We Shall Have Spring Again: Preparing for the return of intangibles

We Shall Have Spring Again: Preparing for the return of intangibles

As part of our ongoing Intangible Shift research series, we examine the implications of the COVID-19 crisis on, and recovery prospects for, Canada’s intangible economy
Daniel Munro
Research Advisor
Creig Lamb
Senior Policy Analyst
April 15, 2020
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In October 1939, just as the Second World War was getting underway, the writer and theologian C.S. Lewis delivered a speech to a group of Oxford University students about the importance of “learning in wartime.” Many students were anxious about pursuing seemingly frivolous topics while “the lives of friends and the liberties of Europe” were “in the balance.” Lewis took seriously the question of whether studying philosophy, poetry and history was “like fiddling while Rome burns” but concluded that it was not. He said that things that are meaningful and important in what are considered “normal times” remain so in “wartime.”  

We find ourselves in similar circumstances. As the COVID-19 pandemic and its economic impact threaten the health and well-being of Canadians and our friends and neighbours around the world, we ask ourselves whether our research on the intangible economy is important and worth continuing. How can research about the intellectual property policies and financial mechanisms needed to support Canada’s increasingly intangible economy, for example, matter in our current crisis? 

We think it does. And we think it may be more important and urgent than it appears at first glance. 

Intangible Shift: Stalled

Intangibles are key contributors to economic growth. Prior to the current crisis, countries that were making what we call the intangible shift were experiencing higher productivity and growth than less intangible intensive peers. Canada, we noted, was making the shift, but at a slower pace than others. We argued that this was a problem because it meant we were missing out on the substantial contributions to economic growth and prosperity that a more intangible economy offers. Our Intangible Shift research series was designed to identify policy options and business strategies that could support, accelerate, and manage the implications of Canada’s intangible shift.   

Our current crisis presents both a challenge and an opportunity for Canada’s intangible economy. If the 2008-09 recession provides even a rough precedent, we will see declines in both tangible and intangible investments. But when recovery begins, there is the potential for an accelerated intangible shift. As we show below, while Canada’s intangible investments were stuck in low gear in the previous recovery period, the USand to a lesser extent, countries in the EUexperienced very strong growth in intangible investments. We need to understand why that happened and identify policies and strategies to help Canada avoid missing out this time around. 

Intangibles During and After Economic Downturns

Examining the 2008-09 recession and subsequent recovery, Canada has reason to be concerned about how our post-pandemic economic recovery might play out. Research on the effects of the 2008-09 recession in the US and European Union (EU) countries shows that while both tangible and intangible investments declined, the impact on intangibles was weaker, and post-crisis growth of intangibles stronger, than tangibles. 

While investments in tangible assets in the US fell by 24 percent during the recession and recovered only slightly over the next five years, intangible investments slowed by only 7 percent during the crisis and recovered quickly. By 2013, intangible investments in the US were 10 percent higher than they were in 2007 and 18 percent higher than in 2009. Similarly, while tangible investments declined by 17 percent in the EU14 during the recession, intangible investments declined by only 2 percent and experienced faster growth in the recovery period.  

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Corrado, C., Haskel, J., Jona-lasinio, C., & Lommi, M. (2016). Intangible investment in the EU and US before and since the Great Recession and its contribution to productivity growth.

Tangible and intangible investments in Canada during the recession largely matched the trends seen in the US and the EU14, but our recovery experience was different. While exactly comparable data are not readily available, growth in intangible investments in Canada from 2010 to 2016 was lower than that of tangibles in both real and nominal terms. As investment slowed, the share of intangible capital in the business sector’s overall capital stock also declined. 

 

Gu, W., & Macdonald, R. (2020). Business Sector Intangible Capital and Sources of Labour Productivity Growth in Canada.

Why does this matter?

In the study of the intangible economies of both the US and EU, the countries that were more intangible intensive before the crisis (between 2000 and 2007), experienced less of a financial shock after the crisis and were better positioned to rebound financially.

If the current COVID-19 crisis exacerbates the slowing of intangible investments in Canadaa trend that has been occurring since the early 2000sour ability to manage the economic shock and rebound may be more precarious. Of course, it is too early to tell whether this will be the case. This crisis seems quantitatively and qualitatively different from previous crises and there are many factors that play into a country’s economic resiliency aside from intangible investments. The role played by Canada’s prudent, stable banking system in warding off a much more severe downturn in 2008-09 is one example.

As Lewis writes, “we shall have spring again.” Our task is to ensure the ground is ready for strong and sustainable growth when it comes.

Still, given the growing importance of intangible investments to long-term productivity, growth, and economic resilience (both following economic shocks and during less volatile periods), it is useful to unpack why Canada’s relative intangible intensity has been declining and identify policies and strategies that will help to bolster our intangible economy in the post-COVID environment.  

As part of our Intangible Shift research series, we will continue to explore what drives the performance of Canada’s intangible economy, what explains divergence from trends in peer countries in both normal and crisis years, and the policies and strategies that will be needed to put Canada on a stronger footing in the next recovery period. When other economies’ intangible-intensive firms and sectors bounce back, we want Canada to be ready to keep up withand even lead inintangible-driven growth to ensure that we can share in the prosperity that it offers. As Lewis writes, “we shall have spring again.” Our task is to ensure the ground is ready for strong and sustainable growth when it comes. 

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

Daniel Munro
Research Advisor
Creig Lamb
Senior Policy Analyst
April 15, 2020
Print Page

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