The Growing Importance of Intangible Assets in the Modern Economy
In an increasingly digitized world where innovation drives growth, intangible assets have gained considerable importance. These non-physical assets, such as trademarks, patents, know-how, software, and even human capital, represent a growing share of companies' value.
Since 1975, the weight of intangible assets in the value of companies has increased from 17% to 90%.
In a report published on June 16, 2021, titled "Getting Tangible About Intangibles: The Future of Growth and Productivity," the consulting firm McKinsey highlighted that companies that effectively manage intangible investments are well-positioned to outperform their competitors.
The French public investment bank (BPI France) also presented a study on this topic in December 2021 to Agnès Pannier-Runacher, the French Minister for Industry. This study reveals that intangible investments positively impact business growth and employment. More specifically, Bpifrance conducted the first large-scale study on the link between intangible investment and the performance of French companies. Led by Rodolphe Durand, a professor at HEC-Paris, and Romain Boulongne, an assistant professor in the Strategic Management Department at IESE Business School, the study showed that companies investing in intangibles are more innovative, confident about the future, grow faster, and create more jobs.
What is an Intangible Asset?
Intangible assets encompass a wide range of resources, such as:
• Intellectual Property: patents, trademarks, copyrights, designs, and models;
• Know-how: skills, knowledge, and expertise;
• Brand Value: reputation and brand image;
• Human Capital: employee skills and qualifications;
• Software and Databases;
• Goodwill: added value linked to the reputation and relationships of a company.
Unlike tangible assets (buildings, machinery, inventory), intangible assets are not visible or touchable, yet they still generate value. For instance, the Coca-Cola brand (a registered trademark) is an intangible asset that represents invaluable worth for the company. Similarly, software developed by a company is an intangible asset that enables it to offer innovative services.
Why are Intangible Assets So Important?
• Innovation Driver: Intangible assets are at the heart of innovation. Patents, for example, protect inventions and thus encourage research and development.
• Source of Competitiveness: Companies with strong intangible assets are better equipped to compete. A recognized brand, for instance, helps retain customers and differentiate offerings.
• Value Creator: Intangible assets can constitute a significant portion of a company's value. For example, the market capitalization of a tech company often largely depends on the value of its patents and software.
Valuation and Accounting
Valuing Intangible Assets
Traditional accounting methods based on physical assets do not always adequately reflect the value of intangible assets. Techniques like discounted cash flow analysis, market comparisons, and income-based models are used to evaluate these assets.
Financial Reporting
Incorporating intangible assets into financial reports provides a better assessment of a company’s health and growth potential. For example, companies like Microsoft and IBM value and report their R&D and software investments, offering a more comprehensive view to investors.
Digital Transformation
Digitalization has amplified the importance of intangible assets:
• Digital Economy: In an increasingly digital economy, data and software have become essential assets. Tech companies base a large part of their value on intangible assets like algorithms, databases, and digital platforms.
• Technology Platforms: Major tech platforms, such as Alphabet (Google), Amazon, and Meta (Facebook), derive a significant portion of their value from their intangible assets, such as algorithms, user data, and networks.
Economic Impact
Intangible assets have a significant impact on economic performance:
• Productivity: Knowledge-based economies, where intangible assets are predominant, tend to have higher productivity levels.
• Economic Growth: The accumulation of intangible assets can drive long-term economic growth by fostering innovation and efficiency.
Conclusion
Intangible assets have become essential in the modern economy, influencing value creation, competitiveness, and economic growth. With technological advancements and increasing digitization, their importance continues to grow, requiring adapted approaches in accounting, regulation, and public policy to maximize their economic potential. Companies and governments should recognize and value these assets to support a dynamic and innovative economy.
