Intangibles and Scale: Do Smaller Markets Make for Less Intangible Investment?

One of the features of intangibles that we have noted is that they are scalable: Uber’s computer program for example across cities.  One of the implications of this is that intangibles are very suited to large markets, since they can potentially be scaled across many customers.  One testable implication of this is around barriers to trade: if a country faces lots of trade barriers, that should mean it makes less intangible investment.

This matters for the Brexit vote of course. If leaving raises trade barriers to services, might UK intangible investment suffer? Remember that the WTO only covers manufacturing, so the UK would have to negotiate trade agreements in services.  Such agreements are currently only covered only by the single market arrangement.

Step forward the OECD who have developed an index of service sector trade restrictiveness (STRI).  This index covers a number of service sectors, such as distribution, sound recording, motion pictures, banking, accounting etc. giving each sector in each country a score of 0-1 from the least to most restrictive to trade in these services.

Over the sectors, the index looks like this




Source: Nordås, H. K. and D. Rouzet (2015), “The Impact of Services Trade Restrictiveness on Trade Flows: First Estimates”, OECD Trade Policy Papers, No. 178, OECD Publishing.


As the picture shows, legal and air transport are the most restrictive to trade, but there is lot of variation across countries in how open they are.

The Figure below shows the correlation with intangible intensity, namely the fraction of GDP invested in intangibles.  Countries like the Netherlands and UK, who are very open, invest a lot.  One interesting country is Austria, not normally viewed as a basket case.  It’s intangible investment is rather low, but it scores highly on the restrictiveness index, so that could be part of the explanation: with high trade barriers it’s a small market and so it’s not worth investing in intangibles.



Source: authors’ calculations.  Trade barriers are higher the further along the horizontal axis.

In an intangible world, scale matters. And scale means free trade.  Barriers to that trade could be particularly costly.

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