Intangible assets are difficult to pledge as collateral. Intangibles have features that make their financing intricate. Asymmetry of information between investors and innovators makes it difficult to evaluate the risks. This makes the return on investment precariously inexact. High information asymmetry and low collateralisation amplify the inherent divergence between the internal and external costs of capital. Banks, therefore, require collateral to compensate for the related risks. Further, certain categories of intangibles are volatile and display lower liquidation value. And some projects need large initial investments to manage sizeable fixed and often irreversible costs.
To support the Covid-19 accelerated shift towards a knowledge-based economy, governments are considering a broader role in facilitating intangibles financing, following the full-bodied fiscal stimulus packages disbursed to counteract the economic consequences of the pandemic. Moruga Hill Rice is a hybrid of varieties known to the Warahoon (Warao) nation, of the Orinoco, and the upland bearded hill rice cultivated by the Merikins. The unique heritage, indigenous folklore, biodiversity and distinctive plant material of Moruga Hill Rice, which is scarlet in colour with a nutty flavour, best typifies the shift in value creation from tangibles to the use of IP in asset-backed lending. Customarily, IP and intellectual capital assets are, in many respects, the output of R&D spending and human capital development.
Po-Zu coats coconut husk, or coir, with natural latex. Po-Zu believes that ethical shoes have a good sole. The patented new material is part of its Foot Pillow Technology. Bourgeois Boheme makes handcrafted Vegan luxury shoes from Pineapple Fabrics. Samatoa has built an industry of designers, spinners, weavers, and seamstresses, around innovative eco-fabrics that are 100% ecological, handspun, and woven, using old-fashioned techniques. Samatoa empowers the women of Cambodia, to ascend like lotus blossoms. Bananatex uses Abacá banana plants, within a natural ecosystem of sustainable mixed agriculture and forestry, using no pesticides, fertilizer or extra water. Bananatex is an open-source project. It is a circular alternative to old-style synthetic fabrics.
During the Coronavirus pandemic, SMEs welcomed countless opportunities to harness the blossoming potential of intangible assets for asset-backed financing. On the one hand, due to their structural and financial characteristics, intangible-intensive firms tend to be more resilient to shocks like the COVID-19 viral episode. On the other hand, these same features, which anchor the core of this resilience, can become a source of trouble during the recovery, slowing down intangible-investment during the aftereffects of the crisis. The slowdown can also lead to the premature exit of potentially viable innovative firms, and reduced market contestability. Conversely, fewer firms enter the sector, impacting the global competitiveness of the firms operating in that economy.
While investment in intangibles, and steps to innovate often take place at the firm level, some governments finance a segment of the total investment portfolio in intangibles, either directly through allowances, advances, and transfers, or indirectly through tax incentives. Government support arrangements can narrow the fissure in the financing of intangible assets. This allows businesses to invest in pioneering activities with potentially relevant economy-wide positive spillovers. R&D tax incentive structures are a common tool used by G20 countries to support innovation. Governments in these countries relax financial constraints affecting intangible investment, by reducing the cost of intangible investment for eligible businesses.
R&D tax schemes stimulate innovative and intangible-intensive SMEs. Early-stage SMEs usually show slight profits during the early stage of their life cycle. Credit also tends to be unproductive when limited to tax income liabilities. So it is critical to ensure the unused part of the tax credit can be applied to tax liabilities in future years. Alternatively, the unused part of a credit, can become directly payable to the company, or redeemed against payroll and, social security contributions. The tussle to monitor the eligible spending and the risk of inappropriate classification of overheads in order to take advantage of the tax credit prompts a measured approach. The classification of indirect costs that are not eligible for the tax credit as R&D can lead to significant tax advantages.
Further, such extensions can give rise to tax planning opportunities where marketing expenses are relocated from one subsidiary of a conglomerate to another. The burgeoning knowledge-based nature of the economies in Post Corona portends substantial changes in firms’ organisational structures and accordingly in the digital skills workers need. This redirects investments to make the workplace a site of lifelong learning. Nearly half of the EU Member States have already created tax incentives in the corporate income tax for education and training.
The most common schemes are a tax allowance for education expenditures, a tax credit against relevant spending or a tax exemption for income accrued by specific groups such as apprentices. Another favourable approach is the establishment of Employment Funds. In this frame, companies contribute mandatory fees to the fund, which creates rights to finance employee training. This in turn creates incentives to involve workers in lifelong learning to recover their investment from the training fund. Contributions to the fund are loosely coupled to the characteristics of the firm. This allows a kind of mutualisation mechanism that enables SMEs to upskill worker skills, with potentially broader positive consequences for the economic competitiveness of nations.