Creative industries play a key role in the knowledge economy

A knowledge-based economy is, of course, not new – knowledge-based institutions, such as universities, go back centuries. But in the late 1970s and early 1980s, three major economic and social forces combined to initiate a radical change in economic structures across the Organisation for Economic Cooperation and Development (OECD):

1. the introduction of very powerful and relatively cheap general purpose information and communication technologies that have gone on getting more powerful and cheaper at an accelerating rate

2. powerful consumer markets made up of well-educated and demanding consumers with a voracious appetite for the high value added services that characterise the knowledge economy

3. globalisation acted as an accelerator – opening up both mass markets of global scale and an endless niche markets, as well as speeding up the spread and adoption of new technologies and ideas.

These changes are universal – they affect all industrial sectors, all sizes of firms, the public sector as much as the private sector. And they are global – we have yet to find an advanced industrial economy where these changes are not taking place.

The evidence for these changes is compelling. In 2004, UK businesses invested nearly £130bn in knowledge-based assets – or 'intangibles'. This was roughly 140% (1.4 times) the investment in more traditional physical assets. In 1970 such investments were worth only 40% of investment in physical assets.

Figure 1 shows the distribution of intangible investment in 2004. Such investment is centred on three areas: technology-related investment, human and organisational capital, and explicitly related creative activities such as design, brand equity and copyright.

The same results have been found by national studies in such diverse economies as the US, Finland, Japan and the Netherlands. The impacts on employment and industrial structure are profound and they are common to all advanced industrial economies without exception. We identify three key developments:

1. a dramatic fall in the share of the unqualified workforce, from 70% in 1970 to less than 15% today

2. a big shift in employment and value added towards knowledge-based services, the biggest source of jobs in today's economy (see Figure 2 for change in value added)

3. the redrawing of conventional industrial boundaries between manufacturing and services and within services itself.

The Work Foundation's (TWF) 2006 report, 'Staying Ahead', set out the contribution of the creative industries as part of the knowledge economy. The DCMS estimates provide a good economic map of the creative economy (probably one of the best in the OECD). The latest published figures – updating those set out in the 2006 TWF report – are impressive:

between 1997 and 2005 the industries grew at an average of 6% per annum in real terms measured by gross value added

between 2000 and 2005 exports grew by over 50% in current prices

between 1997 and 2006 employment (direct and indirect) grew by 340,000, or 21%, to reach 1.8 million.

But precisely because they cut across conventional statistical boundaries it can be hard to fit the economic map of the creative and cultural industries back into the knowledge-based industries or indeed the economy as a whole. Making comparisons with the rest of the knowledge economy on a like-for-like basis is not straight forward.

This concern with definition, measurement and comparability may look like the obsessive focus of policy wonks, but it is a key building block to understanding the economic position and dynamics of the creative sector, and convincing others it matters and that it deserves special attention.

The debate on intangibles goes back at least 30 years and was largely focused on how they were represented in company accounts. However, five years ago, obscure research papers started to publish estimates of just how important intangible investment had become and why it mattered to our understanding of how modern economies work.

Today, the concept has entered mainstream economic and industrial policy thinking within Whitehall, and within the OECD and the EU. The European Commission has committed itself to a major research programme across some of Europe's top universities to understand the future economic and employment implications for Europe.

The TWF 2006 report made three broad conclusions using the knowledge economy framework, the hard data that existed at the time, and the insights from an extensive review of and conversations with firms and organisations in the creative industries.

CREATIVE INDUSTRIES MATTER

First, the creative industries matter because they are an important and integral part of the UK's knowledge economy and likely to become more so in the future. As we discuss below, this conclusion has been sharply reinforced by recent economic events.

Second, the creative and cultural industries are disproportionately important because they impact on national creativity across a wide range of industries and so had wide-ranging impacts on both the economy and society more generally. The TWF report identified six types of 'spillover effect' that could transmit these wider economic benefits.

Third, there had to be a paradigm shift from thinking about the creative and cultural sectors as worthy recipients of grants and subsidies, to one where they're seen as major economic players in their own right, where investment offers significant economic and social paybacks.

The TWF report did not set out detailed policy proposals for the creative sector, as these were for government in the subsequent Green paper and for the individual sectors to develop. It did, however, make the point that policy had to look at a wide range of issues, including the role of the education system, rather than just those specific to the creative and cultural industries.

Since the report was written, economic events have taken an unexpected turn. We face a deep recession of unpredictable length. That uncertainty is even greater for the knowledge economy and in particular the creative sector.

INTANGIBLES: RECESSION-PROOF?

A key question is what happens to investment in knowledge-intensive intangibles in a recession – which is another way of asking how businesses are going to react. A closely related question is how consumers will respond – we can already see some effects from cutbacks in discretionary spending on the hospitality sector.

A recent analysis of US spending patterns by McKinsey shows that in previous downturns US consumers increased some forms of spending and drastically cut back others in comparison with the long-term average. They spent more on education, magazines and books, personal insurance and health care. They spent much less on eating out, personal care services, transport and clothes. Spending on entertainment also fell, but much less drastically.

Of course, these figures are for US consumers and include both a sharp downturn (1990–1992 and one that was quite short and shallow (2001–2002). The current recession may also have different priorities (one can imagine that selling new financial products at the moment could be an uphill task). However, if these patterns held for the UK, then spending on some forms of knowledge services might actually go up compared with spending on more traditional services.

The same article also looked at business spend on software over 50 countries, and found that spending fell by more than GDP in both previous downturns. However, McKinsey thinks spending may hold up more robustly in this downturn because firms had already cut back spending levels after the 2000 'dotcom' and 'millennium bug' boom.

We know that in most recessions investments in physical assets tumble, and this recession is no exception (business orders for new construction work have already collapsed). But we know very little about whether intangible investments are more or less recession-proof than physical assets, or how badly the more cyclically sensitive creative industries will be affected.

The simple reason is that there are few measures that let us see what happened to such investments in the downturns of the 1980s and 1990s, so we have no benchmarks. But there is also the problem of untangling cyclical factors from underlying structural changes.

More generally, will we see a flight from intangibles as banks place more weight on easier to value physical assets, rather than the less well understood 'intangibles'? And if the supply of private venture capital dries up – especially for start-ups operating in riskier and harder to assess areas – an important area of entrepreneurial dynamism will be weakened in the UK.

Knowing the answers to some of these questions has never been more important. Both physical and intangible investment of course matter. But intangible investment is at least 40% higher across the economy as a whole than physical investment. In some sectors, such as manufacturing, it is more than twice as large. Substantial short-term cuts in areas such as R&D, strategic advertising, software, design, and human and organisational capital could leave many firms struggling to catch up in the upturn.

A MORE EXPLICIT GOVERNMENT STRATEGY IS NEEDED

The government will be, out of necessity, devoting much of its collective attention to the short-term impact of the recession over the next 18 months. However, ministers also need to be thinking about what the post-recession economy could look like and what needs to be put in place now to ensure the key sectors emerge in good shape to take advantage of the upturn.

Within this broader policy agenda, we have argued that the government should develop an explicit strategy for developing the UK's knowledge economy. At the heart of the strategy must be encouraging investment at all levels in – broadly defined – knowledge and the knowledge asset base, and the means to exploit and develop them.

Many of the component parts are now in place through the innovation and enterprise White Papers, the Leitch Review, the post-Green Paper by the Department for Culture, Media and Sports, Creative Economy Initiative and the Manufacturing Strategy Review.

These initiatives needed to be brought together – the fact that the 2007 Spending Review failed to do so was a missed opportunity.

The financial services sector will grow much more slowly than in the past and may contract as a share of GDP in the short to medium term. The obvious implication is that other sectors will have to take up the slack if the UK is to continue to develop its knowledge economy.

CREATIVE INDUSTRIES MUST MAKE THEIR CASE

The creative and cultural industries should be one of those future knowledge economy growth sectors and that strategic role should be explicitly recognised across government. But it will not happen without the creative industries collectively developing a more robust evidence base to improve understanding of how their industries really work, and how they interact with other parts of the economy.

ABOUT THE AUTHOR

Ian Brinkley is director of the Work Foundation's knowledge economy research programme.

[email protected]

Figure 1: Business investment in intangibles: Share of total investment in intangibles in 2004

Figure 2: UK share of value added in KE services (1970–2005)