Intangible Assets and Growth Accounting: Evidence from Computer Investments

Shinkyu Yang, New York University and Erik Brynjolfsson, MIT

Draft: May, 2001.

This paper revises growth accounting methodology to take into account the value of intangible assets, particularly those associated with the computerization of many firms in recent decades. We propose a modification of the production function, adopted from the q theory of investment, that treats the adjustment costs and costs associated with the creation of intangible complementary assets as investments instead of current expenditures. We present evidence that the computer-related portion of these intangible investments is substantial and growing. The national accounts do not include the value of the resulting intangible assets creation as part of output and do not include the capital gains accruing to the owners of these intangible assets as income. As a result, a revised calculation of total factor productivity (TFP), taking into account these growing intangible investments, reveals quite a different picture of the US economy from that estimated by the conventional methodology. In particular, we find that the magnitude of intangible capital investments that accompany computerization of the economy is plausibly far larger than the direct investments in computers themselves. A revised estimate that takes intangible investments into account indicates that the TFP of the US economy grew up to 1% per year faster during the past decade than previously estimated.