Tracking the value of intangibles

By Toby Boyd, Communications Division, WIPO

What is intellectual property (IP) worth? A new report from WIPO includes fresh evidence. Lead author Carsten Fink, WIPO’s Chief Economist, explains.

The latest World Intellectual Property Report examines the role of intangible capital in global value chains. What exactly does that mean and why is it important?

Let’s start with global value chains. These days, products are manufactured all over the world and production is global. Your smartphone, for example, includes lots of different components made in factories in different parts of the world. Some microprocessors may be made in the Republic of Korea, the screen may be made in the United States, other parts elsewhere, and then they may all be sent to another factory in China for assembly and packing before being shipped off to retailers and, ultimately, consumers.

The idea of the global value chain basically relates to the production process, from the conception of a product through to its delivery to the consumer. It means looking at the product supply chain in its broadest sense and measuring the value that is contributed at each stage in that chain.

And what about intangible capital?

Going back to our example of the smartphone, the value of different components of a phone consists of far more than its physical parts. A huge amount of the value comes from intangibles – things like the design of the phone, all the technology behind it, including the skills and knowledge of those who make it, and the way it is branded. Even the design of the box the phone comes in may be a valuable asset for the phone manufacturer, helping to distinguish their phone from that of competitors.

Intangibles can be hard to measure – they are, after all, things that you literally can’t put your finger on – but they are crucial to the look, feel, functionality and appeal of smartphones and the other products we buy. In this edition of the World Intellectual Property Report, we seek to shed some light on just how much these intangibles are worth, in their various forms, and the role they play in the production process.

That sounds challenging. How did you go about it?

There were two main strands to our research. First, we sought to calculate the value of intangibles at the macroeconomic level to put a figure on their overall worth. It was technically challenging but we worked with a team of researchers at the University of Groningen who assembled data on global value chains for manufactured products covering around one-quarter of global output.

In particular, the Groningen team estimated the value added within the global value chains of 19 different manufacturing industries. Value added basically means the difference between what goes in and what comes out at each stage of production. The final step was to combine these value added estimates with data on capital and labor inputs to determine how much value was generated by the workers performing different production tasks, how much came from investment in capital goods such as factories and machinery, and how much was down to investment in intangibles.

What did you discover?

Intangibles are highly important. According to our research, they account for more than 30 percent of the total value of production – meaning that in 2014, the latest year for which data were available, intangibles were worth around USD 5.9 trillion.

Now, it has been recognized for some time that investment in intangibles is crucial to success in modern manufacturing. As economies have become richer, consumers have come to expect more sophisticated technology and a choice of distinctive brands, so it was reasonable to suppose that intangibles added a lot of value to products. But the research published in our report represents the first attempt to actually put a number on that value.

When you say intangibles, do you mean intellectual property (IP)? Does your research prove that IP is worth USD 5.9 trillion?

I wouldn’t go that far. Technology, design and branding are indeed often protected by formal IP rights such as patents, industrial designs and trademarks. But there are also other types of intangible assets which are important in the way many products are made, but which are harder to track because they are not registered or recorded publicly, for example the “know-how” of workers and managers in operating machinery and organizing production.

Taking all those things together, it is likely that a good part of the income earned from intangibles is related to IP, one way or another. But the USD 5.9 trillion figure also includes things that could not be described as IP, such as the large returns generated by companies through the wide adoption of their technology platforms.

You said that this macroeconomic analysis was one of two elements of your research. What was the other one?

We wanted to generate some deeper insights into the role that intangibles play in the global value chains for different products. Even at the macroeconomic level, it is clear that intangibles are more important in some industries than in others. For example, we found that they account for 38 percent of value added for chemical products but only 24 percent for fabricated metal products. But we wanted to dig deeper than that, to try to understand how different industries function and the types of intangibles companies invest in, and why.

That is why we selected three contrasting products – coffee, solar panels and smartphones – and studied the role of intangibles in the global value chain for each of them.

Was it possible to come to any general conclusions?

All three case studies reinforced the key point that intangibles, and especially IP, are an essential part of successful business strategies in competitive global markets. But in each case, different kinds of IP are important, and in different ways.

For instance, coffee highlights the value of branding. We chose to study coffee because it is one of the world’s most important traded agricultural commodities, providing a livelihood for around 26 million farmers. Almost all coffee is produced in developing economies for consumption in richer countries. And it is also businesses in high-income countries that tend to earn most of the money from coffee sales – they get around 70 percent of the total value of the market. This is partly because of the short shelf life of roasted coffee, which means that many of the economically valuable supply chain activities take place close to the consumer.

But changes in the coffee market are offering coffee farmers new opportunities (see page 5). Consumers have shown that they are willing to pay a premium for specialty coffees. This means that farmers can boost their incomes by targeting these higher-end market segments. Some are teaming up directly with independent baristas to develop gourmet brands of so-called “third wave” coffee that command a particularly high price. In the process, they are cutting out many of the traditional intermediaries and transforming the supply chain.

How about solar panels? What has been happening there?

Solar panels – also known as photovoltaic (PV) modules – have seen big changes in the global value chain in recent years. Production used to be dominated by Western companies, but now China is the undisputed world leader, with more than 80 percent of global manufacturing capacity for most PV technologies.

Again, that transformation testifies to the importance of intangible capital. As PV technology matured, patent rights lapsed on many of the core inventions. Chinese companies were able to catch up in their technological capabilities by purchasing state-of-the-art production equipment and hiring skilled and experienced workers and managers from abroad. In this way, they were able to undercut many Western firms, some of which went bust or merged. But today, companies that are active in this sector – both Western and Chinese – are investing very heavily in new research and development and filing lots of patents, so the story is by no means over.

And smartphones?

Smartphones are probably the example par excellence of how important different types of intangibles and IP can be. As I said earlier, a smartphone consists of a huge number of components, and when you factor in intangibles the picture becomes even richer. The smartphone global value chain is incredibly complex.

A huge number of different businesses are involved in producing these phones and the technology that underlies them – component manufacturers, organizations that develop mobile telephony standards, assembly plants, and so on. They all benefit to a greater or lesser extent from their place in the value chain. But overwhelmingly it is a handful of leading firms that profit, because they own key intangible assets. For example, we calculated that Apple gets to keep 42 percent of every iPhone 7 that it sells. That doesn’t directly correspond to the return to intangibles, but without doubt intangibles are the driving force behind it.

In particular, Apple’s success is rooted in its cutting-edge technology, its strong brand name – ranked the most valuable in the world by many analysts – and its commitment to design. And the same is true of other leading smartphone makers. Samsung Electronics is the second-biggest company in the world in terms of R&D expenditure, while Huawei is eighth, and they are all actively filing patents, trademarks and industrial designs.

So the overall lesson is: if you want to thrive in the global marketplace, invest in IP?

I would say, for businesses looking to compete globally, intangibles have to be part of their strategy and that ultimately requires careful thinking about IP. That doesn’t always have to mean being at the cutting edge of technology – coffee farmers in certain developing economies have been able to increase their income mainly through branding and marketing – but for some products R&D is essential. In such cases, investment in intangibles is clearly key to giving consumers the innovative products they demand.