This summer I wrote about the great research on intangibles in the Chilean Wine Industry done by Mark Dutz and colleagues at the World Bank. And I promised to let everyone know when the full study was released. Here it is and I highly recommend it to anyone interested in intangibles: Public and private investments in innovation capabilities : structural transformation in the Chilean wine industry
We used some of the early versions of the data in our meetings in Chile in June set up by our Smarter-Companies partner AKLOE. It was wonderful to have data that was directly applicable to the country. One country down. A couple hundred to go!
What was so great about this paper? It used a “novel” approach to measuring intangibles at the corporate level: investment. Novel? Really? Well yes. We’ve known for a long time from the CHS macroeconomic data from The Conference Board that investment in intangibles eclipsed tangible investment in the U.S. over 20 years ago, with a similar pattern in the largest economies. But there is still virtually no information on the spending at the individual firm level. That’s because intangibles aren’t capitalized so they wash through the income statement year after year.
The investment approach was taken in a couple of earlier studies including by Nesta Investing in Innovation in the UK but what was great about this study is that it looked at the correlations between investments and the growth of individual firms and the industry overall.
In the period from 1990 to 2012, Chilean wine production (in liters) rose by 9% per annum. Much of this growth went to exports which went from $116 million to $1.78 billion, 13% per annum. What drove this shift? Was it just about producing more wine? No. That capacity already existed. It was about making a connection with new markets, telling an effective story to the market and controlling quality in a time of significant growth. All this required investment in intangibles.
As this graph shows, the growth story of Chilean wine exports is a story of intangibles investment. The study found that spending on knowledge-based intangibles was a statistically significant and economically important correlate of the growth in the industry and in individual firms.
When we wrote Intangible Capital in 2010, we called for a new report to record “i-capex,” spending on knowledge intangibles that is an investment in the future but not an investment that qualifies for capitalizing on the balance sheet. This simple accounting issue has led to the 80% gap between tangible net worth on balance sheets and corporate value in the public markets.
It’s past time to start measuring intangibles investment. This study is a great step in the right direction. Where should we take the next step?