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24. In terms of accounting principles, the SNA recommends measuring gross output of R&D for market producers (firms that sell R&D) and total cost for other producers (own account R&D). This is essentially different from the Frascati Manual concept, which recommends measuring expenditure on R&D. The major difference between total cost (SNA) and expenditure (Frascati Manual) is in the treatment of fixed capital: whereas the cost approach counts consumption of existing fixed capital, the expenditure approach counts the expenditure (purchase) of new fixed capital. The Frascati Manual applies the same treatment to intermediate goods, which are measured by purchases instead of consumption (under the heading “Other current costs”). For gross output, recommended by the SNA for market producers, it equals total cost plus an operating surplus and adjustment for net taxes on production (payments less subsidies) (Table 5).

Table 5. Gross output and total intramural R&D

1. Intermediate consumption also includes the cost of any bought-in R&D.

Source: OECD.

25. There are other, smaller differences in the treatment of fixed capital in the SNA and the Frascati Manual: i) in the SNA, gross fixed capital formation (GFCF) on buildings excludes the value of the land on which they are situated, whereas the Frascati Manual includes land and buildings as capital expenditures, with no separate identification; ii) disposal, especially sales, of fixed capital, is not considered in the Frascati Manual and might lead to double counting, as part of the capital expenditure of one entity would correspond to a reduction in the capital stock of another. This is hard to measure, and it is likely to be small in practice.

R&D as intermediate consumption

26. The SNA 1993 gives the following instruction for the R&D of market producers (the Frascati Manual business enterprise sector):

“Research and development are undertaken with the objective of improving efficiency or productivity or deriving other future benefits so that they are inherently investment – rather than consumption-type

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activities. However, other activities, such as staff training, market research or environmental protection, may have similar characteristics. In order to classify such activities as investment type it would be necessary to have clear criteria for delineating them from other activities, to be able to identify and classify the assets produced, to be able to value such assets in an economically meaningful way and to know the rate at which they depreciate over time. In practice, it is difficult to meet all these requirements. By convention, therefore, all the outputs produced by research and development, staff training, market research and similar activities are treated as being consumed as intermediate inputs even though some of them may bring future benefits.

“As already noted, research and development is not an ancillary activity like purchasing, bookkeeping, storage and maintenance which tend to be found frequently in all establishments. When research and development is carried out on a significant scale within an enterprise, it would be desirable to identify a separate establishment for it so that the relevant inputs and outputs could be distinguished for analytical purposes. Because of the difficulty of obtaining price data, the output will usually have to be valued by total costs of production, as in the case of most other own-account production. The output produced has then to be treated as being delivered to the establishment, or establishments, which make up the rest of the enterprise and included in their intermediate consumption. When there are several other establishments, the amounts of research and development delivered can be distributed in proportion to their total costs, or other indicator, in much the same way that the output of head offices or other central facilities has to be allocated.

“When an enterprise contracts an outside agency to undertake research and development, staff training, market research or similar activities on its behalf, the expenditures incurred by the enterprise are treated as purchases of services used for purposes of intermediate consumption.”

(CEC et al., 1994, paragraphs 6.163-6.165.)

27. The consideration of “software and large databases” as an investment good in the SNA 93 raises particular issues for R&D. The above text mentions that “all the outputs produced by research and development (…) are treated as being consumed as intermediate inputs”. This is in fact contradicted by the capitalisation of own account software production in national accounts, as a substantial part of own account software consists of R&D (R&D performed in software companies and R&D on software performed in other companies). Available figures show that a substantial and increasing share of R&D is in programming software.

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R&D in the expenditure account

28.The Manual distinguishes between performers and funders of R&D. The SNA distinguishes between the producers and the users of R&D services (expenditure account). The unit which “performs” the R&D also “produces” it. The “funder” unit is usually, but not always, the SNA “user”.

29.The funding unit is the SNA user when the money is used to finance intramural R&D (“own funds”) or to purchase R&D services from another unit. The funding unit is not the SNA user if it transfers money for R&D performance to another unit but does not receive a flow of R&D services in return, e.g. all types of R&D grants and also indirect forms of R&D support. In this case, the performer is the user. In the case of market producers, any grants, etc., from government must be treated as “subsidies” (see Table 5). Problems may arise for the R&D content of procurement contracts. In principle, the R&D is embedded in the product as it is in other purchases of goods and services, and the SNA user of the R&D is the producer/performer. If, however, the funding agency places a separate R&D contract and becomes the owner of the R&D results, then the funder is the SNA user. When a funding entity other than the government is not the performer (extramural R&D), the Frascati Manual makes no specific recommendation regarding the classification of such transfers of funds, whereas the SNA proposes various categories (income from sales, subsidies, current transfers and capital transfers), with the idea of gaining a better understanding of the economic mechanisms at work.

30.While all R&D has a user, only part of R&D appears per se in the final expenditure account. In the expenditure account, the vast majority of R&D is treated as being used up in the production process and hence already incorporated in goods and services. These are either carried forward to a subsequent period (capital formation) or used without further transformation to satisfy the individual or collective needs of members of the community (final consumption). This covers all R&D financed by market producers and R&D financed by government and non-profit institutions serving households (NPSH) which contributes directly to the services they supply. The only R&D activities treated per se as final consumption in the expenditure table are those financed as a collective service by government (notably basic research) and similar R&D financed by NPISH.

The need for satellite accounts

31. Satellite accounts are an evolving mechanism for presenting particular topics as annexes to main national accounts.

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32.The characteristics of satellite accounts can be described as follows:

“Over time, satellite accounts for particular fields have come to be associated with the following characteristics:

1.They feature data for a whole field of economic activity and provide a framework for arraying more comprehensive information about a field than can be shown in the main accounts.

2.They are purpose-oriented in that the criterion for a transactor’s or transaction’s inclusion is its linkage to the field.

3.They are articulated with the main accounts and contain at least one measure that is also in the main accounts.

4.They present information in ways that are different from the main accounts: definitions, classifications and accounting conventions may differ from those used in the main accounts in order to provide the most useful presentation of information about the field. What is counted as current or capital in the main accounts may be changed, or the boundary of production may be moved. The definitions, classifications and accounting conventions must be consistent within the account, however.

5.They often contain tables that answer several questions: Who is producing, and what are the means of production? Who is financing? What is the result of the expense, and who is benefiting or using the result?

6.They often encompass monetary and physical data in an integrated fashion. Physical data may relate to production, such as the number of persons employed in the field or the stocks of equipment. Physical data may also relate to beneficiaries, such as the number of persons affected by activities in the field.

The advantage of satellite accounts is that an alternative view of the economy can be obtained without disturbing the main accounts.”

(Carson and Grimm, 1991)

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Annex 4

R&D Related to Health, Information and Communication Technology (ICT) and Biotechnology

1. This annex presents three areas of R&D for which it is not possible to derive information through direct use of the classifications recommended elsewhere in the Manual. All three are of high policy relevance, and there is a clear need for data on R&D related to these fields. To obtain the data, it is often necessary to combine R&D data from various classifications or even to develop new survey questions.

Deriving data on health-related R&D from regular R&D statistics

Introduction

2.Recently, demand for data on health-related R&D has been particularly strong. As international comparisons are often requested, this section provides general guidance on how to compile data on health-related R&D from existing surveys and more general sources. In this context, “health-related” refers not only to biomedical research but also to a wider category including relevant R&D in the social sciences, notably on health services.

3.The aim of the exercise is to establish gross expenditure on R&D (GERD) for health, broken down by sector of performance and source of funds. There should be matching R&D personnel data by sector of employment. Guidance is also given on GBAORD, as those who seek health R&D series often use this source. Further information on international comparisons and examples of national efforts can be found in Measuring Expenditure on Health-related R&D (OECD, 2001).

4.In principle, similar compilations could be made for other fields such as agriculture.

General approach

5. There is demand for a data set covering all health-related R&D, but regular R&D surveys normally break down expenditure and personnel according to the primary aim/field/industrial activity of the unit concerned.

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Furthermore, classifications may not be detailed enough to identify small categories of health-related units.

6.The process thus has to be to break out the data for categories that are clearly health-related (core elements) and then to use various adjustment and estimation methods to refine these data and to add in the health-related component of other categories. This generally means starting from institutional classes, for which a full set of data is available (sources of funds, personnel, etc.) and then using functional data to make the necessary adjustments. The process will vary among sectors and also among countries because different institutional and functional breakdowns may be used and also because data providers have special knowledge of national specificities in the organisation of health R&D.

7.In principle, the preferred source should be GERD data reported by performers. In practice, several sources may be used to compile health-related R&D spending. In some countries, especially those where the collection of GBAORD data is associated with the general R&D survey, these budget series (particularly those for which data on first destination are compiled) may identify central government funds for R&D on health which are not immediately visible in the survey of performers by socio-economic objective (protection and improvement of human health) or field of science (medical sciences). Similarly, useful additional information and data may be gleaned from the reports of medical charities, health research councils and funds and even from the reports of pharmaceutical industry associations. Building up a reasonable picture of GERD for health may involve mixing and matching data from a variety of sources.

Identifying health-related R&D in GBAORD

8.Those seeking data on government funding of health-related R&D are often drawn to GBAORD because there is a specific category of socio-economic objective for this topic. However, they may not realise that this category only covers R&D whose primary purpose is the protection and improvement of human health (NABS 4) and that funds for relevant activities may be included in other categories.

9.The most important additional category is “General university funds and non-oriented research”. The core coverage recommended for health in GBAORD is therefore:

–Health.

–General university funds and non-oriented research: medical sciences.

10. Health-related research funded for other objectives, for example military medical research, health and safety research at nuclear establishments or support for relevant enterprise R&D as part of industrial policy should also be included when available.