wine (2)

There’s a great new study of the Chilean wine industry funded by the World Bank that shows a direct connection between the level of investment in intangible capital by wine producers and the explosive growth in Chilean wine exports (they grew at an compound annual growth rate of 9% over 20 years reaching $1.2 billion in 2010).

Here are the basics. The study shows that the great majority of both large and small producers (by number of hectares under production) spent considerable amounts in training (human capital in SmarterCo language), software (structural capital) and reputation/branding (relationship capital). Large producers also invested in global collaboration (strategic capital).


It’s interesting to note that investments in R&D are less frequent. This is important because many people tend to equate intangibles with R&D and patents. Although the spending on/use of R&D would be higher in other industries, we cannot ignore the supporting knowledge ecosystem around intellectual property.

10468396701?profile=originalIn this graph, the IC investments (shown separately in blue, red and green—and totaled in purple) mirror the growth trajectory of the exports. The two brown lines show tangible indicators: the number of wineries and hectares under production. These, too, grew. But not as fast and not along the same trajectory as the intangibles.

The conclusions of the study included:

  • Spending on intangibles is a statistically significant and economically important correlate of growth as reflected in exports, both at industry and firm levels
  • Spending on reputation and branding and on learning through global collaboration…are more important of all

This study is very exciting for a number of reasons.

First, I’m heading to Chile for a week of meetings and presentations next week with our partner AKLOE. I am really excited to discuss this case with the innovation, business and academic communities in Santiago. I promise to report back on what I learn.

Second, the methodology used by Mark Dutz and his co-authors lbuilt on great work by The Conference Board, OECD and a research team in the U.K. including Jonathan Haskell that did a primary research project on intangibles spending a few years ago. Connecting these dots is important. I expect that we have the start of a powerful approach.

Third, I’m especially excited about the work because it looks at the actual spending on intangibles, something I’ve been advocating for years (see Ch 7 about i-capex in Intangible Capital). Measuring i-capex a simple and powerful way to begin to measure intangibles in a reliable fashion. I strongly believe that this will someday be standard practice. It just makes too much sense to not end up in the standard financial package.

Finally, they worked to also incorporate concepts of risk. This is an important part of the intangibles story that we all need to spend more time on. Awareness of intangibles as assets is growing. How to express/measure the liabilities is still less studied. At SmarterCo, we’re doing this by focusing on the relative strength/weakness of individual intangibles. But we all have a lot more work to do.

In Chile, we’ll also be training a new crop of ICountants. With this great example in their own backyard, maybe our colleagues there will break new ground for our field!

Read more…

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?

Read more…