Ad Spend Fuels Economic Growth- Ad Age

More Ad Spend, Better Economy
Study: Bigger Outlays Correspond to Faster GDP Growth, Especially in U.S.
By Bradley Johnson 

Published: October 08, 2007 

LOS ANGELES (AdAge.com) — Advertising is good for the economy — according to an academic study paid for by advertisers.

Advertising proponents long have argued that ad spending helps drive commerce, fueling economic growth. But the World Federation of Advertisers and French Advertisers Association now offer a deeper global analysis of how more ad spending correlates with faster GDP growth. 

The two ad groups helped support and finance a doctoral thesis in economics written by Maximilien Nayaradou at the University of Paris-Dauphine. Mr. Nayaradou synthesized his findings into a 40-page report that was released by the ad groups last week in a presentation to the European Parliament. 

Malte Lohan, the WFA's public-affairs director, said the study helps demonstrate advertising's contribution to the economy. "While advertising in its broader sense of marketing communications is a major intangible investment of companies — about 50 percent more than investment in R&D — very little is known about its wider macroeconomic role," Mr. Lohan said. "It is widely assumed that advertising contributes to economic growth, innovation and competition, but neither the exact mechanisms at work nor the extent of this effect have been fully understood. The study is an important contribution to bridging this gap." 

Economic benefits
Mr. Lohan, whose federation represents 55 ad groups including the Association of National Advertisers, noted a political agenda. "In a climate where pressure is growing worldwide for restrictions on marketing communications," he said, "it is urgent that the industry better understands and more effectively communicates the benefits of advertising: real choice for consumers, more jobs, vibrant and independent media, the competitiveness of domestic markets in the age of globalization. This study provides valuable arguments to demonstrate that advertising is an integral element of the fabric of dynamic, wealthy societies." 

Mr. Nayaradou based his research on ad and economic data from the 1990s and early this decade, mainly from France and the U.S., with some data from other developed European countries and Japan. 

There's a lot at stake: Mr. Nayaradou calculates that worldwide ad spending in 2002 — some $675 billion — accounted for 2.06 percent of world gross domestic product. Ad spending in this case includes media advertising and unmeasured disciplines such as direct marketing, promotions, events, sponsorships, directories and public relations. 

Mr. Nayaradou's research shows the U.S. as the world leader in advertising: Ad spending accounted for 2.66 percent of U.S. GDP in 2002. Western Europe that year generated 1.95 percent of GDP from advertising. Japan lagged far behind at 1.13 percent. The report attempts to show that advertising contributes to economic growth by: 

• Stimulating consumption (as consumers respond to ads).
• Accelerating the spread of innovation (by creating demand for products that grow out of R&D spending).
• Promoting competition (as marketers battle for market share).
• Creating ad-related jobs and promoting ad-related economic activity (such as ad-supported media).

Analyzing data by country, Mr. Nayaradou shows that ad spending correlated with GDP growth in the '90s, with the U.S. leading the way in spending rates and GDP growth. 

But correlations don't necessarily prove the economic value of advertising. Regarding ad spending and consumption, the report notes: "A simple correlation certainly does not explain causality. ... Nevertheless, it is probable that the two elements of the correlation have an impact on each other." 

The macroeconomic research makes the case that advertising works, but Mr. Nayaradou doesn't claim that any one company's specific spending will produce results. "It is difficult to quantify [advertising's] effectiveness accurately beforehand," the report said. "For a company, having an expectation of additional prospective sales is not the same as having the certainty of selling more products. This is only a probability." 

So advertising works. Probably.