Investment in Knowledge‐Based Capital and Productivity: Firm‐Level Evidence from a Small Open Economy†

• Published date: 01 June 2021
• Author: Mattia Di Ubaldo,Iulia Siedschlag
• Date: 01 June 2021
• DOI: http://doi.org/10.1111/roiw.12464

© 2020 The Authors. Review of Income and Wealth published by John Wiley & Sons Ltd on behalf of

International Association for Research in Income and Wealth

363

INVESTMENT IN KNOWLEDGE-BASED CAPITAL AND

PRODUCTIVITY: FIRM-LEVEL EVIDENCE FROM A SMALL OPEN

ECONOMY†

by Mattia Di UbalDo* and iUlia SieDSchlag

University of Sussex Business School

Economic and Social Research Institute

Trinity College Dublin

This paper examines the responsiveness of firm productivity to investment in knowledge-based capital

(KBC) including a range of intangible assets such as research and development (R&D), intellectual

property assets, computer software, organizational, and branding capital. A dynamic econometric

model is estimated with micro-data from Ireland over the period 2006–2012. Ceteris paribus, the esti-

mated average elasticity of productivity with respect to investment in KBC per employee is 0.3. In

comparison to previous empirical studies, this paper goes beyond the representative firm approach and

accounts for the heterogeneous behavior of firms which differ by ownership, size, export participation,

and sector of activity. Further, the analysis finds that investing simultaneously in multiple KBC assets

has complementary as well as substitution effects on firm productivity, with different interdependence

patterns for specific investment combinations across groups of firms and sectors.

JEL Codes: F61, L22, O33

Keywords: firm heterogeneity, investment in intangible assets, productivity

1. introDUction

In recent years, there has been an increased focus on investment in

knowledge-based capital (KBC) as a source of innovation and productivity

Notes: This research was part of the joint Research Programme on “Enterprise Exporting,

Innovation and Productivity” undertaken by the Economic and Social Research Institute, Enterprise

Ireland and the Department of Jobs, Enterprise, and Innovation. The views expressed in this paper are

purely those of the authors. Results are based on analysis of strictly controlled Research Microdata

Files provided by the Central Statistics Office (CSO) of Ireland. The CSO does not take any responsi-

bility for the views expressed or the outputs generated from this research. We would like to thank

Gerard Doolan, Andrew Murray, Ben Berstock, and Alan Corcoran in the CSO for valuable support

with data access and clearance. We also thank an anonymous referee, Prasada Rao, the Editor, Marie

Bourke, Egidio Farina, Paul Gorecki, Elizabeth Harvey, Karen Hynes, Declan Hughes, Martina

Lawless, Kieran McQuinn, Garrett Murray, Niall O’Donnellan, Mary O’Mahony, Zuzanna Studnicka,

and participants at research presentations at the Economic and Social Research Institute in Dublin, the

Irish Economic Association Conference in Cork, the University of Michigan in Ann Arbor, the

European Investment Bank in Luxembourg, and the European Economic Association Conference in

Manchester for useful comments and discussions.

*Correspondence to: Mattia Di Ubaldo, University of Sussex Business School, Falmer, Brighton,

UK (M.Di-Ubaldo@sussex.ac.uk)

†Results are based on analysis of strictly controlled Research Microdata Files provided by the

Central Statistics Office (CSO). The CSO does not take any responsibility for the views expressed or the

outputs generated from this research.

Review of Income and Wealth

Series 67, Number 2, June 2021

DOI: 10.1111/roiw.12464

This is an open access article under the terms of the Creative Commons Attribution License, which

permits use, distribution and reproduction in any medium, provided the original work is properly

cited.

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Review of Income and Wealth, Series 67, Number 2, June 2021

364

© 2020 The Authors. Review of Income and Wealth published by John Wiley & Sons Ltd on behalf of

International Association for Research in Income and Wealth

growth.1 KBC comprises a broad range of intangible assets such as research and

development (R&D), computer software and datasets, organizational know-how,

firm-specific human capital, designs, and other intellectual property assets

(Andrews and De Serres, 2012). This approach has been driven by the rapid growth

of information and communication technologies (ICT) in the 1990s as a new gen-

eral-purpose technology and the need to undertake complementary investments

such as investment in skills and organizational change required to exploit the

opportunities that ICT offered.2

Measuring investment in KBC3 and its impacts is challenging given the

non-physical nature of intangible assets. To overcome this challenge, several

methodological frameworks have been put forward. Among these, the mostly

used is the one proposed by Corrado et al. (2005, 2009) known as the CHS frame-

work. On the basis of the economic theory underpinning the optimal growth

literature (Weitzman, 1976; Hulten, 1979), the authors have formalized their view

that expenditures on a broad range of intangibles should be capitalized in com-

pany and National Accounts. Such expenditures have been grouped in three cat-

egories: (a) computerized information: knowledge codified in computer programs

and databases; (b) innovative property: R&D and intellectual property assets such

as patents, copyrights, designs, and trademarks; (c) economic competencies:

knowledge embodied in firm-specific training, organizational know-how, and

branding.

Using the CHS framework, recent research has helped to progress the quan-

tification of investment in KBC assets at the industry level and to assess its

contribution to productivity growth by exploiting growth accounting methodol-

ogies (Corrado et al., 2012, 2014, 2018; Dal Borgo et al., 2013; OECD, 2013;

Niebel et al., 2017). Evidence provided by Corrado et al. (2018) shows that over

the 2000–2013 period, investment in intangible capital contributed substantially

to labor productivity growth in several countries including the U.S. and EU.4

Corrado et al. (2017) go one-step further and uncover complementarities

between investing in ICT and other intangible capital assets. Further, they iden-

tify positive externalities from knowledge spillovers as a channel linking invest-

ment in KBC to productivity gains. Jona-Lasinio and Meliciani (2019) also use

the CHS framework in a multi-country analysis and find that investment in

intangible capital amplifies the productivity effect of participation in Global

Value Chains. Finally, Chen (2018) studies the contribution of intangible capital

to the international income differences. To be able to perform the analysis on a

large number of countries, this work adopts a narrower definition of intangibles

compared to the CHS framework, but finds that including intangible investment

as a factor of production allows to explain a larger fraction of the cross-country

1Recent international evidence is reviewed by OECD (2013) and Corrado et al. (2018).

2Karlsson et al. (2010) reviews the international evidence on the role of ICT as a new general pur-

pose technology and complementary investments needed to exploit the growth opportunities ICT offer.

3Throughout this paper we use the terms knowledge-based capital (KBC) and intangible assets

interchangeably.

4Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary,

Ireland, Italy, the Netherlands, Portugal, Slovakia, Slovenia, Spain, Sweden, the United Kingdom.