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Robert M. La Follette
School of Public Affairs
1225 Observatory Drive
Madison, WI 53706

Telephone:  608.262.3581
Fax: 608.265.3233


Last updated:
July 12, 2007

© 2006 Board of Regents of the University of Wisconsin System

Donald Nichols
Director of the La Follette School of Public Affairs
Professor of Economics and Public Affairs

January 4, 2006
Response to Business Week Online's Economics Unbound

PDF version of response

Thinking About Dark Matter

Ricardo Hausmann and Federico Sturtzenegg use the “dark matter” metaphor to support their claim that the high profits earned on U.S. investments abroad are due to its investments in intellectual property and that the existence of those profits suggests that there must have been a past export of that property.  Such exports, it is claimed, are huge, and explain a large part of the U.S. current account deficit. 

An example in the discussion is that of Intel, whose profits in Ireland are high relative to Intel’s physical investment in plant in Ireland. These profits, it is argued are a return on an unmeasured investment of intellectual property in Ireland.

The Hole in the Dark Matter Argument

Intel’s profit abroad should be thought of as a royalty on Intel’s past intellectual investment in the U.S., not as profit on an unmeasured intellectual investment in Ireland.

The payment should be thought of as akin to a purchased service, not as a return on an unmeasured investment.

Thinking about Purchased Services

If Ireland purchases electricity from a generation facility in Belfast, UK, it is not true that part of the power plant must have been snuck into Ireland when the data collectors were not looking. Services can be purchased from abroad.

If Intel U.S. licenses its patents to a non-Intel Irish manufacturing company, it is not true that the royalty payments collected by Intel represent a return on an unmeasured capital investment in Ireland. Services can be purchased from abroad.

And if Intel’s internal transfer pricing policy required its own Irish plant to remit to its U.S. parent a fair market royalty on each manufactured chip, the consequences of the international accounts would be the same as if this royalty were being charged to a competitor.  Services can be purchased from abroad.

But Intel, to the chagrin of the IRS, chooses not to pay itself a royalty, but to book its profits in Ireland. This choice of accounting practice does not signify that a real, though unmeasured investment must have been made by Intel in Ireland.  It signifies that a royalty on intellectual property has been defined as a profit for internal accounting reasons.  The profit continues to represent the purchase of a service from abroad.

In Econ 101 terms, if marginal cost equals zero, an additional sale does not require additional investment. Hence additional production from Intel’s Irish plant does not require additional investment in Ireland of intellectual capital.

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