How Much Does Your Company Really Invest in Innovation?
Charles R. Hulten
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Investment in knowledge capital—the full range of activities beyond R&D to implement or commercialize new ideas—exceeds investment in tangible fixed capital among U.S. non-farm businesses. Macroeconomic evidence in the United States shows that intangible capital has been by far the largest systematic source of growth and is positively correlated with real GDP per capita.
Own-account intangible capital goes largely unmeasured in company financial statements because of conventional accounting practices. There may be large amounts of data and unorganized tacit knowledge within an organization, but with no associated cash flows to use as a yardstick, their absence from financial reports makes it hard to understand the aggregate scope of investment in innovation and operational capabilities. KPIs can be valuable, but they are often hard to connect to dollar metrics and aggregate into a summary metric of innovation. Moreover, they measure outcomes, not the scale of effort and commitment of resources.
Nonetheless the proven value of collective innovation to business growth underscores the importance of measurement and inclusion in a company's financial statements.