Investment in intangible assets that underpin the knowledge or learning economy, such as intellectual property (IP), research, technology and software, and human capital, has risen inexorably over the past quarter century, and the COVID-19 pandemic appears to have accelerated this shift toward a dematerialized economy. Are we seeing the start of a new stage in the history of capitalism based on learning, knowledge, and intellectual capital? As economies recover from the pandemic, could a wave of investment in intangible assets breathe new life into productivity and unlock more growth potential?
New research uses sector-level data and the results of a new survey of more than 860 executives that reveal that “top growers”—companies in the top quartile for growth in gross value added, a measure of economic growth—invest 2.6 times more in intangibles than low growers, companies in the bottom two quartiles. The research uses the survey and sector-level data from the INTAN-Invest database to explore the correlation between intangible investment and the productivity of sectors, economies, and firms, and to discover the formula for the effective deployment of intangible assets to drive growth.1 The research takes the broader definition of intangibles outlined by economists Jonathan Haskel and Stian Westlake, who include economic competencies such as advertising and brands, marketing research, organizational capital, and training. This more expansive definition of intangibles appears more relevant to the role they increasingly play in companies, sectors, and economies.
Over the past 25 years, the investment share of intangibles has increased by 29 percent
Over the past 25 years, the United States and ten European economies achieved 63 percent growth in gross value added (GVA). During this period, the share of total investment of intangibles as defined by the INTAN-Invest database increased by 29 percent (Exhibit 1). Rising investment in intangibles has been linked with increasing total factor productivity of entire economies. This could indicate that the deceleration of productivity growth over the past decade partly reflects a slowdown in investment in intangible assets.
The share of intangibles in total investment has risen steadily even in the face of economic disruptions such as the bursting of the dot-com bubble in the late 1990s, although this shift decelerated in the aftermath of the global financial crisis. During the pandemic, when social distancing necessitated a shift toward remote working and large-scale and much faster digitization, investment in intangible assets accelerated once again. In the United States, for example, intangibles investment (as measured by gross fixed capital formation) as a share of total investment increased by one percentage point between the first three quarters of 2019 and 2020 to reach 29 percent of total investment in 2020. In some European economies, the increase in the intangibles share was larger—2.8 percentage points in France, and 1.9 percentage points in the United Kingdom, according to national statistical agencies.
Investing in intangibles correlates with productivity and sector growth
An intangibles-rich economic model is not the only way for an economy to be successful; there are other ways to promote productivity and growth. Nevertheless, economies that are experiencing growth in intangibles investment are also posting growth in total factor productivity.2 This suggests that an increase in intangibles investment may trigger an increase in total factor productivity, and therefore long-term economic growth.
Additionally, there is an observable link between investment in intangibles and GVA growth at the sector level, according to statistics from the INTAN-Invest database. Broad correlations are present across sectors, but the strength of the correlations varies.
Sectors that have invested the most in intangibles—more than 12 percent of their GVA—have achieved higher growth in GVA, at more than 2.7 percent per year, or 28 percent higher than other sectors. Knowledge-intensive services have invested relatively heavily in intangibles at 15 percent of their GVA and, on average, achieved above-average GVA growth of 3.0 percent a year. Innovation-driven services including information and communications technology (ICT) on average invested 17.4 percent of their GVA in intangibles and grew at 2.9 percent a year. Most other sectors invested less than 10 percent of their GVA and achieved below-average rates of GVA growth.
Regardless of the sector, companies that invest more in intangibles grow more
In all sectors, there are companies that are outperforming others. One of our key findings is that firms that invest most in intangibles are outperforming their peers. Top growers, defined as companies in the top quartile of growth by sector in 2018–19 (whose median growth was 20 percent) are investing 2.6 times more in intangibles than low growers (3 percent median growth in 2018–19) (Exhibit 2). The gap between them increases to between five and seven times in sectors such as financial services where competitive advantage is anchored on knowledge.
Even in sectors with relatively lower growth such as manufacturing, top growers are using high investment in intangibles to outgrow the market. Some companies that have outperformed their sectors have diversified into “intangible-like” adjacencies. For instance, manufacturing companies in slower-growing industries have used their intangible assets (such as brand) to carve out resilient niches within the industry or find new growth markets.
Top growers in innovation-driven sectors, including telecommunications, media, and technology, invest 5.2 times more than low growers. One leading entertainment industry company today still invests in tangible assets such as roller coasters, land, and stores, but it is building up its data analytics capability with a team of more than 1,000 people to develop a more personalized customer experience. Similarly, top growers in knowledge-intensive sectors such as financial services invest 5.4 times more than low growers. One major European bank had invested limited amounts in intangible capital and had limited access to data, a shortage of skills, and conflicting data strategies. In response, the bank invested heavily in organizational and managerial capital and deployed an analytics transformation program covering the redesign of its organization, a talent strategy, the modernization of its data architecture, and building analytics capabilities across the organization.
Top growers in retail trade invest 8.0 times more in intangibles than low growers. Again, advanced analytics are part of the story as retailers increasingly shift focus from adding to tangible capital by opening new stores to developing new sources of growth on the back of digital, data, and analytics. One leading US discount retailer used digital and analytics capital to connect partners, acquire companies, and win customers in a single digital platform, embedding machine learning throughout the organization. In parallel, the company worked to improve its brand capital, offering customers a loyalty program with a focus on free delivery, more choice, and a personalized pricing system. The company also developed its human, organizational, and managerial capital, reskilling existing workers and attracting new talent.
Intangibles are interdependent, and companies achieve greater synergies by investing in them all. Companies that have invested across all categories of intangibles are further ahead in their digitization journey, less likely to be disrupted because they are highly innovative, and highly likely to be able to attract top talent and retain it. All of this creates value and, importantly, value that can be defended even amid a deep market and economic disruption. During the COVID-19 pandemic, companies that invested significantly in all four main types of intangible capital—innovation capital, digital and analytics capital, human and relational capital, and brand capital—were able to maintain 2019 levels of growth.
Top growers not only invest more in intangibles but also deploy them in ways that develop new capabilities
Purely investing in intangibles is not sufficient to drive growth. Companies need to think about how those intangibles are deployed and implemented to ultimately build capabilities that create a competitive advantage.
Top growers and low growers both invest in intangible assets—the first more than the second. The survey results suggest that there is considerable agreement among top and low growers across sectors that intangible capabilities are key to delivering growth and competitiveness. About 24 percent of both top and low growers strongly agreed that digital and analytics capital is crucial for building a sustainable competitive advantage, and this finding holds across sectors from telecommunications, media, and technology, where data have been a valuable asset for building ecosystems, to advanced manufacturing as more players digitize their supply chains. The key difference, however, is that top growers take the deployment of intangible capital to the next level and display a detailed understanding of how intangibles can be used to develop the capabilities that are most likely to deliver on growth. When asked to be precise about what delivers disproportionate returns, survey respondents cited specific use cases, rigorous processes, data-driven decision making, and, broadly, using intangible investment to embed data, talent, innovation, and purpose in their day-to-day operations. In short, low growers plan, while top growers do (Exhibit 3).
Looking in more detail at the different types of intangible asset, a clear picture of higher growth driven by effective deployment and use of intangibles emerges (Exhibit 4):
- Innovation capital. The share of top growers that reported using data as the basis of decision making was nearly double the share of low growers. Likewise, more than twice the share of top growers said that they have rigorous processes in place to measure the impact of R&D and design, enabling them to build rapidly on successes and abandon failures. Similarly, twice as many top growers are more willing to disrupt their own business models proactively (rather than waiting to be disrupted) and actively search for opportunities to invest in disruptive innovation.
- Data and analytics capital. Only top growers say that they have taken the next steps needed to implement their digital strategy, including making effective use of proprietary data, investing in flexible architecture to avoid being held back by legacy systems—so-called tech debt—and ensuring that they can leverage the full power of intangibles through real-time analytics. Top growers are 1.3 times more likely to have proprietary data, 1.8 times more likely to run analytics decisions in real time, and 2.0 times more likely to have a flexible infrastructure.
- Human and relational capital. Both top and low growers agree on the importance of attracting talent, but top growers are 2.6 times more likely than low growers to strive to retain that talent by offering a unique value proposition. Top growers are twice as likely to define performance measures for all parts of the organization, and 1.7 times more likely to put in place talent-management processes to foster diversity. Our survey indicates that top growers are 3.0 times more likely to make investment decisions holistically, to do so on a systematic and regular basis, and to maintain agility. Top growers are 1.5 times more likely to make decisions about spending and investment allocation through systematic but agile evaluation of returns. Finally, top growers are twice as likely as low growers to agree strongly that it is important to scale disruptive new business models.
- Brand capital. Only top growers are already deploying this type of intangible to ensure that they can leverage brands effectively by not only listening to the voice of consumers but listening in a tailored way to serve them with personalized offerings backed by real-time data analytics and tailored pricing and promotion. It is notable that 2.5 times more top growers than low growers regard personalization as the core part of the customer experience, and more than double the share of top growers say that they continuously allocate and reallocate marketing spending in or near real time.
Deploying intangibles is a moving target. As businesses invest, they will need to continually assess not only what is key to success today but what areas they will need to prioritize for growth in the future. Continuous reexamination of the type of intangibles that are most likely to deliver on competitiveness and growth, that can be scaled, and that are most likely to deliver synergies that may create value in other areas of the learning economy will require a high level of visibility. Companies should consider setting up a control tower that monitors the skills the organization needs, what IP will deliver the next slice of competitive advantage, and what area innovation capital should focus on.
Huge value is at stake, and executives and policy makers need to ask themselves what it will take to realize the opportunity
The correlation of investment and deployment of intangibles with growth in GVA is becoming ever clearer, and huge value is at stake. As a thought exercise, consider the potential value that could be created if 10 percent more companies were to attain the share of intangible investment, and the GVA growth, of top growers. This could produce an additional $1 trillion in gross value added or a 2.7 percent increase across sectors in OECD economies. If more companies could capture more of the productivity- and growth-driving power of intangibles, these assets could play a major role in the bounce-back of companies and economies from the COVID-19 crisis.
Executives—and governments—searching for sources of growth should arguably pay more attention to the full range of intangible assets. The formula that top growers have apparently hit upon may help other businesses to understand the best way to invest in intangibles and deploy them, and help policy makers to put in place the right kinds of enabling infrastructure.
For companies, execution is key. Top growers invest 2.6 times more than low growers in intangibles, invest in the four major types of intangible asset, and deploy them effectively with a focus on embedding intangibles in day-to-day business operations to achieve returns. Mindset matters. Investing in intangibles is different from investing in tangibles. Take a supermarket as an example. Investing in a new store is fairly straightforward for a retailer with relatively certain prospects for sales. However, the sales boost from investing in, say, a real-time promotion platform is less certain. In the worst-case scenario, the property may be able to be resold, but an investment in software may not be able to be recovered. This illustrates why investing in intangibles requires a mindset shift toward the test-and-learn, risk-taking approach that is more typical of top growers than low growers. In the survey, 70 percent of top growers agreed with the statement “in order to achieve above market growth, you need to pivot to a mostly test-and-learn, agile culture,” compared with 60 percent of low growers.
As the intangible, digitized economy spreads, the imperative to reskill—within companies, and more broadly in society—becomes even more urgent. Digitization, automation, and the deployment of intangibles appears to have accelerated as leading companies responded to the pressures of the COVID-19 pandemic. A December 2020 McKinsey Global Economic Conditions survey of executives found that about 75 percent of respondents in North America and Europe said they expected investment in new technologies including automation to accelerate in 2020–24, up from 55 percent who said they increased such investment in 2014–19. This could put more pressure on low-skill workers who are disproportionately susceptible to being displaced by automation.
Intangibles bring new requirements for knowledge infrastructure. The shift from tangible to intangible assets increases the need for knowledge infrastructure. Policy makers will need to focus on facilitating knowledge infrastructure, including education, as well as communications technology including the internet, urban planning, and public science spending. Increasingly important will be digital infrastructure to store and manage data, the technology needed to support high-speed connectivity to transport data, and powerful high-performance computers to process data. This infrastructure will fully unlock the value of big data and foster scientific and technological innovation that enables firms to achieve their digital and innovation objectives.
The evidence is stacking up in an age increasingly driven by innovation and knowledge that firms and sectors that invest most heavily in intangibles are reinforcing and deepening their competitive advantage and achieving the highest rates of growth in gross value added. Fast-growing companies invest 2.6 times more than slower-growing counterparts. But investment in intangibles is only a starting point. The full potential of these game-changing assets will not be realized unless companies are smart about how they deploy them to create synergies and scale, and enhance a range of capabilities that can deliver on growth.