In the past, firm investment was mainly direct to tangible assets (physical assets) such as machinery vehicles, and buildings and in the case of government, infrastructure; and production and the value of the firm increased with the accumulation of these assets. However, production capital is not just tangible assets. Firms also invest in soft capital such as knowledge, skills, research and development (R&D) and patents. These assets are known as intangible assets and today they power the new economy or knowledge economy which is driven by know-how, knowledge, human creativity and innovation (Nanayakkara, N.D).

In fact, intangible assets are becoming a major source of Gross Domestic Product (GDP) and firm competitiveness. They are the fundamental driver of economic development as they enable the production of new and better services, products and processes and drive customer, shareholder and stakeholder value (Brooking Institute, 2019; Nanayakkara, N.D).  As developed economies move away from industrial driven processes towards technology and-innovation processes, intangible investments are becoming vital to economic growth and sustainability. Furthermore, just as physical assets were used to create “more physical assets in the industrial age”, intangible assets should be used to create “more intangible assets in the information age” (Jarboe & Furrow, 2008).

The shift from tangible to intangible

In the 1980s, the information and technology revolution began to “emerge in full force” with the development of personal computers, mobile phones, and other IT and software programs. The firms that developed these new products were different, in that the majority of their capital expenditure was focused on the development of new technology (Haskel & Westlake, 2017; Hulten, 2010).

In 2006, Charles Hulten examined Microsoft accounts and wondered why the company was worth so much. Valued at around $70 billion, the company only had $3 billion in plant and equipment assets – a mere 4 percent of the company’s value. Hulten realised that the company was worth so much because of the things we cannot touch and see. That is, its Microsoft’s intangible assets such as R&D, product design, the value of its brands, its supply chains and the human capital built up by training; and none of this included Microsoft’s office buildings or servers (Haskel & Westlake, 2017; Hulten, 2010).

Just as Hulten found, intangible assets have certain characteristics that make it hard to see, value and sell. Thus, intangibles are still not recognised fully on balance sheets or on income statements (Jarboe & Furrow, 2008).

Intangible characteristics

By nature, intangible assets are things you cannot touch and they are driven by human capabilities. For example:

• knowledge is an unusual type of good because putting an idea into practice does not use it up and you can also not lock your asset to protect your property rights (Haskel & Westlake, 2017); and
• fifty percent of R&D expenditure goes towards the salaries of highly educated workers such as scientists, designers, and engineers (Brooking Institute, 2019).

In addition, return on an intangibles investment is determined by the value of a final product, rather than the asset itself. Whereas, physical assets hold value and are therefore are relatively liquid (can be sold at any time) (Hall & Lener, 2009). Thus, there is something fundamentally different about intangible assets and trying to generate it and measure its value is hard.

Haskel and Westlake (2017) suggest that there are four characteristics of intangible assets that make them different and important in comparison to tangible assets – these are referred to as the four ‘S’ and include:

1. Scalable: Intangible assets are scalable as many people can use it at once and scalability is not hindered by traditional structures such as machines to increase production;
2. Sunk costs: Intangible assets have sunk costs, that is, there is no means to retrieve that invested funds. Intangible assets will also depreciate more rapidly than physical capital, but they deliver benefits over time, not just in the period the expenditure was made (Barnes & McClure, 2009);
3. Spillovers: Intangible assets generate spillovers that benefit multiple businesses. As intangible are ideas or knowledge is very hard to keep secret to prevent others from copying the idea. For example, firms can poach staff, imitate or examine new technologies or drugs and read research papers; and
4. Synergies: Intangible assets tend to be more valuable when combined with other technologies and products thereby generating synergistic benefits. For example, the microwave was the result of a combination of defence investment and household good production (Haskel & Westlake, 2017).

 Calculating intangible value

Over time, the emergence of technology and innovation as a primary economic driver has led to a restructuring of the economy with the majority of a firm’s value now driven by investments in intangible assets (Brooking Institute, 2019). In 2006, the Australian Productivity Commission found that intangible investment was almost half the size of tangible investment of the Australian economy. While more recently, the Brooking Institute (2019) notes that the “collective knowledge of the U.S. population is worth approximately $240 trillion, far exceeding the value of other inputs to economic growth”.

However, it is widely agreed that the value of intangible investment is underestimated or not captured. Governments must reassess the way they calculate GDP and national accounting, which treats spending on intangibles mostly as a current expense (i.e. intermediate input) and not an investment.  As a result, firms cannot capitalise on the growth or depreciation of the asset; and governments are not developing enough incentives to promote investment (Hall & Lener, 2009; Australian Productivity Commission, 2010). 

See Part Two of this blog for more information on issues and what governments can do to incentivise and support more investment into intangible assets.

Investment is central to the functioning of any economy. It is the process of committing time, resources and money to produce useful things in the future. Investment underpins production by business, government and individuals (Haskel & Westlake, 2018).

Investment is very important because it builds up the “capital stock”: the assets – tools, and equipment that workers use to produce the goods and services that make up economic output. An asset is an economic resource or property that is expected to provide a benefit over a period. For example, if a bank acquires a new office, it expects to get a benefit that lasts for some time. Capital is the use of assets to generate income and or an increase in the value of the assets over time.

The rate of return on capital plays an important role in economic growth as it incentivises the development and use of new assets in production (Baker, DeLong & Krugman, 2015). Capital investment generates profits for owners of capital through consumer spending, international trade and business investment which drives economic growth.

Investors are willing to develop, buy or hold assets if the rate of return compares well with interest rates on similar capital investment elsewhere in the economy. Return on capital is determined by the time to make a satisfactory return on the investment, the marginal utility of wealth as it declines over time, and tolerance of risk-reward (Baker, DeLong & Krugman, 2015).

Competitive financial markets play a central role in ensuring that capital is allocated to firms with the greatest potential to commercialise new processes and technologies thereby incentivising and fast-tracking technological innovation (Kerr &Nanda, 2014). Businesses and investors go to financial markets to raise money to grow their business and to make more money, respectively (CFI,2019). However, it is worth noting that financial markets only distribute income generated by activity and do not add to that income.

There are many financial markets and they vary in size. For example, formal markets include:

• Cash: banks and other financial intermediaries that offer debt loans.
• Bond or money market: offers opportunities for companies and the government to secure money to finance a project or investment
• Stock market:  trades shares of ownership of public companies.
• Commodities market: where traders and investors buy and sell natural resources or commodities such as corn, oil, meat, and gold.
• Derivatives market: involves derivatives or contracts whose value is based on the market value of the asset being traded such as futures contracts or options.
• Forex Market: where currencies are traded and considered the most liquid market in the world as it trades cash assets.

Issues

However, there are flaws in these formal markets. For example, it is much harder to fund research and development and start-ups because of the high-risk nature, early stage of development and lack of cash flow. Thus innovation and early-stage business investment might happen through friends and family, angel investment, venture capital, equity crowdfunding and credit card debt.

In addition, firms controlled by private equity and venture capital firms, may not aim to produce new things but to maximise the value of their own shareholders through share buy-backs and short term trading, rather than long-term investments (Mazzucato, 2018).

Financial deregulation and a growing financial sector and products, some markets are able to generate their own revenue and profit without contributing to gross domestic product. New and complicated financial instruments, such as securities and derivatives, allow owners and traders of these products to get rich by capturing value from other sectors, rather than by creating value (Mazzucato, 2018). For example, the futures market allows investors to trade on the potential future value of a bond rather than holding and using that asset to produce additional value.

Finally, capital owners can extract more profits is to identify markets where there is limited competition such as in monopoly markets. Or by holding assets that do not require them to be productive or contribute to production outputs which are called rent-seeking. Both harm economic growth by reducing competition, innovation, and investment in new and better assets. They also waste valuable resources and talents and redistributes capital to the wealthy and powerful (Wong, 2016).

How firms form, grow, decline and exit are all critical factors in job creation and economic growth. Economists have been studying which firms are the highest job creators in order to target policies to support the most effective businesses to create jobs.

Mature Firms

The term mature firm refers to the growth phase of a business that is “well-established in its industry, with a well-known product and loyal customer following” (Kenton, 2019). Mature firms generally have slow and steady rates of growth and face constant competition.

Mature medium and large firms that account for most employment (about 45 percent) and most job creation and destruction (Haltiwanger et al, 2010). Most people believe that firms with the “most jobs create the most jobs;” however, these large businesses typically grow at around about 1-2 percent per annum (Arslan, 2011). Goswami, Mevedev & Olafsen (2018) explain that large ‘incumbent’ firms can lack the ability to adapt and innovate from a too greater focus on existing products and services; and therefore they are not job creators once established.

Conversely, small businesses make up (over nine in ten) of Australian businesses. They generate “33 percent of Australia’s GDP, employs over 40 percent of Australia’s workforce, and pay around 12 percent of total company tax revenue” (Commonwealth of Australia, 2016).  However, they typically pay the least of all sectors small businesses are often associated with negative net job creation and are the least likely source of job growth. This is because small businesses may have low productivity, operate in declining markets or they may not be inclined to grow (Haltiwanger et al, 2010).

This is not to say that mature firms of all sizes are not important, as they certainly play a role in the traded economy, underpin existing competitive advantages and clusters, support innovation and stable employment. It’s just that from a job creation perspective, they have limited capacity.

Start-ups

A start-up is often misunderstood for simply a small new business; however, there is a difference between the two. A start-up is a saleable new firm that is working to solve a problem and capitalize on developing a product or service which they believe there is demand for (Grant & Kenton, 2019).  While a new small business may be operating on a traditional businesses model, has limited scalability and are producing goods and services that are already available in the market.

Start-ups typically exist in high-tech or financial sectors but not exclusively, and therefore often in the tradable sector. Start-ups are also more innovative than any other business due to reasons such as:

1. Fewer barriers to entry (i.e. they aim to commercialise new ideas);
2. Start-ups choose higher risk strategies and can ‘pivot’ more easily to adapt to markets demands or gaps; and
3. large rewards for successfully starting a business and commercialising an innovation (Acs & Audretsch, 1988; Koutroumpis, Leiponen & Thomas, 2017; Lerner, 2012).

By nature, all start-up firms operate in a volatile environment as they test their products and services on the market, build an appropriate business model to scale. Start-ups face what is known as the valley of death, an ‘up or out’ dynamic, which forces a young business to manage a negative cash flow before their new product or service generates revenue from real customers (Forbes, 2013). As a result, start-ups are more likely to exit and therefore they also disproportionally contribute to job destruction. In fact, it is estimated that 90 percent of start-ups fail and that after five years, many of these young start-ups destroy nearly half of the jobs they created (Patel, 2015; Haltiwanger et al, 2010). Nevertheless, the surviving firms continue to ramp up, growing faster than more mature firms, and continue to create a disproportionate share of jobs relative to their size.

High Growth Firms

Recently, words such as gazelles and unicorns have been used to describe young and small firms that have continued to grow strongly beyond the start-up phase. Referred to by academics as high growth firms (HGF), they have drawn a lot of attention because of their ability to stimulate growth and job creation. In addition to this, they also generate significant spillovers such as knowledge, innovation and inspire entrepreneurship that benefit other businesses and support start-ups (Goswami, Mevedev & Olafsen, 2018).

HGF makeup on average between 5 percent and 10 percent of all firms and create around 50 percent of all new jobs (Financial Times, ND). Economists found that HGF generated revenue nearly twice as fast as GDP (Evans, 2017). These figures are relatively consistent across developed nations (e.g. UK, US, Australia); however, in developing nations HGF can make up to 20 percent of firms and “generate as much as 80 percent of all new sales and jobs” (Goswami, Mevedev & Olafsen, 2018).

Goswami, Mevedev & Olafsen (2018) advise that while HGFs are typically young, they do not have to be and they are not necessarily small. Research from the UK found that the majority of these HGFs have less than 50 employees but were relatively established in the market and just over five years old. The high growth episode typically starts post start-up stage and most HGF are not able to sustain this growth past five years. Therefore, HGF do not remain strong job creators in the long term. HGF were also found to operate in all industry sectors (e.g. food, health), not just the technology sector and pop up in all sorts of diverse geographical areas, responding to local challenges and opportunities (Fetsch, 2016; Goswami, Mevedev & Olafsen, 2018, OECD, 2012). Thus, policy must take into consideration the creative destruction dynamic and as a result, policies targeting HGF policies targeting can be misguided (Duranton, 2012; Goswami, Mevedev & Olafsen, 2018).

Support

Governments around the world now widely recognise the powerful link between HGF firms and innovation, job creation and international competitiveness. Most are now actively reviewing policies, laws and taxes to support new firms to start and achieve this growth episode (European Commission, 2012; Goswami, Mevedev & Olafsen, 2018). However, both government and professional investors such as venture capitalists, are “notoriously bad” at picking these businesses and a HGF can typically only be identified once it is in a growth run (Goswami, Mevedev & Olafsen, 2018).  Nevertheless, it is important for governments to understand how these firms are established, what drives them and ways to encourage more business growth in order to design effective interventions.

Academics and institutions (Goswami, Mevedev & Olafsen, 2018; Lerner 2012; Marrugo-Salas, 2018) agree that instead of working with individual firms, efforts should be directed towards building the entrepreneurial environment. There is broad agreement that there are a number of determining factors that support HGF and job creation more broadly. These include:

• the proximity to suppliers and customers;
• contact and exchange with research and development (R&D) institutions;
• access to financial resources;
• economics of scale (industrial agglomeration);
• managerial capabilities and worker skills;
• global linkages; and
• entrepreneurial and creative culture.

Finally, to help policymakers’ structure policies that support firm’s innovation and economic development, Goswami, Mevedev & Olafsen (2018) call for policymakers to focus on stimulating factors such as “innovation, agglomeration and network economies, managerial capabilities and worker skills, global linkages, and financial development, which contribute significantly to increasing the probability of a high-growth episode”. To do this, they propose an “ABC framework”:

1. improving Allocative efficiency e.g. productivity improvements, labour flexibility, start-up regulations, logistic networks, land use allocations;
2. encouraging Business-to-business spillovers e.g. industry clusters, smart specialisation, technology parks and export markets development; and
3. Strengthening firm Capabilities training, R&D, financial incentives, advisory services, incentives, promotion and awards, incubators and accelerators.

Today places are more than just markets, they are products and can be consciously branded (Fanning, 2015; Järvisalo, 2012). Places compete in the global economy for their share of the world’s investors, consumers, tourists, businesses, positive media attention and diplomatic power (Anholt, 2007). To be competitive, places must actively build, promote and manage distinctive brands (Järvisalo, 2012).

BRANDING

Branding is an extremely valuable component of an economic development strategy, as a successful brand will position a place or product[1] to create perceived customer value and can lead to a competitive advantage (Buncle & Keup, 2009).  Unfortunately most marketers confuse branding with promotional slogans and superficial design, such as gloss and logos (Järvisalo, 2012).

Instead, branding is really about creating understanding for a product¹ and differentiating it from competitors (Clifton & Simmons, 2003; Järvisalo, 2012). It is the process of “designing, planning and communicating the name and identity in order to build or manage the reputation of a” product or organisation (Anholt, 2007).  Therefore a successful brand is defined as “an identifiable product, service, person or place, augmented in such a way that the buyer or user perceives relevant unique added values which match their needs most closely” (DeChernatony & McDonald cited in Grillot, 2007).

In developing a brand, marketers need to strategically consider and design the four elements of a brand, being:

• Brand Identity –the core component of a product. That is, what is assertively communicated through visuals such as logos, packaging, product design;
• Brand image – the perception of a brand interpreted by the customer or wider society. Image is formed on personal or cultural values, associations, feeling, experience and expectations. Thus Images are how a customer receives and interprets a brand message;
• Brand purpose –the unique value that a product delivers, it is the promise to the market place and therefore should represent the aims of an organisation or place; and
• Brand equity –the desirable value that is created from developing a positive brand reputation. It is through this ‘value’ associated with a brand that leads to a brand becoming a tangible asset (Anholt, 2007).

PLACE BRANDING

Like the commercial world, branding is just as valuable for places. Places that build strong positive reputations are able to lift the standard of living for their residents by attracting customers such as investors, tourists, new residents and businesses, and by driving political agendas (Anholt, 2007; Taderera, 2014).

Place branding is an umbrella brand for a place’s geography, economy, culture and its people. It is an economic aspiration to reposition a place through “capturing and accumulation of reputational value through the coordination, collaboration and strategic efforts of a place’s stakeholders (government, community, business, industry bodies) to develop, communicate, maintain and adapt a place brand position to gain competitive advantage” (Anholt, 2009). Place branding must therefore supported by tangible efforts by a community’s’ leaders to improve the competitive image of a place to attract capital (Niedomysl & Jonasson, 2012).

CREATING A PLACE BRAND

Strategy and positioning

Typical strategy analysis looks at two broad approaches applied in place branding to create value, these are cost leadership and differentiation (Raith, Staak & Wilker, 2007). However, places must initially look at their location factors to build a brand off. This includes:

• local assets and resources;
• industrial sectors or clusters;
• customers, markets and trading partners;
• logistics and spatial connections;
• competitors; and
• competitiveness (quality, innovation and production capacity)(Mauroner, Oliver & Zorn, Josephine, (2017).

Sense of place

In the global economy, places can really only become distinct by having a unique sense-of-place, or as termed in the commercial sector, a value proposition (Buncle & Keup, 2009). While the term sense-of-place has many meanings, it is a holistic term for how a place is recognised by those that live there and those who do not. This is because, unlike commercial products, a place largely inherits it brand from its natural environment, culture and heritage.

When brands are tied heavily to a community’s sense of place, people identify with the brand as it reflects their self-concepts (Taderera, 2014). People are then able to act as brand advocates and the brand diffuses to other areas of society, building the brand. While a sense-of-place should not be viewed as a “panacea for economic growth”; it is the core of a place’s value proposition and therefore helps to distinguish a place in a competitive market (Buncle & Keup, 2009).

Other Key insights

• Be strategic in setting a brand. Based on existing strengths and weaknesses, a brand should represent where the place wants to go and how it wants to be perceived,
• Don’t be afraid to be innovative. Aim to capture new markets and create new spin offs.
• Work collaboratively. Governments cannot brand a place alone. It must be a partnership approach and include local leaders, industry and business, urban designers, artists, community and its customers.
• Be proud of who you are and what you offer. It is very hard to rebuild a sense of place. But community pride and sense of purpose can reunite the community, cementing the brand.
• Make sure you deliver what you promise. Brands that sell an image that does not reflect reality are no more than marketing gloss.

[1] Products include goods, services, ideas, experiences, people and places (Fanning, 2015).

REFERENCES

Anholt, (2007) Competitive Identify: The New Brand Management for Nations, Cities and Regions. Palgrave Macmillan: United Kingdom.

Anholt (2009) Why National Image Matters: Introductory Essay in handbook on Tourism Destinations Branding. World Tourism Organization and the European Travel Commission: Madrid. explore.am/wp…/ETC-Handbook_on_Tourism_Destination_Branding.pdf

Buncle, T. & Keup, M, (2009) Handbook on Tourism Destinations Branding. World Tourism Organization and the European Travel Commission: Madrid explore.am/wp…/ETC-Handbook_on_Tourism_Destination_Branding.pdf

Clifton, C. & Simmons, J. (2003) Brands and Branding, The Economist. Profile Books Ltd: London. Retrieved from http://www.culturaldiplomacy.org/academy/pdf/research/books/nation_branding/Brands_And_Branding_-_Rita_Clifton_And_John_Simmons.pdf the economist brand pdf

Grillot, K. M. (2007). What happened in vegas?: The use of destination branding to influence place attachments. Available from ProQuest Dissertations & Theses Global. (304816077). Retrieved from http://ezproxy.ecu.edu.au/login?url=http://search.proquest.com/docview/304816077?accountid=10675

Holt, D (2002) Brand and Branding, Harvard Business Review. Retrieved from https://hbr.org/product/brands-and-branding/an/503045-PDF-ENG

Järvisalo, S. (2012) How to build successful city brands? -Case Munich, Berlin & Hamburg. HAAGA-HELIA University of Applied Sciences. Reterievd from https://www.theseus.fi/bitstream/handle/10024/…/City%20brands.pdf?…1

Mauroner, Oliver & Zorn, Josephine. (2017). Cluster branding – a case study on regional cluster initiatives, cluster management, and cluster brands. International Journal of Innovation and Regional Development. 7. 290. 10.1504/IJIRD.2017.086234.

Niedomysl, T., & Jonasson, M. (2012). Towards a theory of place marketing. Journal of Place Management and Development, 5(3), 223-230. doi:http://dx.doi.org/10.1108/17538331211269639

Rivas, M (2015) Innovative Place Brand Management, Re-Learning City Branding. URBACT-CityLogo final report.

Taderera, F., Al-Nabhani, S., Bhandari, V., SundarKirubakaran, P., Al Rahbi, H. A., Karedza, G., Sundaram, S. (2014). Marketing Excellence: Myth or Reality in Oman. International Journal of Arts & Sciences, 7(4), 195-206. Retrieved from http://ezproxy.ecu.edu.au/login?url=http://search.proquest.com/docview/1644513201?accountid=10675