Company productivity increases with more knowledge-based capital

First study using official company records — more knowledge-based capital increases productivity — some sectors are already investing more in knowledge-based capital than in machines and buildings — economic policy must take a holistic approach towards investments

Every year in Germany, around 200 billion euros are invested in knowledge-based capital, such as research and development (R&D), software and databases, marketing and advertising, or technical design. These investments do not only increase company productivity, however. They also make investments in traditional capital goods, such as machinery or buildings, more effective. This is the conclusion reached by the German Institute for Economic Research (DIW Berlin) on the basis of a dataset containing almost two million official company records. “We found that, regardless of whether investments are made in R&D, organizational capital, or software, the positive effects on productivity are quite similar,” said Alexander Schiersch, who led the project.

Unlike in the United States, German companies are currently investing more in physical capital than in knowledge-based capital—around 320 billion euros a year in total. However, some important German economic sectors are beginning to invest more in knowledge-based capital, such as manufacturing or information and communication. Investments in knowledge-based capital have increased nominally over the past few years, but only at the same pace as overall growth. Thus, most economic sectors have not become more knowledge intensive over the past few years.

A significant amount is invested in important industries, such as the automotive and engineering industries in particular, but also in the production of data processing technology, optics and electronics, or in the pharmaceutical industry. The largest investments in these sectors are in R&D. In contrast, more is invested in organization and software in the professional services sector.

It was also shown that knowledge-based capital and material assets complement each other. “For German companies to maintain their competitiveness, it is important to invest in various elements of knowledge-based capital. This means that economic policies should take a comprehensive approach. When designing a framework for investments, it should take all capital elements into account,” said Schiersch. Thus, it can make sense for governments to not only focus on supporting firms when they invest in machines, but to encourage and support them in investing simultaneously in new software solutions or online marketing for their products or services as well.