McKinsey & Company does research for decision makers in policy and business. Once in a while they sneak in an interesting sidebar of research that could actually address some major social and economic issues. In mid-November they issued a research report on the value of the Global Balance Sheet. The major statement from the report was, 68 percent of global net worth is stored in real estate — and the balance is held in such things as infrastructure, machinery, and equipment and, to a much lesser extent, so-called intangibles like intellectual property and patents. (Source: Rise and Rise of the Global Balance Sheet, McKinsey and Company)
Low Interest rates have accelerated the prices of real property. However, the low interest rates increased real estate prices and the wealth gap for low income population segments.
The McKinsey report included a fascinating side bar on accounting for the value of intellectual property (IP) held in companies. They referred to a paper published in 2016 by Ryan Peters and Lucian Taylor which calculated potential increases in value of IP on Balance Sheets for corporations. The McKinsey research paper went on to say that there should be more investment in intellectual property and innovation because people produce products and services. Investing in development of human capital, innovative products, brands and patents adds to the value of companies and the economy over the long-term. Accounting rules that amortize (deduct) the costs of developing valuable IP, intellectual property on Balance Sheets at 20% per year may be excessive.
This shift in looking for value from work by people is important to small and mid-size businesses where the performance and talents of owners are critical to question, What is the value of small and mid-size businesses? Intangible assets are described as human capital (meaning talents), innovative products, brands, patents, software, customer relationships, databases, and distribution systems.
This expanded view of value does open doors for increasing the value of small companies. Business owners can add value to their companies by publishing content, creating distinctive new products and adding whole business lines. The pandemic environment may be wobbly, but keep working on new ideas and innovations.
Here are links to commentary on the research on the value of IP and the Global Balance Sheet
Intangible capital and the investment-q relation – ScienceDirect