McKinsey report: intangible asset spending drives growth and productivity gains

Investing in intangibles directly correlates with productivity and sector growth, as well as general economic growth, a new report from the McKinsey Global Institute finds.

The report, Getting tangible about intangibles: The future of growth and productivity?, used data from the INTAN-Invest collaboration, which measures and analyses intangible assets, to explore whether there  is an observable link between investment in intangibles and gross value added (GVA), a measure of economic growth.

It concludes that the evidence shows that industry sectors which saw the most investment in intangibles delivered the highest growth in GVA. This relationship “is strongest in knowledge-intensive services such as financial services and in innovation-driven services such as telecommunications, media, and technology.”

However, all sectors showed a clear correlation between investment in intangibles and company growth, whatever the overall GVA growth for the individual sectors was.

McKinsey observes that, on average, ‘top growers’ (companies in the top quartile of GVA growth) invested 2.6 times as much in intangibles as ‘low growers’, defined as the bottom 50 percent of companies for GVA growth. Median growth for low growers was 3%, while for high growers, it was 20%.

A sector-by-sector analysis found that top growers in certain sectors invested far more than low growers: 5.2 times as much for Telecoms, media and technology, 5.5 times as much for Financial services and 7.8 times as much for retail.

The McKinsey report also adds:

“The scalability of intangibles is already enabling large and profitable firms to emerge, and they could potentially pull further ahead, thereby widening the productivity and profit gaps between leaders and laggards. Previous MGI research found that a key distinguishing feature of “superstar” companies is their investment in intangibles.”

McKinsey splits intangibles into four categories:

Innovation capital from investments that build a company’s IP, including R&D, design, product and service design, and entertainment and artistic originals, like books and movies.

Digital and analytics capital from investments in building software, like CRM systems, developing databases, digital platforms such e-commerce interfaces; and analytics models and algorithms

Human and relational capital. This covers investments that on the one hand build individual or organizational skills through training and talent spotting programs, and on the other, relationships with business partners, data suppliers and the like.

Brand capital, from investments in marketing and sales to build brand equity (such as  brand awareness advertising) or to improving customer listening and service delivery, and so enabling customer retention.

The report states that:

“Intangibles are interdependent, and companies achieve greater synergies by investing in them all. Companies that have invested across all categories of intangibles are further ahead in their digitization journey, less likely to be disrupted because they are highly innovative, and highly likely to be able to attract and retain top talent. All of this can create value and, importantly, value that can be defended even amid a deep market and economic disruption.”

It concludes:

“The evidence is stacking up in an age increasingly driven by innovation and knowledge that firms and sectors that invest most heavily in intangibles are reinforcing and deepening their competitive advantage and achieving the highest rates of growth in gross value added. The full potential of these game-changing assets will not be realized unless companies are smart about how they deploy them to create synergies and scale and to enhance a range of capabilities that can deliver on growth.”