M71 indirect investment

The demand for consulting engineering services arising from the indirect investment in the M71 product.

M71 indirect investment

Introduction##

It is likely that the demand from consulting engineering services arising from investment in various types of services is underestimated in national accounts because consulting engineering services may be embodied in services that are not recorded as a specific product. Consequently, although overall investment may not be underestimated, the ‘real’ contribution from consulting engineering services may be masked.

Consulting engineering activity mainly involves architecture and engineering services, classified under the M71 (Architectural and engineering services; technical testing and analysis services) product in national accounts.

We discuss below the 'indirect' investment in M71 services. However, the same discussion also applies to other sources of indirect investment in consulting engineering services, namely the contributions classified under the following products: M72.19 (Other research and experimental development on natural sciences and engineering services), B09.90 (Support activities for other mining and quarrying), M74.10 (Specialised design services), M74.9 (Other professional, scientific and technical services), M74.20 (Photographic services), and N81.30 (Landscape services).

The use of consulting engineering services corresponding to these various activities and arising in various areas of economic activity are discussed elsewhere.

Methodology

To estimate the 'indirect' investment in M71 services throughout the economy we use the approach described by Cette and coworkers who developed the approach to estimate the indirect investment in information and communications technology (ICT).

For the M71 services or 'product', the total investment (given by Grosss Fixed Capital Formation, GFCF), I, consists of the direct investment in the M71 product and the direct investment in other (non-M71) products:

  • I = DI(M71) + DI(M71)

Some non-M71 direct investment embodies M71 investment. Direct non-M71 investment can therefore be split into two components that reflect the contribution in value terms of each component namely:

  • investment in non-M71 product, i.e. the value of the overall investment in non-M71 product, excluding the value of the embodied M71 product, in direct non-M71 investment;
  • non-M71 industry indirect investment in M71 product, i.e. the value of the M71 product embodied in direct non-M71 investment.

Therefore:

  • DI(M71) = I(NM71) + II(M71)

The investment in M71 product is the sum of direct and indirect investments in the M71 product:

  • I(M71) = DI(M71) + II(M71)

Total investment is therefore given by:

  • I = I(M71) + I(NM71)

The value of direct M71 investment is given in a Use Table by the GFCF column while the direct non-M71 investment is the sum of all the other values in the same column:

  • DI(NM71) = Sum[(DI(i)] for i not equal to M71.

For each product i, the share of M71 intermediates used by industry j except the M71 industry in investment in non-M71 products is assumed to equal the industry's share of M71 intermediate consumption in output, i.e.:

  • II(M71,i,j)/DI(i) = [IC(M71,j)/P(j)]

where

  • IC(M71,j) is the intermdiate consumption in the table of the M71 product by an industry j that uses consulting engineering services;
  • P(j) is the output of industry i;
  • DI(i) is the direct investment in product i from the table's GFCF column.

With a further four assumptions (see Cette et al), the indirect investment in the M71 product i by an industry j that uses consulting engineering services is therefore:

  • II(M71,i,j) = [IC(M71,j)/P(j)]*DI(i)

The indirect M71 investment for the entire economy is the sum of Equation 1 across all products except M71 and industries j.

Indirect investment

The ratio IC(M71)/P for each economic activity (column) in a Eurostat Use Table at Basic Prices is multiplied by the DI, the GFCF in the GFCF column for the the activity's primary product to give [IC(M71/P].DI for each product.

These values are summed for all products except M71 to give the indirect investment in M71.

In the case of France in 2010 for example, the indirect investment in M71 was bEUR 2.289 as compared to a direct investment (GFCF) of bEUR 17.785 for the Eurostat Use Table at Basic Prices for France in 2010. In other words, M71 indirect investment was 11.4% of total investment in the the M71 product.

The M71 indirect investment varied significantly between the European Member States. For example, it was only 7.6% of total investment in M71 in Austria in 2010.

The demand generated by indirect investment

For the FIDIC-EFCA Consulting Engineering Industry Survey we are however more interested in benchmarking fee levels by matching the use of M71 and other types of services supplied by the consulting engineering industry to the demand generated by investment in construction, plant and intangibles.

From a Use Table at Basic Prices, DI(M71), the direct investment in the M71 product, corresponds to a use in a given country of M71 services given by the total output of the M71 product less exports and the use by the M71 economic activity.

This removal of use by the M71 industry is necessary to avoid double counting where most of the intermediate consumption of the M71 product is by the M71 industry owing to subcontracting and the like Goodridge et al., 2014.

For the Europe 27 countries considered for the 2019 update of the FIDIC-EFCA Survey (see EFCA 2019 conference presentation), the investment requiring consulting engineering services was bEUR 2251 in 2010 of which only bEUR 12.05 or 0.53% was indirect investment in the engineering services component of M71. Indirect investment in the engineering services component of M71 investment in fact raised the demand for consulting engineering services in 2010 by only bEUR 1.39 or by 0.69%. The demand arising from indirect investment in the engineering services component of M71 is therefore small and can be ignored.

Conclusion

As discussed elsewhere, consulting engineering services includes services classified under several products other than M71, namely M72.19 (Other research and experimental development on natural sciences and engineering activities), B09.90 (Support activities for other mining and quarrying), M74.10 (Specialised design activities), M74.9 (Other professional, scientific and technical activities), M74.20 (Photographic activities), and N81.30 (Landscape service activities).

These non-M71 products together represent on average in the Europe 27 countries considered for the survey update (see EFCA 2019 conference presentation) only some 13% of consulting engineering services. M71 engineering services therefore comprise the major component of consulting engineering services. It is therefore unnecessary to consider the generation by indirect investment of consulting engineering services classified under non-71 products .

Moreover, in estimating the total demand for consulting engineering services it is unnecessary to consider the demand arising from indirect investment.

However, the FIDIC-EFCA survey removes the direct investment in computer hardware from the investment in plant when benchmarking demand to use. This is because the investment in computer hardware does not generate a demand for consulting engineering services. A preliminary estimate suggests that the the removal of indirect investment in computer hardware reduces the investment requiring consulting engineering services by some 3.5%. This means that the average fee for consulting engineering services obtained by benchmarking demand to use are increased by approximately 5%. Clearly, indirect investment in computer hardware needs to be taken into account in estimating the demand for consulting engineering services arising from investment (in construction, plant, intellectual property products, and own-account design).

Updated 19 May 2019