Monday, July 25, 2016

How did the capital stock increase by €300 billion when investment was just over €50 billion?

There are many mysteries in the 2015 National Income and Expenditure Accounts published by the CSO two weeks ago.  The change that had the biggest impact on the accounts and was the source of the 26 per cent GDP growth was the €300 billion rise in the gross capital stock.  The bizarre nature of this is shown in this chart from a recent NTMA investor presentation.

NTMA Capital Stock

We know very little about this €300 billion increase.   The CSO will be publishing final figures for the capital stock later in the year but it is not clear that the sectoral and type figures usually provided will be made available for 2015.

Most commentary has linked the increase to inversions by US MNCs and redomiciling by PLCs from other countries.  It is not clear that this is the cause of the increase.  A company moving its headquarters does not automatically mean that it’s stock of fixed assets are included in Ireland’s capital stock. 

If a US pharmaceutical company does an inversion with an Irish company the manufacturing plants the company has in the US and other countries will remain part of the capital stocks of those countries.  The company may move intangible assets to Ireland but that would be a move separate to the inversion.  Also the only inversion in 2015 was the Medtronic-Covidien match-up which comes no where near the scale shown above.

A key problem is that we don’t know the type of assets that made up the €300 billion increase in the capital stock.  We can take it that much of it is intangible assets (leased aircraft are also said to have played a role but that may have been overstated).  The reason for this uncertainty is that gross fixed capital formation was just over €50 billion.

So how do we get a €300 billion increase in the gross capital stock with a little more than €50 billion of investment?  This seems hard to explain.  With the scrapping and obsolescence of some existing capital we should expect the increase in the gross capital stock to be less than the level of gross investment.  And, in theory, the movement of assets between countries should be de-investment in one country and investment in another country.  The ‘G’ in GFCF refers to depreciation.  Capital formation itself is made up of the net of acquisitions and disposals of fixed assets.

So why was the increase in the capital stock nearly six times greater than the level of investment?

One reason could be that different assets are included in each but that seems unlikely as they are supposed to be related measures.  It could be that US MNCs have transferred the economic rights to exploit their intellectual property to Irish-resident entities and that these economic rights are counted in Ireland’s capital stock but as the patent is retained by the US parent there is no investment expenditure in Ireland.  Not sure.

Another possibility are valuation differences between how the assets are counted for investment and for the capital stock.  It could be that these assets are counted in the investment data on some sort of “cost-plus” basis, i.e. the amount of R&D expenditure it took to actually produce them.  While in the capital stock the assets are counted on the basis of how much they are worth.

There was a large increase in R&D expenditure in 2015 in the €54 billion GFCF total and it went from €9.6 billion in 2014 to €21.3 billion in 2015.  But is €12 billion of additional R&D expenditure enough to explain an increase of a few hundred billion in Ireland’s capital stock.  I suppose it depends on what intellectual property rights were moved to Ireland the value of which does not necessarily depend on the R&D expenditure that went to generating them.

Whatever the reason it seems we need a more nuanced story than linking the increase in the capital stock to inversions and redomicilied PLCs.  In fact, given the massive increase in external debt linked to direct investment shown in previous posts such corporate restructurings don’t seem like a useful explanation at all.

No comments:

Post a Comment