The digital economy is underpinned by a new class of non-physical assets. Why aren’t we investing in them?
Canada is in danger of becoming a tenant nation, according to a recent Public Policy Forum report written by Sean Speer and Robert Asselin.
Speer and Asselin describe a post-industrial Canada falling into a modern form of dependency where, although we generate world-class innovation, we lack essential infrastructure and/or skills to commercialize it. We’re simply giving it away: squandering our and our children’s future.
Although the problem is described well and the authors put forward a few very good policy alternatives, they’re missing a key ingredient in reversing this undesirable situation: overcoming Canadian’s timidity and blind adherence to the status quo.
The modern economy is experiencing change on a scale hasn’t been seen for centuries. We’re in the midst of a radical transition in the economy’s engine of growth. It’s triggering a deep-seated asset revolution similar to the 16th-century mercantile revolution or the Industrial Revolution of the 19th century.
Both of these previous economic revolutions changed more than the economy – they also completely remade society and reinvented all its institutions.
What’s driving the modern revolution? Intangible assets.
Intangibles now represent more than 80 per cent of the market capitalization of public companies in Canada while traditional tangibles represent 20 per cent. Four decades ago these numbers were reversed.
The scale of change is important. This isn’t, as some have argued, a fourth Industrial Revolution. The rise of intangibles represents a radical departure from industrial processes and systems.
Physical assets (land, plant, equipment and machinery) underpinned the industrial economy. The factory system of the industrial era mechanized the productive process and centralized production safely within national borders.
The digital economy is the reverse; not only is it underpinned by a new class of non-physical assets but it decentralizes production, transcends national boundaries in a digital hop, and creates intangible outputs that have unlimited reproducibility.
In other words the challenge we face can’t be met by employing the old industrial mindset, institutional systems and policy alternatives. Now’s the time for new thinking and an end-to-end review of the entire economic status quo, including capital markets.
For example, according to the article, “spending on IP (intellectual property) products reached an annualized $34.6 billion (US$25.9 billion) in the fourth quarter, according to Statistics Canada, or about 1.7 per cent of the economy. That’s down from about 2.2 per cent in 2014.”
You’d wonder, given these numbers, if IP is even worth worrying about.
But is Statistics Canada measuring the right things?
Gross domestic product (GDP) is a measure of economic (largely industrial) output aggregated nationally from firm-level statistical data. Economists at Statistics Canada employ MFP (multi-factor productivity analytics), which supposedly includes intangibles.
But this method only calculates the value of intangibles by subtraction from incomplete data.
The reality is, the vast majority of intangible spending does not appear on company balance sheets, as these expenses are universally written off for tax purposes. So spending on intangibles is not captured at the firm level, and therefore isn’t aggregated into regional statistics or into national statistics. So the real picture is vastly distorted.
In other words, the measurement problem is orders of magnitude greater than reported.
What’s needed to save our digital future is investment in Canadian technology.
But that’s almost impossible in today’s capital markets, which are specifically designed for capital flight.
If you’re one of the many Canadians who contribute to a pension fund, buy mutual funds or have savings in RRSP or TFSA accounts, you might be surprised to learn that your savings are not growing the economy. Instead, they’re parked passively in stock markets, essentially making a side bet on the economy.
This means the vast majority of Canadian’s savings are unavailable to grow the economy.
Many talk about FDI (foreign direct investment) as a solution, but DDI (domestic direct investment) must proceed FDI. Making that happen means working with Canadian banks and other financial institutions to restructure Canadian capital markets.
Canadians are reluctant to tackle that on their own.
The institutional problem we face is deep-seated. Ask economists, accountants, auditors, bankers or government policy analysts and they’ll probably tell you that intangibles have no intrinsic value. Our professional classes seem to believe that these resources can’t (and shouldn’t) be recognized or leveraged like real assets.
Tragically, the market is telling us otherwise. And if we don’t overcome our habitual deference to an outdated system, we risk becoming that unworthy tenant nation.
Robert McGarvey is chief strategist for Troy Media Digital Solutions Ltd., an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.
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