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Investments in “intangible assets” like R&D, digital transformation, and employee training are strongly correlated with increased productivity and growth, according to a study McKinsey Global Institute (MGI) released today.
An MGI survey conducted in March asked 861 corporate executives in 16 countries how much their companies invested over 2018 and 2019 in areas related to innovation, digital platforms and analytics, organizational and managerial capital, partner ecosystems and networks, and brand building. The study found that companies MGI determined were in the top 10% for annual growth had invested 2.6 times more in such “intangible assets” compared to the bottom 50% of surveyed companies measured by growth.
Companies double down on ‘intangibles’
MGI also reported that investment in intangibles has grown 29% as a share of companies’ gross value over the past 25 years in the United States and 10 representative European countries. The trend of spending more in these areas has prevailed through global economic downturns, most recently during the turmoil caused by the COVID-19 pandemic, according to the management consulting firm.
The study echoed similar research by McKinsey that found spending in innovative areas can be linked to growth. For example, a 2019 survey of companies investing in artificial intelligence (AI) determined that adoption of the technology correlated with revenue increases.
MGI’s latest report, titled “Getting Tangible About Intangibles: The Future of Growth and Productivity?” found that the correlation between intangible investing and growth held true across different industry sectors, like advanced manufacturing; financial services; telecommunications, media, and technology; and retail trade. Sectors where constituent companies invested more than 12% of their gross value in intangible assets saw 28% higher growth than those with less investment, MGI said.
A paradigm shift in the tools of industry
MGI said the trend toward investing more in intangibles was most pronounced in “knowledge-intensive” and “innovation-driven” industries like financial services and telecommunications. But increased intangible investing is happening in all sectors. And globally, the report noted a shift toward a “dematerialized economy” across the board.
“In the 19th century, the tools of growth were industrial machines; the tools of the knowledge economy will be intangible assets. We could well be seeing a new stage in the history of capitalism based on learning, knowledge, and intellectual capital,” MGI council member Eric Hazan said in a statement.
“As economies recover from the pandemic, could a wave of intangibles investment breathe new life into productivity and growth? It is quite possible, but the key will be not only investment in intangibles but ensuring that they are deployed effectively.”
MGI co-chair Sven Smit said it was important to properly define intangible assets beyond just the traditional categories of IP, software, and brand and loyalty management. He said it must also include the development of digital, organizational, and managerial capabilities through training and hiring.
“Take this more up-to-date view, and you get a fuller picture of the full power of intangibles to drive growth,” Smit said.
MGI said the companies reaping the greatest rewards from intangibles investing weren’t just spending more relative to their peers but also doing so more smartly and systematically, with sophisticated risk-reward models and data-driven testing and decision-making processes to “embed data, talent, and innovation in day-to-day operations.”
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