Erixon, European Centre for International Political Economy director & economist., 15

Investment in brands drives the allocation of resources in our economy. It increases competition, pushes firms to innovate, and decreases asymmetries in the market leading to a higher level of economic development.

Investment in brands and intangibles has seen an increase in the last fifteen years, especially in advanced economies such as the EU and the US. The US is a pioneer when we talk about investment in brands, whereas the EU is still investing a higher share of GDP in tangible assets. Differences within the European Union are also significant. Size seems to matter. Larger economies usually invest less in brands, whereas relatively smaller economies invest more. Moreover, smaller economies tend to “spend” more on branding compared to bigger ones.

However, on average, the economies taken in our sample (EU27 plus Norway and US) show that they correlate positively with investment in brands. The econometric results show a positive and significant correlation between investment in brands and GDP per capita.

Nonetheless, each country’s economic characteristics influence the role that brands play in the economy. Examples analysed in this policy brief are Germany and Sweden, where GDP per capita and investment in brands are negatively correlated, and Norway and the US, where correlation between the variables is rather positive.

1. Introduction

Brands are central to the way the modern economy works. The brand is a unique design, symbol or trademark that distinguishes one firm’s product from another. It is a firm’s intangible asset, perhaps the most valuable asset a company possesses, and should be the one that is most difficult to copy or reproduce by competitors. The brand equity embeds the strategy that a firm utilises to construct its reputation, to develop trustable relations with business partners and consumers, and to have a competitive advantage on the market. According to Urwin et al (2008), branding is defined as a “reputational asset” which has been “developed over time so as to embrace a set of values and attribute”[1] of a company.

Investment in intangible assets has increased significantly over the last 15 years. Companies have understood the value of knowledge creation in the economy and the long-term return on investment that it generates. According to the academic literature, investment in intangible assets and in brand has a positive and significant influence on economic development.

From an organisational perspective, branding is central to the company strategy. Although it is not tangible, it represents the personality of the company and is the interface for direct contact with consumers. It is the company’s façade and it embeds the company’s culture and strategies to achieve a certain reputation in the market. Brands communicate a message to consumers. They create the perception that consumers have of a company or of its product. Consumers associate a company name to a higher quality product therefore they will rely on that perception for future purchases.

Investments in brand create more competition in the market, forcing firms to use their resources more efficiently to produce larger quantities for a cheaper price. It pushes firms to take more risks to launch an innovative product in the market, boosting innovation. It eliminates asymmetric information that can arise between consumers’ needs and the firms’ trying to fulfil those needs.

Investment in intangibles and in brands drives the allocation of resources in the economy creating new competitors in the market. A continuous re-allocation of resources in the market is key for a well-functioning market economy. According to the OCED, on average, about 15-20% of all firms and more than 20% of jobs are created or destroyed each year (OECD, 2012). This can occur thanks to firms entering and leaving the market, and a shift in resources across firms or within firms. In the market, only the more efficient firms survive over a long period of time.

The value of brands and corporate brand strategies extend beyond companies. They are increasingly a source of economic development therefore shaping economies in different ways. Investment in brands is a large portion of investment in intangibles and it influences directly and indirectly investment in other categories. Equally important, investment in brands and in intangibles generally contributes to an efficient allocation of resources in the economy, since capital and labour are re-distributed in the sectors where they are more needed.

Although investment in intangibles has on average largely increased in the past fifteen years, not all countries have invested the same resources in the matter, or have experienced a larger return on investment from it. The economic results of investment in brands and intangible assets also vary between countries. For this reason, we deepen the analysis on investment in brands and economic development, taking into consideration a country’s economic features. In our study we analysed four countries – Germany, Sweden, Norway and the United States, which each have a different understanding and give a different importance to investment in brands.