Reflections on Complementarities in Capital Formation and Production: Tangible and Intangible Assets across Europe

This paper investigates capital formation with a view at various tangible and intangible assets across Europe. We assess to what extent there are complementarities among different asset types, i.e. investment in one asset type affecting the productivity of an investment in another. Using novel datasets at both macro and firm level, we estimate translog production functions at different aggregation levels to assess complementarities both at the within-country and the within-sector level. At macro-level, evidence suggests complementarities between tangibles and intangibles and between National Accounts and non-National Accounts intangibles. At firm-level data, we explore more disaggregated asset classes and find that investing simultaneously in software, training of employees, and business process improvements is associated with better firm performance. Within a sector, firms tend to choose to invest either in own R&D or in embedded R&D and training. Our analysis demonstrates that policy support that aims at stimulating investment only in certain assets (while excluding others) may fall short in unlocking its own full potential. The emphasis should rather be on addressing investment bottlenecks arising from market imperfections, while remaining non-discriminatory with a view at what sort of capital deepening is envisaged, i.e. leaving it to the firm to find the most appropriate mix of assets. Accordingly, investment support programmes should generally be open to include intangible assets, notably also those not captured as such in the National Accounts, such as training and organisational capital, and help addressing challenges arising from collateralising such investments.