Driving competitive advantage through intangible investments
Discover how intangible assets are reshaping business performance, competitive advantage, and value creation in the digital economy
The nature of business value creation has transformed dramatically over recent decades. This shift has accelerated through the rise of technology companies and digital business models, where physical assets play a diminishing role in determining business success. The traditional focus on tangible assets, such as buildings, machinery and inventory, has given way to a new paradigm where intangible assets like software, data, intellectual property, and organisational capabilities drive business performance.
According to Dr Jonathan Haskel, a Professor of Economics at the Imperial College Business School, ex-Board Member of the UK Statistics Authority and past Member of the Bank of England’s Monetary Policy Committee, this transformation presents significant challenges for business leaders in how they measure, manage, and create value. Prof. Haskel, who recently spoke at a joint conference held by the UNSW Centre for Applied Economic Research and the Economic Statistics Centre of Excellence (ESCoE) at UNSW Sydney, said the shift from tangible to intangible assets is reshaping the economic landscape. The changes reflect a fundamental transformation in how companies generate value and maintain competitive advantage in the modern economy.
The UNSW-ESCoE Conference on Economic Measurement 2024
The rise of intangible assets
The contrast between traditional and modern business models reveals a fundamental shift in how companies create value. This transformation represents more than just a change in business operations; it marks a complete reimagining of how organisations build and maintain competitive advantage in the global economy.
“Here’s what factories used to look like and here’s what factories look like now,” explained Prof. Haskel, who compared traditional manufacturing facilities to Microsoft’s early days. This transformation is evident in the world’s most valuable companies today. The shift from physical to digital assets has reshaped not only how companies operate, but also how they compete and create lasting value.
Prof. Haskel presented pictures of Saudi Aramco’s tangible assets (such as buildings, equipment, vehicles, ships and pipes) to the conference audience, and then compared it to a 1986 picture of Microsoft’s assets, including the first few lines of code from the early version of Microsoft Word. “The assets of Saudi Aramco and previously dominant companies were very tangible. The assets of Apple, Microsoft, Alphabet and Amazon are very intangible,” he said.
This stark contrast illuminates the changing nature of corporate value creation. While traditional companies built their worth through physical infrastructure and equipment, Prof. Haskel said modern leaders in the global economy derive their value from software, algorithms, data, and intellectual property. This shift has profound implications for how companies invest, compete, and grow.
The impact on business performance
The rise of intangible-intensive companies has also created new dynamics in market competition. Companies that excel in managing intangible assets often gain significant advantages through economies of scale and scope. This is particularly evident in how leading firms have pulled away from their competitors, and Prof. Haskel observed that the gap between market leaders and followers has widened significantly in sectors where intangible assets dominate, creating what appears to be a self-reinforcing cycle of competitive advantage.
Intangible-intensive companies such as Microsoft have greater economies of scale and scope over the kind of intangible investments they make, Prof. Haskel said: “They’re doing all sorts of intangible investment lots of different projects. The projects spill over and you make other discoveries unrelated to the initial project, because the uncertainty of knowledge. That gives them a scale advantage,” he said.
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This pattern of market leadership through intangible assets creates unique competitive dynamics. Unlike physical assets, which typically face diminishing returns as they scale, Prof. Haskel said intangible assets often become more valuable as their use expands. A software platform, for instance, can serve additional users at minimal marginal cost, while simultaneously generating valuable data that can be used to improve the product and create new services. The network effects and spillover benefits from intangible investments create powerful feedback loops that strengthen market positions.
Understanding intangible investment categories
Prof. Haskel also presented research that discussed distinct categories of intangible investments that businesses make. Some of these are already recognised in national accounts, while others remain outside traditional measurement frameworks. “Software and databases, R&D and artistic originals are already included in the national accounts. The other intangibles are things like design, branding, business process re-engineering and employer-provided training, for which we use additional surveys,” said Prof. Haskel.
This categorisation helps businesses understand the full scope of their intangible investments and their potential impact on value creation. Prof. Haskel said research shows that intangible investment has been rising steadily across developed economies, while tangible investment has declined as a proportion of business activity.
Understanding these different categories of intangible investments is crucial for business strategy and resource allocation, he added. Each category contributes differently to business success – software and databases might directly enable operational efficiency, while investments in brand building and employee training create value through enhanced market position and organisational capabilities. The challenge for business leaders lies in recognising these distinctions and developing appropriate frameworks for evaluating and managing each type of intangible investment, Prof. Haskel said.
Measuring business value in the intangible economy
Traditional accounting methods struggle to capture the true value of intangible assets, and Prof. Haskel said this has led to misunderstandings about company performance and market power. His research suggests that when intangible assets are properly accounted for, many assumptions about market concentration and returns need to be reconsidered.
“If you’re trying to get some sort of return on capital employed, and but you don’t measure the capital employed, or you only partially measure the capital employed, then it’s going to look like you’re making a very high return,” he said. “If you decided to measure the capital that Microsoft are using to try to get some measure of the return on their capital, the tangible capital that Microsoft use would be only buildings and a few computers. That’s obviously just not adequate representation of the type of capital that a company like that is using. They’ve got all the software capital and the reputational capital and the ability to coordinate these supply chains and so on.”
This measurement challenge creates significant practical problems for business leaders and investors. When conventional metrics fail to capture the full scope of a company’s productive assets, they can lead to distorted views of business performance and value creation. For instance, Prof. Haskel said companies with significant intangible assets might appear to be generating unusually high returns on capital, simply because much of their productive capital base remains unmeasured.
The future of innovation and productivity
Prof. Haskel’s research suggests significant changes ahead in how businesses innovate and create value. “At Imperial, the scientists think there’s going to be innovation in the innovation process,” he said.
“Nuclear fusion is a good example. Scientists have been trying for decades to try to get nuclear fusion going. The scientists now talk about breakthroughs in software and artificial intelligence being able to simulate magnetic fields and so forth, in a way that couldn’t be done before.”
This evolution in innovation processes represents a fundamental shift in how businesses approach research and development. The integration of artificial intelligence and advanced computational methods is enabling companies to tackle complex challenges in new ways. That said, said Prof Haskel, “measured productivity might be the same or might slow. It’s going to take a long time for the co-investments needed to transform that productivity into output to come along”.
The transformation extends beyond traditional research and development into areas like business process innovation and organisational learning. Companies are finding new ways to combine different types of intangible assets to create value, leading to what Prof. Haskel describes as “innovation in the hard-to-innovate sectors.”
Implications for business leaders
The increasing importance of intangible assets presents both opportunities and challenges for business leaders, and Prof. Haskel’s research suggests several key considerations for managing the intangible economy:
First, investment in intangible assets requires different approaches to traditional capital investment. These investments often have spillover effects and can create value in unexpected ways. Companies need to think more broadly about how they measure and manage these investments.
Second, the ability to commercialise knowledge has become a critical capability. “When we talk about knowledge, I think this intangibles research program is best understood in terms of commercially valuable knowledge. There’s obviously heaps of knowledge out there in the world, but commercialising that knowledge, I think, is a major challenge for firms. And what we’re trying to study here is the steps that firms are taking to commercialise that and thereby embody it in production,” said Prof. Haskel.
Third, the future points toward continued growth in intangible investment. “Further moves towards the more intangible economy. I have to mention AI. AI, of course, is a mix of software, which is intangible, fast hardware, which is tangible, scanning databases, which are intangible, yet to be measured. The scientists think there will be innovation in the innovation process,” said Prof. Haskel.
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His research also suggests businesses should focus on developing capabilities to identify, measure and manage intangible assets effectively. This includes understanding how these assets create value through spillover effects and network advantages, rather than traditional linear return on investment calculations. Prof. Haskel said companies also need to consider how their intangible investments might create value in unexpected areas of the business, beyond their initial intended purpose.
“We need some new policies and institutions for the intangible, intensive economy around banking and raising finance and so forth,” said Prof. Haskel, who suggested business leaders actively engage with policymakers and financial institutions to help develop frameworks that better support intangible investment and value creation.