ($66 billion), advertising and brand equity ($17 billion), and human capital ($4 billion).[4] 

These intangible investments have contributed significantly to Canada’s productivity growth. Yet, compared to peer jurisdictions, Canadian firms invest less in some key intangible assets, notably industrial R&D and software, which helps to explain our poor productivity track record relative to leading peer countries like the United States.

The Intangible Shift: A proposed Brookfield Institute research program

Intangible investments and activities are critical to innovation, productivity, and economic growth. Although Canada is experiencing an intangible shift, we lag other advanced economies on the extent and intensity of the shift, leaving us poorly positioned to compete effectively in the global economy. The Brookfield Institute plans to launch a research series that will explore the many opportunities and challenges of the intangible economy in an effort to help leaders develop policies and strategies that position Canadian firms and workers to succeed.

In January 2020, we plan to release a foundational report that provides an overview of what the intangible economy is, what’s different about it, how Canada is doing, and where better policies and strategies are needed to support the ongoing shift. Over the next two years, we hope to release a series of deep insight reports that examine key questions, challenges, and policy options that Canadian decision makers will need to address in order to prepare for the age of intangibles. These deep dive reports will examine:

  • Financing innovation and growth in the intangible economy
  • Data ownership, use, and governance
  • Intellectual property and policy
  • Rethinking foreign direct investment (FDI)
  • Rethinking competition policy
  • Skills, talent, and education
  • Intangibles and inequality
  • Measuring intangibles

Advisors

Brookfield’s Intangible Shift research program will benefit from the insights and guidance of an advisory board of international experts, including:

  • Stian Westlake, Senior Fellow, Nesta
  • Cam Vidler, Vice President, Industry and Innovation, Business Council of Canada
  • Graeme Moffatt, Senior Fellow, Munk School of Global Affairs and Public Policy
  • Danielle Goldfarb, Head of Global Research, RIWI Corp
  • With more to be confirmed shortly!

[1] J. Haskel and S. Westlake, Capitalism Without Capital (Princeton: Princeton University Press, 2018); T. Muntean “Intangible Assets and Their Contribution to Productivity Growth in Ontario.” International Productivity Monitor (2014); OECD, “A new source of growth: intangible assets.” (Paris: OECD, 2011); R. Asselin and S. Speer, A New North Star: Canadian Competitiveness in an Intangibles Economy (Ottawa: Public Policy Forum, 2019).

[2] These features draw from, but also slightly modify, the features of intangibles identified in J. Haskel and S. Westlake, Capitalism Without Capital. 

[3] Brynjolfsson, E., Hitt, L., & Kim, H. (2011). Strength in numbers: How does data-driven decision-making affect firm performance? International Conference on Information Systems 2011, ICIS 2011, 1, 541–558. https://doi.org/10.2139/ssrn.1819486

[4] Baldwin, J., Wulong, G., & Macdonald, R. (2009). Intangible Capital and Productivity Growth in Canada. Statistics Canada.

For media enquiries, please contact Coralie D’Souza, Director of Communications, Events + Community Relations at the Brookfield Institute for Innovation + Entrepreneurship.