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Investing into things that do not physically exist may sound strange, but Professor Jonathan Haskel can convince you otherwise. He studies the knowledge economy, which invests both in tangible assets, such as buildings and machines, but also intangible assets, like software, design and R&D, considering how such intangibles affect growth, productivity and innovation.
Why are intangibles different to other assets? Haskel defines four features that differentiate them: sunk costs, spillovers, scaling and synergies.
Haskel suggests the advertisement of a company’s brand is an example of a sunk cost because it cannot then be resold to another firm, unlike a tangible investment, such as a machine. Spillovers can be produced by a company or a country that invests in R&D since others can build and learn from their finished products -a good business example is Xerox’s investment in the graphical user interface which Microsoft and Apple eventually adopted. Haskel also argues that intangible investments are highly scalable, for example Uber’s software can be replicated across cities to expand the service at virtually no cost. Finally, synergies are combinations of intangibles collected within one company, where, while it may be possible to copy one asset (say, a company’s software), it is much harder to copy the rest of it (such as its network with clients and regulators). Smart, isn’t it?
Intangibles are at the heart of innovation. But what is innovation exactly? Contrast innovation, ‘doing something differently’ from duplication, ‘doing more of the same’. If an economy is using more labour and more machinery it is growing by duplication; if it is using those inputs more shrewdly, it is growing via innovation – after all using inputs more adeptly is what intangible investment is all about. Growth via duplication is more common among developing countries, whereas developed countries enjoy growth beyond duplication by investing in intangible assets.
Still doubting the importance of the intangible asset? Look for further material on Professor Haskel’s website.
Written by Natalia Bakhir (MSc Investment and Wealth Management)
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