Investment in brands drives the allocation of resources in our economy. It increases competition, pushes firms to innovate, and decreases asymmetries in the market leading to a higher level of economic development.
Investment in brands and intangibles has seen an increase in the last fifteen years, especially in advanced economies such as the EU and the US. The US is a pioneer when we talk about investment in brands, whereas the EU is still investing a higher share of GDP in tangible assets. Differences within the European Union are also significant. Size seems to matter. Larger economies usually invest less in brands, whereas relatively smaller economies invest more. Moreover, smaller economies tend to “spend” more on branding compared to bigger ones.
However, on average, the economies taken in our sample (EU27 plus Norway and US) show that they correlate positively with investment in brands. The econometric results show a positive and significant correlation between investment in brands and GDP per capita.
Nonetheless, each country’s economic characteristics influence the role that brands play in the economy. Examples analysed in this policy brief are Germany and Sweden, where GDP per capita and investment in brands are negatively correlated, and Norway and the US, where correlation between the variables is rather positive.
2. The evolution of investment in brands and intangible assets
Western economies are increasingly dependent on assets that are not physical and the value those assets generate. Throughout economic history, investment in tangible assets like equipment and machinery has been an important source of growth for economies. The level of tangible investment has set the pathway for the economy’s ability to grow and generate income thanks to an efficient allocation of resources, such as capital and labour.
Investment in tangibles still matters, but what has become important for developed economies is their generation of intangible assets. Intangible assets allocate resources efficiently in the economy, increasing capital and labour productivity. They support a greater generation of economic output thanks to economies of scale, creation of innovation, and diffusion of spill over effects. Intangible assets are equally important as tangible assets today in determining the future trajectory of an economy – in short, its future path of economic development.
Although investment in intangible assets has increased in past years, investment trends differ across economies depending on how they value knowledge creation. In Figure 1 below, the graph on the left hand side shows the evolution of investment in intangible assets as a percentage of GDP in the EU and the US over fifteen years. In other words, we can see how much the two economies are “spending” on intangible assets. Both economies have increased their investment in intangibles, however the US has devoted a larger amount of resources to it.
The chart on the right hand side explains the argument in more detail. While the US has clearly focused on intangible assets, the EU economy’s allocation of resources is still driven by tangible assets. About 8,5 % of GDP is invested in tangible assets, compared to 4,5% of GDP for intangibles. In the US, 5% of GDP is dedicated to tangibles whereas 11% of GDP is dedicated to intangibles.
Those numbers show how resources are mainly allocated in both economies. In the EU, a large amount of capital and labour is employed in sectors where tangible assets such as machinery and equipment, e.g. heavy industries, still play an important role. In comparison, US economy seems to be driven by a knowledge-based approach. However, the economic outcome and the level of development in the EU and the US are not necessarily better than one another. As we are well aware, economic development in both economies is high. Investments in different types of assets depend on the country’s economic characteristics, which consequently determine the country’s productivity level and economic output.
In fact, some of the richest countries in the EU have comparatively low levels of investment in intangible while countries with a lower GDP level have a larger share of their investment dedicated to intangibles. Supporting this argument is Figure 2, where the countries with the highest share of investment in brands are Czech Republic, Greece and Slovenia, which have a lower GDP per capita compared to Germany and Sweden, which are characterised by the lowest share of investment in brands but a higher GDP per capita.
Moreover, the same figure shows another trend. In the EU, smaller countries, in population terms, such as Belgium and Ireland, tend to have a higher share of investment in brands compared to bigger countries such as Italy and Spain. Smaller countries are generally knowledge based whereas bigger countries rely more on an industry-based economy.
Figure 1. Investment in intangible assets in the EU and the US.
Figure 2. Investment in brand by country in 2010