Today, companies produce goods with vendors around the world – and in many cases, different stages of production are performed in different locations. Value of a product is added at each stage of the supply chain or global value chain. This value can be added by workers, machinery, and intangible capital. Intangible capital is becoming increasingly important – it includes “things one cannot touch, but are crucial to the look, feel, functionality and general appeal of a product.”
Intangible capital is crucial to the success of a company. To take a closer look at the value of intangible capital, how to manage intangible assets in global value chains, and the role of intellectual property (IP), The World Intellectual Property Organization released its 2017 report titled “Intangible Capital in Global Value Chains.”
It does so at the macro-economic level, by presenting original estimates of the income accruing to intangible assets in 19 global manufacturing value chains, and it also explores the role of intangibles in greater detail through case studies of specific value chains for smartphones, coffee and solar cells.
Production processes have been unbundled and spread around the world unleashing rapid growth in world trade, outpacing global output growth. Several forces supported this shift in the organization of global production:
- Falling costs of international trade made it cost-effective to disperse production across a number of locations. Cheaper and faster transportation had already propelled international trade during the first globalization phase. The advent of air transport, the spread of containerization and other innovations lowered transport costs even further.
- Progressively more liberal trade policies after the Second World War – following the proliferation of protectionist policies in the interwar period – also helped to lower the costs of shipping goods from one country to another.
- Modern information and communication technologies (ICTs) were critical in enabling dispersed production. In particular, rapidly falling communication costs and ever more powerful computing technology allowed companies to coordinate complex production processes involving many locations around the world.
Intangible capital has become more important in global value chain production. There is an increased importance of pre- and post-manufacturing stages and those stages account for ever-higher shares of overall production value.
Intangible capital accounts for around one-third of production value with food products, motor vehicles and textiles accounting for around one-half of income to intangibles.
Through transfer pricing and related practices, companies shift profits from one location to another. Thus, an intangible asset may originate in one economy, but most of its returns may show up in another. More fundamentally, increasing cross-border ownership and sharing of intangibles is undermining the very notion of location-bound assets and earnings.
Download the report: “Intangible Capital in Global Value Chains.”
Check back for two additional posts about this report.