R&D Capitalization: Where Did We Go Wrong?

Globalisation and the activities of multinational enterprises groups (MNE groups) present an increasing challenge for macroeconomic measures particularly those designed to reflect domestic economies. The very presence of MNE groups goes against the basic idea of there being an identifiable and measurable domestic economy consisting of domestic consumers and producers. In a globalised world with limited to no trade barriers, MNE groups will operate across multiple national economies, often under a single management or control structure. One of the serious problems that MNE groups present for macroeconomic measurement is the issue of assigning economic ownership of Intellectual Property (IP) to the various fractions of a global value chain and therefore to domestic economies. This is an issue for which the international guidance is currently incomplete and still under research by national accountants.
This paper is an attempt to contribute to the discussion of R&D capitalisation by establishing a bridge between the micro and macro worlds. By analysing real world companies and their production process this paper aims to highlight some of the issues with the current recording treatment around IP. This translation of information on the MNE group’s business structure to the national accounts framework will give an indication of real world distortions that national accountants will encounter when measuring the activities of MNE groups on a domestic economy basis.
In this paper the discussion of IP focuses largely on R&D. Though the issue of marketing assets (trademarks, brand names etc.) is also discussed in relation to their use by MNE groups and as yet unsolved issues in their recording in macroeconomic statistics.
This paper offers a number of proposals for improvements though definite solutions to the issues are not possible in one paper alone. Perhaps the greatest contribution of this paper is in highlighting clearly, through real world examples, the need for openness and data sharing between national statistics institutes (NSIs). Accurate recording of the activities of MNE groups requires co-operation and data sharing at a far greater level than NSI’s have previously been willing to do.
This paper refers to a number of real businesses to illustrate the issues involved in recording the activities of MNE groups in national economic statistics. All the information contained within this paper relating to these MNE groups is taken from previously published publically available sources. There may deficiencies in the way the characteristics of these MNE group structurers are being revealed by these sources. We nevertheless take these available sources as the starting point of this paper with the main purpose of highlighting the complexities of their recording in the national accounts.