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Title Productivity and Innovation in UK Financial Services: An Intangible Assets Approach
Author Jonathan Haskel and Annarosa Pesole
Year 2009
Abstract Financial services are typically described as highly innovative (indeed excessively so
according to some commentators). Case studies suggest very high innovation around IT,
software and the internet, and new products including those via financial engineering.
However, it is hard to see this by many standard IO and productivity measures. Patenting
for financial products (at least in the UK) is almost zero. R&D as a fraction of sales in UK
financial services is 0.02%, putting finance (on this measure) less innovative than furniture
manufacture (0.3%). Whilst measured labour and total factor productivity growth have
been quite rapid, there are doubts over measurement and the residual nature of TFP growth
leave open the question of what drives financial innovation. This paper looks at innovation
in UK financial services by trying to bring together the industry productivity/TFP literature
with some of the case study evidence. Such evidence suggests that much financial
innovation (a) can be readily copied and (b) requires investment in product development,
software, marketing, training and organisational change. Whilst copying can be captured by
TFP, these investments are almost certainly not captured by conventional R&D. Thus we
follow the Corrado, Hulten and Sichel (2005) intangibles framework and measure the
broad range of intangible/knowledge assets that case studies suggest are important in
finance. We document these investments are very large in UK finance, and that
conventional R&D understates them. Incorporating them into the growth accounting
picture we show the method seems to capture much of innovation in financial services and
changes the productivity/TFP growth picture to give more intuitive numbers.
DownloadInfo Productivity and Innovation in UK Financial Services: An Intangible Assets Approach
Remarks First draft, please do not quote. Comments very welcome.
Topic revision: r4 - 26 Jan 2011, JonathanHaskel
 

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