Revision of the International Standard for GDP Compilation and Challenges Ahead

Part 2: R&D Expenditures to Be Capitalized

Faculty Fellow, RIETI

Historians say that innovation is not the work of a single brilliant inventor but the result of collective research efforts by talented forerunners and their successors. Technological innovation in today's world cannot be realized without systematic research and development (R&D) activities at private-sector companies and public organizations. It has been recognized in economics that expenditures on such activities have characteristics similar to those of investment.

The 2008 System of National Accounts (2008 SNA) of the United Nations recommends that R&D be treated as capital. Accordingly, with the forthcoming revision of the Japanese System of National Accounts (JSNA) in late December 2016, the treatment of R&D expenditures, which are currently recognized as consumption (i.e., intermediate inputs into production), will be changed to be recognized as investment (i.e., gross fixed capital formation).

In order to enable this change, internationally comparable data on R&D expenditures are indispensable. For half a century, efforts to define the concept of R&D have been undertaken based on manuals developed by the Organisation for Economic Co-operation and Development (OECD). Japan has an accumulation of primary data for more than 60 years collected in the annual Survey of Research and Development.

Japan lags behind the United States and Europe by a couple of years in shifting to the capitalization of R&D. However, the Economic and Social Research Institute (ESRI) of the Cabinet Office began making necessary preparations as early as eight years ago, for instance, by collecting long-term historical data on R&D expenditures, changing the industrial classification, and making adjustments to align to the concept of R&D as investment in the SNA 2008. It is expected that the revision will boost the value of Japan's nominal gross domestic product (GDP) by 3.5%. The increase is greater than those observed in many other countries, reflecting the structure of the Japanese economy.

An increase in GDP resulting from the capitalization of R&D corresponds to the change in the recognition of production process (input-output relationship). Under the previous SNA, R&D expenditures were treated as intermediate inputs into production—hence immediately expensed as consumption of services needed for production—carried out during each accounting period. In contrast, when R&D is treated as capital, "capital services," a production factor derived from the stock of R&D accumulated to date, are recognized as an input into production in each period. The concept of capital services is a key concept newly introduced in the 2008 SNA.

Importantly, the description of production as revised by the 2008 SNA is more consistent with the concept of innovation mentioned at the beginning of this article. It will provide a more accurate picture of an economy by properly assessing how much is consumed and how much is invested for the future.

>> Original text in Japanese

* Translated by RIETI.

September 23, 2016 Nihon Keizai Shimbun

November 21, 2016

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