In recent weeks, we’ve repeatedly discussed intangible assets and their role in the complex tax strategies of multijurisdictional corporate groups (MJGs). Intangibles were central to our investigation with The Business Post and feature prominently in many of our case studies. But what exactly makes intangible assets so special?
The term comes from the seemingly dry world of accounting, yet its implications for the global economy are profound. To give a clearer picture, we take a step back and answer three basic questions.
What are intangible assets?
Put simply, intangible assets are anything on a company’s balance sheet that is not physical – assets that cannot be touched. The most familiar example is investment in research and development. But other forms include software, data, branding and design, organisational know-how, and intellectual property.
These assets share a defining trait: they are bound up with knowledge. Scientific and technological knowledge, process-specific expertise, and proprietary information all fall under this category. As a result, industries built on knowledge tend to hold more intangible assets
This trend is borne out in data. The World Intellectual Property Organization shows that tech and pharmaceutical companies consistently dominate global rankings for intangible assets. Our own investigations support this pattern. These two sectors are consistently the most intangible-rich. Yet the rise of intangibles is not limited to them. Even traditionally physical industries like manufacturing now report growing shares of intangible assets.
How have intangible assets evolved over time?
Intangible assets have not always been so dominant. For much of the 20th century, they were a marginal part of overall investment. That changed dramatically in the late 20th century. In advanced capitalist economies today, investment in intangible assets now outpaces investment in tangible ones.
This is not just a matter of accounting categories. Measured as a share of GDP, intangible investment has pulled ahead of tangible investment. We are living in a new kind of economy – one shaped by intangible capital.
What makes intangible assets so important?
We focus on intangible assets not just because they have become more common, but because of what makes them unique. These characteristics challenge the assumptions of existing market models.
Returns on intangible assets can be unusually large. Think of a pharmaceutical firm developing a new drug. The tangible assets – lab equipment, manufacturing tools – are only used in development. The real value lies in the formula, which becomes an intangible asset.
That formula can then be licensed, sublicensed, or transferred globally. The right to exploit it can be distributed almost indefinitely, sold to other pharmaceutical producers, who then mix the actual drug, or to corporations in other countries. The costs of reproducing and distributing it are minimal, even as its value remains high. This cost structure – high upfront investment, low marginal cost – favours monopoly.
In our recent working paper, we show that sectors with high intangible intensity, like tech and pharma, also display significantly higher market concentration, as measured by the Herfindahl-Hirschman Index. Rising monopolistic power is a defining feature of the intangible economy.
There is also the question of mobility. Intangible assets, by their very nature, are not tied to a specific place. Unlike factories or machines, they can be moved across borders with ease. This allows multinational groups to allocate them wherever it is most tax-efficient.
But mobility is only part of the story. Intangibles can also be duplicated and distributed across corporate structures. In many of our case studies, we found that intangible assets are booked in jurisdictions far removed from the economic activities they ostensibly represent. This makes them central to profit shifting and corporate tax avoidance.
There are further challenges. Intangible assets complicate national accounting. They contribute to regional economic clustering. And they raise thorny problems for regulators and policymakers. Though they originate in accounting categories, their effects are anything but technical. They are deeply political.
At Democracy Challenged, we see intangible assets as a key to understanding modern capitalism. Their rise is reshaping markets, distorting tax systems, and undermining democratic control. That is why we will continue to investigate the political economy of intangibles, bringing together insights from accounting, law, economics, and political science.
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