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Intellectual Property (IP) is the right to use an idea in production. For example, a patent for a drug or rights to a song are Intellectual Property. IP is an asset that is used to produce other goods over several years; in that sense it is Fixed Capital, like a factory or a machine. It is intangible (has no real physical presence), it is the idea rather than the product, but it can still be highly valuable. It can be used by its owner directly to produce things, or it can be licensed to another company that uses it for production; if a company licenses out its IP it usually receives 'royalties' in return. Many of the largest corporations in Ireland are in high-tech industries like pharmaceuticals or information technology that rely heavily on IP.
Intellectual Property is an important part of Ireland's Globalised production. Unlike a building or a machine, it is very easy to move Intellectual Property into or out of a country. There is a lot of Intellectual Property held in Ireland. Some of it has been produced here, and much has been imported when an Irish arm of a global corporation has bought it from another arm of the same corporation. Most of the IP is an asset of Foreign-Owned Corporations, and the return on this investment goes abroad, rather than staying in the economy. For this reason, investment in IP is excluded from Modified Domestic Demand, which is intended to measure domestic activity.
In many cases, this IP is used in production in Ireland, for example, pharmaceutical firms make drugs in Irish factories using patents held here. Some multi-nationals in Ireland produce goods and services here using IP that is held abroad. In those cases, the Irish branch must pay royalties to a foreign company for the right to use the IP. These payments are royalty imports. On the other hand, companies here that hold IP receive royalties from manufacturers abroad for the right make to a patented product (so creating royalty exports from Ireland).
Any Intellectual Property declines in value over time, this is called Consumption of Fixed Capital (CFC) in National Accounts. For example, a drug patent might be very valuable when it is the first treatment for a disease, but over time other drugs will come on the market, and after a fixed number of years the patent will expire and anyone is allowed to make the same drug. The depreciation on the high-tech IP held by foreign corporations here is very high, because the stock of IP is valuable and it depreciates very fast as technology moves on quickly.
So it is important to distinguish between royalties for use of an IP asset and buying the asset itself. If royalites are paid to use IP, then that adds to the Output of the owner and Intermediate Consumption of the user. If the IP itself is bought, that is capital investment, which adds to Gross Fixed Capital Formation of the buyer, and then adds to their Consumption of Fixed Capital over the years.
The depreciation on IP is included in GDP, GNP and GNI. The G in all of these acronyms stands for Gross, meaning gross of CFC, that is, before accounting for how assets have been declining in value. We saw that GNP and GNI exclude the net profits of foreign-owned companies that leave the country (as dividends and Reinvested Earnings). So GNP and GNI are a better indicator of our underlying domestic economy than GDP. However, GNP and GNI still include the depreciation on assets held by foreign-owned corporations. This depreciation is ultimately a cost to the owners of the corporations holding the assets, so it makes sense to exclude it when calculating a measure of growth for the domestic economy. For this reason, depreciation on IP (and on leased aircraft) are excluded from Modified GNI.