Intangible capital, digitalisation and scale: Evidence and interactions in firm-level production and competition dynamics

This paper investigates the role of intangible capital in transforming production dynamics, firm performance, and competition. Using firm-level data and a refined Cobb-Douglas production function framework, we compute output elasticities for inputs across seven business cycles, 1970-2019. Estimates reveal a consistent rise in the output elasticity of intangible capital, surpassing physical capital in the most recent cycle, and a corresponding decline in the variable input elasticity. Trends are pronounced in digital-intensive and service sectors. We explore how digitalisation interacts with intangible investment and contributes to firm growth, profitability, and scale advantages. Results show that intangible capital has a significantly greater marginal impact on profitability for top-performing firms, with one component of intangibles, i.e. organisational capital, emerging as the primary driver of this effect. Larger firms exhibit lower overhead input shares and higher EBIT margins, suggesting economies of scale linked primarily to organisational capital. Results indicate that intangible assets are increasingly non-rival and scalable, reinforcing performance premia of sector/industry leaders. We extend the literature on intangible-biased technological change by identifying mechanisms through which digitalisation and intangible investment reshape firm-level and sector-level dynamics. Findings have implications for competition policy, innovation strategy, and the design of productivity-enhancing interventions in an increasingly intangible-driven economy. • The output elasticity of intangible capital surpassed physical capital and is pronounced in digital-intensive industries and services • Complementarity is evident between intangible assets and the organisational span of their implementation • Organisational capital is a primary driver of profitability, especially for top-performing firms, reinforcing performance advantages • Digitalisation enhances returns to intangible investment and assets – such as software and algorithms – which are highly scalable and non-rival • Scalability of intangible assets especially in digital-intensive sectors contributes to profitability gaps between leaders and laggards.