Knowledge Assets in the Global Economy: Assessment of National Intellectual Capital
Journal of Global Information Management
July-Sep, 2000, 8(3), 5-15.
“Our government is filled with knowledge…We have 316 years' worth of documents and data and thousands of employees with long years of practical experience. If we can take that knowledge, and place it into the hands of any person who needs it, whenever they need it, I can deliver services more quickly, more accurately and more consistently.”
From “Knowledge Management: New Wisdom or Passing Fad?” in Government Technology, June 99
This article has the following objectives: developing the need for assessing knowledge capital at the national economic level; review of a national case study of how intellectual capital assessment was done in case of one nation state; suggesting implications of use of such assessment methods and needed areas of advancement; and highlighting caveats in existing assessment methods that underscore the directions for future research. With increasing emphasis on aligning national information resource planning, design and implementation with growth and performance needs of business or nation, better understanding of new valuation and assessment techniques is necessary for information resource management policymakers, practitioners and researchers.
Keywords: National Intellectual Capital, Information Resource Management, Knowledge Capital, Intangible Assets, Structural Capital, Human Capital
Emergence of the service society after the last world war brought increased realization of role of employees’ knowledge and creativity in adding value to the company. Attempts to capitalize company investments in people on the balance sheet in the 1970s failed because of measurement problems. The subject gathered increased interest more recently in the 1990s, with the rapid emergence of information and communication technologies (ICT). As business processes became increasingly ‘enabled’ by large-scale information systems, information systems designers attempted to capture employees’ implicit and explicit knowledge in “corporate memory” by means of intranets and other similar applications (Malhotra, 2000a, 2000b).
It was recognized, that in contrast to the knowledge of individual employees, such corporate memory does form part of a company’s capital. Accordingly, “knowledge” has become a key production factor, however the financial accounts are still dominated by traditional factors of production, including buildings and machinery. Hence, there is an imperative need for developing an understanding of “knowledge capital”, or the so-called intangible assets. The topic is not only pertinent to individual enterprises, but also to national economies that are making a rapid transition to a society based on knowledge work. This article develops the case for assessment of national intellectual capital by drawing upon existing research, practice and a recent study of an Asian nation representative of countries making a transition from ‘developing’ to ‘developed’ status. The issues discussed herein are important for information resource management policymakers, practitioners and researchers for assessing their contributions in terms of new measures of performance. More importantly, as the world economies transition from the world of “atoms” to world of “bits,” they would be expected to plan, devise and implement information and knowledge management systems that provide differential advantage in terms of ‘intellectual capital.’
Knowledge Assets and Intellectual Capital
Traditional assessment of national economic performance has relied upon understanding the GDP in terms of traditional factors of production – land, labor and capital. Knowledge assets may be distinguished from the traditional factors of production – in that they are governed by what has been described as the ‘law of increasing returns’. In contrast to the traditional factors of production that were governed by diminishing returns, every additional unit of knowledge used effectively results in a marginal increase in performance. Success of companies such as Microsoft is often attributed to the fact that every additional unit of information-based product or service would result in an increase in the marginal returns. Given the changing dynamics underlying national performance, it is not surprising that some less developed economies with significant assets in ICT knowledge and Internet-related expertise are hoping to leapfrog more developed economies.
Despite increasingly important role of knowledge-based assets in national performance, most countries still assess their performance based on traditional factors of production. Today’s measurement systems are limited in their capability to account for tacit knowledge embedded in the human resources, although there is some agreement on measuring other categories of knowledge, including patents and trademarks. However, the emerging knowledge economy is characterized by industries that are more knowledge intensive and by goods and products that are more intangible than they were in the post-industrial economy. Knowledge assets or intellectual capital may be described as the “hidden” assets of a country that underpin its growth, fuel its growth and drive stakeholder value. There is increasing realization about knowledge management as the key driver of national wealth, the driver of innovation and learning, as well as that of the country’s gross domestic product (GDP). Increasing importance of knowledge assets and intellectual capital have been drawing greater attention of not only company CEOs, but also national policymakers, to non-financial indicators of future growth and performance.
Knowledge asset measurement relates to the valuation, growth, monitoring and managing from a number of intangible but increasingly important factors of business success. In the context of knowledge assets, knowledge represents the collective body of intangible assets that can be identified and is measurable. This interpretation of knowledge differs from the notion of knowledge as knowing and learning, which concerns how organizations acquire, share and use knowledge – either helped or hindered by technology and organizational processes. In contrast, the notion of knowledge assets is about the identifiable aspects of the organization that although “intangible” can be considered as adding some kind of value to it. Knowledge capital is the term given to the combined intangible assets that enable the company to function. Examples of such knowledge assets could include shared knowledge patterns and service capability and customer capability.
Assessment of Knowledge Capital and Intellectual Assets
The worth of knowledge assets, taking the difference between market and book values as a proxy, is hidden by current accounting and reporting practices. However, as evident from current valuations of many Net-based enterprises, one observes a significant widening gap between the values of enterprises stated in corporate balance sheets and investors’ assessment of those values. The increasing proportion of intangible vis-à-vis tangible assets for most industrial sectors has been affirmed by various other observations (Edvinsson and Malone, 1997; Hope and Hope, 1997; Stewart, 1995). In case of major corporations, often such high market valuations are attributed to brands. Recent business history has shown that huge investments in human capital and information technology are the key tools of value creation that often do not show up on company balance sheets as positive values themselves.
Measurement of institutional or organizational value in the current business environment using traditional accounting methods is increasingly inadequate and often irrelevant to real value in today’s economy. For instance, while traditional accounting practices often treat brand as depreciable entity over time, in today’s economy, intangible assets like brands and trademarks often increase in value over time, often longer than the time periods accounted for their depreciation. Even, specific kinds of valuations of intellectual capital, such as patents, copyrights and trademarks are not valued according to their potential value in use, but recorded at registration cost. Similarly, the distinction between assets and expenses is made arbitrarily on many balance sheets: an advertising campaign could be recorded in either column as evident from a case such as that of AOL. The traditional balance sheet, a legacy of last five centuries of accounting practices, provides a picture of historic costs, assuming that the cost of purchase reflects the actual value of the asset. However, it does not account for the hidden value inherent in people’s skill, expertise and learning capabilities, the value in the network of relationships among individuals and organizations or the structural aspects relevant to servicing the customers. These hidden values or intangible assets assume increasingly important role in an economy that is characterized by a transition from ‘programmed’ best practices to ‘paradigm shifts’ that characterize the new business world of ‘re-everything’ (Malhotra, 2000c). Such factors are assuming greater importance in assessment of the potential for future growth of an enterprise or a national economy.
This issue is compounded by an apparent paradox: the more a company invests in its future, the lesser is its book value [although the recent astronomical caps for various Net-related stocks suggest increasing realization about intangible assets]. Extrapolating the case of such companies to the organizations within a national economy, one may understand the implications for accounting for intangible assets that do not show up in accounting reports, but may underpin their future success or failure.
Valuation from the perspective of intellectual capital and knowledge assets takes into consideration not only financial factors, but also human and structural factors (Stewart, 1997). Stewart defines intellectual capital as the intellectual material that has been formalized, captured, and leveraged to create wealth by producing a higher-valued asset. Intellectual capital is defined as encompassing: i) human capital; ii) structural capital; and iii) relational capital. These aspects of intellectual capital include such factors as strong business relationships within networked partnerships, enduring customer loyalty, and employee knowledge and competencies. The compelling reasons for valuation and measurement of intellectual capital and knowledge assets include understanding where value lies in the company and the sectors of the national economy and for developing metrics for assessing success and growth of companies and economies.
Measuring Knowledge Assets and Intellectual Capital
Managers of enterprises and national economies are trying to find reliable ways for measuring knowledge assets to understand how they relate to future performance. The expectation from finding reliable measures of knowledge assets is that such measures can help managers to better manage the intangible resources that increasingly determine the success of the enterprises and economies.
The terms knowledge capital and intellectual capital are used synonymously in this article. Within the scope of subsequent discussion, such terms refer to “the potentiality of value as it exists in various components or flows of overall “capital” in a firm; the relationships and synergistic modulations that can augment the value of that capital; and the application of its potential to real business tasks… [it] includes an organization’s unrefined knowledge assets as well as wealth generating assets whose main component is knowledge” (Society of Management Accountants of Canada 1999, p. 17).
One may observe that it is the application of intellectual capital to practical situations that contributes, primarily, to the translation of its potential value to financial assets. Or as observed by Stewart (1997, p. 67): “Intelligence becomes an asset when some useful order is created out of free-floating brainpower – that is, when it is given coherent form (a mailing list, a database, an agenda for a meeting, a description of a process); when it is captured in a way that allows it to be described, shared, and exploited; and when it can be deployed to do something that could not be done if it remained scattered around like so many coins in a gutter.” Unless effectively utilized and applied, knowledge assets may not necessarily yield any returns in terms of financial performance measures. In other words, “knowledge assets, like money or equipment, exist and are worth cultivating only in the context of strategy… you cannot define and manage intellectual assets unless you know what you are trying to do with them” (Stewart 1997). [For instance, a detailed account of how knowledge management is relevant to e-business strategy and performance is presented in a forthcoming article (Malhotra 2000c).]
The subsequent discussion reviews the case of an Asian nation state that utilized one of the more popular methods for assessment of its national intellectual capital. Concluding discussion will highlight the existing caveats in the adopted methodology and underscore the important issues that need to be addressed in future research and practice.
Knowledge Capital of a Nation State: The Case of
The nation state of
A popular method of assessment of intellectual capital
originally proposed by the Swedish company Skandia was recently applied to a
joint Swedish-Israeli study that examined how to assess
Skandia Model for Measuring Intellectual Capital
In Skandia’s view, intellectual capital denotes intangible assets including customer/market capital; process capital; human capital; and renewal and development capital. The value of intellectual capital is represented by the potential financial returns that are attributable to these intangible or non-financial assets.
The Skandia model attempts to provide an integrated and comprehensive picture of both financial capital and intellectual capital. Generally, the national economic indicators supported by hard quantitative data are used for examining the internal and external processes occurring in a country. However, the model questioned if such indicators provided a full and accurate assessment of the country’s assets and if they provide an indication of its potential for future growth. In doing so, it developed the framework of intellectual capital as a complement of financial capital.
In this model, there are four components of intellectual capital: market capital (also denoted as customer capital); process capital; human capital; and renewal and development capital. While financial capital reflects the nation’s history and achievements of the past; intellectual capital represents the hidden national potential for future growth. The value chain according to Edvinsson and Malone (1997, p. 11) expresses the various components of market value on the basis of the following model:
Market Value = Financial Capital + Intellectual Capital
The key determinants of hidden national value, or national intellectual capital, are human and structural capital, defined thus:
Intellectual Capital = Human Capital + Structural Capital
Human Capital: The combined knowledge, skill, innovativeness, and ability of the nation’s individuals to meet the tasks at hand, including values, culture and philosophy. This includes knowledge, wisdom, expertise, intuition, and the ability of individuals to realize national tasks and goals. Human capital is the property of individuals, it cannot be owned by the [organization or] nation.
Structural Capital: Structural capital signifies the knowledge assets that remain in the company when it doesn’t take into consideration human capital that is the property of individual members. It includes organizational capital and customer capital [also known as market capital]. Unlike human capital, structural capital can be owned by the nation and can be traded.
Structural Capital = Market Capital + Organizational Capital
Market Capital: In the context of the original model applied to market enterprises, this component of intellectual capital was referred to as customer capital to represent the value embedded in the relationship of the firm with its customers. In the context of national intellectual assets, it is referred to as market capital to signify the market and trade relationships the nation holds within the global markets with its customers and its suppliers.
Organizational Capital: National capabilities in the form of hardware, software, databases, organizational structures, patents, trademarks, and everything else of nation’s capabilities that support those individuals’ productivity through sharing and transmission of knowledge. Organizational capital consists of two components: process capital and, renewal and development capital.
Organizational Capital = Process Capital + Renewal & Development Capital
Process Capital: National processes, activities, and related infrastructure for creation, sharing, transmission and dissemination of knowledge for contributing to individual knowledge workers productivity.
Renewal and Development Capital: This component of intellectual capital reflects the nation’s capabilities and actual investments for future growth such as research and development, patents, trademarks, and start-up companies that may be considered as determinants of national competence in future markets.
Figure 1: Components of Intellectual Capital
(Based upon Edvinsson & Malone, 1997)
In the context of the national intellectual capital assessment, while financial capital reflects the nation’s history and achievements of the past,
1. Process capital and market capital are components upon which nation’s present operations are based;
2. Renewal and development capital determines how the nation prepares for the future; and,
3. Human capital lies at the crux of intellectual capital. It is embedded in capabilities, expertise and wisdom of the people and represents the necessary lever that enables value creation from all other components.
Figure 2Financial Capital and Intellectual Capital
(based upon Edvinsson & Malone, 1997)
Process of Measuring Intellectual Assets:
This article covers an overview of the various factors that
were taken into consideration for assessing national intellectual assets for
The process of assessment of national intellectual assets as
applied in the case of
The study found the vision of
The study identified the key competencies necessary for
nation’s current and future performance and clustered them along the five
components of a nation’s balance sheet: financial capital, market capital,
process capital, human capital, and, renewal and development capital. The specific indicators identified for each of
the components represent the criteria that represent long-term competitive
Financial Capital: As noted before, financial capital is an indicator of a nation’s past success and achievements. The valuation of the assets as they appear on a traditional balance sheet does not reflect the nation’s real value as assessed by the global market. This component of the nation’s balance sheet is based upon past performance and statistical data that express the rate of change in tangible assets. Such factors include gross domestic product (GDP), dollar exchange rate, external debt, unemployment, productivity rates within various sectors of the national economy, breakdown of exports according to industries, and inflation.
Gross Domestic Product
(GDP): This indicator represents the total value of all services
and goods produced in the country. The
change in the GDP per capita (in real terms) represents the change in the
citizens’ well-being and in the country’s economic strength. Since its origin,
As with other national economies, an inflationary process leads to increase in
the cost of domestically produced goods and services, a relative decrease in the
prices of imported products and services, and a devaluation of the domestic
Due to the financial crisis of 1980’s,
Unemployment: Higher employment enables a national economy to increase production efficiency to maximum by using its existing resources. Until 1985, unemployment levels in the Israeli economy were below 5% when they started rising due to an influx of immigrants. After peaking to 11.5% in 1992, these levels had been falling again and in 1997 were lower than most industrialized nations.
various Economic Sectors: Over the decade 1986-1996,
Breakdown of Exports
According to Industries: The exports have reflected production in various economic
sectors. Coming from an
agriculture-intensive background, in 1950, out of $50 million in exports,
agricultural products accounted for 70% of exported goods. The transition from a developing economy to a
developed nation has been characterized by a shift in production and exports to
the knowledge-intensive economic sectors such as electronic products, computer
software, and pharmaceuticals. In 1994,
agricultural products accounted for only half-a-billion dollars of $25 billion
in exported goods and services. In 1997,
hi-tech exports constituted 33% of
Inflation: 1980s were
characterized by very high inflation rates in
The study asserts that
Capital: Market capital reflects the intellectual capital embedded
Providing Solutions to
Market Needs: Given a dynamic business environment characterized by
changing customer needs, a country’s capability in meeting such needs represents
a competitive edge in the global marketplace.
Events: The country’s level of participation in international
events is an indicator of its strong desire for renewal as well its openness and
willingness to gain knowledge. Given its
high rate of participation,
Openness to Different
Cultures: People’s desire to meet others, learn, see, broaden their
horizons, and to develop and renew themselves may be considered another
indicator of its market capital. Such
openness of the
Language Skills: Knowledge of foreign languages alleviates problems of communications both in local culture and the global market. There is a realization in Israeli society that the willingness to learn languages contributes greatly to a country’s relations with other countries. Accordingly, Israeli schools are rated highly in professional teaching of foreign languages.
Process Capital: This component represents the country’s intellectual assets that support its present activities including sharing, exchange, flow, growth and transformation of knowledge from human capital to structural capital. Such assets include information systems, laboratories, technology, management attention and procedures. A nation’s long -term growth can be achieved if human capital is integrated within existing structural systems. Such integration through information and communication systems enhances the nation’s capability to anticipate and translate market needs into product and service applications. Information technology serves as a key tool for the production of high-quality products and services and the opening of access channels to new markets. Indicators of process capital include communications and computerization, education, agriculture, management, employment, development of service sector and absorption of immigrants.
Communications and Computerization: Strong communications infrastructure for domestic and international communications between the nation’s citizens and rest of the world facilitate rapid exchange of information and its translation into knowledge inherent in innovative processes, products and services. Some parameters that may be used for assessment of this indicator include communications and computerization infrastructure, extent of Internet use, circulation of daily newspapers, and, extent of software use.
Communications and Computerization Infrastructure: An index of computer infrastructure that measured variables such as the number of PC’s per capita, and the number of PC’s in homes and schools, ranked Israel high among developed and developing countries. Similarly, an index of communications infrastructure that rates the level to which the communication infrastructure meets business organizations needs ranks Israel ahead of developed countries such as Germany, Japan, Belgium and Italy.
Extent of Internet
Internet use makes it possible to rapidly share information and to communicate
and collaborate even when isolated by geography and time zones. The report asserts that the extent of Internet
use is also an important indicator for the assessment of a country’s effective
management of knowledge. An index that
measured extent of Internet use relative to population size ranks
Circulation of Daily
Newspapers: Per capita newspaper distribution is assumed to be another
indicator of the level of knowledge sharing and involvement in the happenings
around the world. According to a World
Extent of Software
The extent of software use reflects the level of knowledge sharing and the
effort to turn human capital into structural capital. The extent of software use also serves as an
indicator of the quality of the country’s current infrastructure that supports
effective management of information and knowledge.
An index based upon the relationship
between the extent of expenditure for hardware and the extent of expenditure for
Education: Education enhances
knowledge sharing, and building and assimilation of mechanisms for the flow of
knowledge in the society. Three
indicators used for assessing
Agriculture: In making transition
from a developing country to a developed nation,
Management: The quality of
management in a nation’s economy is an important determinant of future health of
its enterprises and long-term comparative advantage. Three criteria that were used in the study for
Top Management International Experience: International experience of management provides the country’s enterprises better ability for penetrating global markets and exploiting opportunities.
Risk Taking: Government’s support in entrepreneurship and risk- taking
through financial support is necessary for technological innovation.
Funding: Venture capital fund is an important basis for supporting
entrepreneurship and in ensuring the success of start-ups.
Development of the Service Sector: The trend of increasing percentage of commercial services based on the development of advanced and knowledge-based sectors is common among the developed nations. The high rate of growth of Israel’s service sector characterized by the GDP contributed by this sector, investments in R&D, high yield of invested capital, and productivity, wages and percentage of exports in this sector, all point to growth in knowledge-based fields.
Absorption: Successful integration of highly skilled and professional
immigrants is a key factor in the country’s ability to benefit from the
immigration and its human capital. Sustained migration of high quality scientists
and professionals into the economy of
Human Capital: Human capital, as noted earlier, lies at the crux of intellectual capital. It constitutes the nation’s peoples’ capabilities reflected in education, experience, knowledge, intuition and expertise. Human capital embodies the key success factors that provide competitive edge in the past, present, and the future. The human capital is the most important component in value creation. However, due to the “soft” nature of these assets, it is often difficult to devise measures for many of them. As noted by Pasher (1999): “The analysis is especially complex when dealing with wisdom, intellect, experience and knowledge. The attempt to assess wisdom or motivation ultimately differs from the quantitative evaluation of “hard” assets, such as the extent of personal computer use or the proportion of employees in R&D.” Despite the acknowledged difficulty of measurement of such assets, the study considers the following factors as key indicators of human capital.
Education: This component is assessed in terms of percentage [and its growth] of students having, or working towards advanced degrees (including certification studies); and, the number of graduates and holders of doctorate degrees in fields considered fundamental for long-term growth – including computer sciences, life sciences and engineering.
Opportunities: The study asserts that a country that grants equal
opportunity for citizens to wisely utilizing their inherent human resource,
generates greater human capital. The
indicators that were used to measure this component included: female students at
institutions of higher education and women in the professional work force, two
criteria in which
Culture: This factor was based on two indicators: number of published books per 100,000 inhabitants, and annual number of museum visits per capita.
Health: Maintenance of good living conditions while guaranteeing the population a decent level of health was considered important for maintaining the attractiveness of the nation for its citizens.
Crime: A low rate of crime was considered as a positive correlate of human capital given lesser resources directed to fighting crime and more positive contributions to the society.
Renewal and Development Capital: Renewal and development capital reflects the country’s desire and ability to improve and renew itself in order to progress. Early identification of changes in the dynamic business environment and their translation into business opportunities contributes to the nation’s future growth and performance. The six indicators used for this component of intellectual capital in the study included the following.
National Expenditure on Civilian R&D: Investments in civilian R&D are expected to facilitate incubation of innovative ideas and their translation into value-adding products and services that contribute to future economic growth.
Scientific Publications in the World: The extent of the scientific activity – represented in terms of scientific publications, and the quality of that activity – in terms of citations by other scientists, are considered another indicator of the renewal and development capital.
Patents: In terms of per capita patent registrations,
Work Force Employed in
R&D: Human capital in technological fields is considered as
Companies: The study reports that
Companies: Considered as one of the industries that represent
progressiveness of a country’s scientific and technological progress, biotech
sector represents another indicator for renewal and development capital. This is an area of emerging growth for
The reported study and its assessment of national
intellectual capital of
Discussion and Issues for Future Research
The reported study used specific indicators of the various components of intellectual capital that represent critical success factors pertinent to long-term future success and growth. However, such indicators may vary across different nation states depending upon their specific national economic strengths in the global market. Also, the case study discussed one popular method for assessment of national intellectual capital and illustrated its application. This doesn’t imply that there is only one method that may be used for such assessment. There are diverse methods that have been applied for the assessment of intellectual capital at the level of business enterprise, and they may be extrapolated to similar assessments at the level of nations and countries (see for instance, Society of Management Accountants of Canada, 1999, for a review of some of these methods). For national policymakers who plan to do intellectual capital assessment for their national economies, another document of interest would be the Netherlands Government’s Ministry of Economic Affairs pilot project “Balancing accounts with knowledge” that provides comparison between methodologies used by four different accounting firms (Government of Netherlands Ministry of Economic Affairs, 1999).
While the presented framework of intellectual capital and the illustrative case study have merit in communicating these issues to information professionals, however, they also raise important issues for advancing the research and practice in information systems. From the perspective of information professionals and researchers interested in strategic, organizational and behavioral issues, such issues provide venues for advancing understanding of knowledge assets and intellectual capital. The following discussion provides a brief synopsis for such issues for future research.
Information, Knowledge and Performance
Several practitioners and researchers have acknowledged that tacit knowledge is a key component of intellectual capital. However, the superficial distinctions between data, information and knowledge are often criticized, as one person’s data could be another person’s knowledge. Or, to put in one such critics’ terms (Stewart, 1997): “knowledge exists in the eye of the beholder.” Does this imply that information professionals and researchers can do nothing about management of knowledge assets or intangible assets? Not necessarily so!!
As noted earlier, knowledge assets, like money or equipment exist and are worth cultivating only in the context of strategy. Or, keeping in perspective the [future] outcomes driven focus of intellectual capital, rather than focusing upon information or information technology, one needs to focus upon ‘what gets done’ with that information. This shift in perspective would certainly bring the focus closer to performance that is the key motivation for investments in information and technology. Although one person’s data may be another person’s knowledge, however that distinction may spell the difference between effective use, misuse, abuse or non-use of information. Hence, it is important to understand why often the same information results in different actions [or inactions] when processed by different individuals. Seminal work in this area done by Malhotra and Kirsch (1996), Malhotra and Galletta (1999) and Malhotra (1999) could serve as a basis for developing further understanding for relating information and knowledge to performance.
Taking a Hard Look at the “Soft Issues”
Human capital lies at the crux of intellectual capital. It is embedded in capabilities, expertise and wisdom of the people and represents the necessary lever that enables value creation from all other components. Several practitioners and researchers have acknowledged that human capital, often characterized by “soft” issues such as individual motivation and commitment, is difficult to measure. The same assumption has often resulted in use of inappropriate surrogates for such “soft issues” . Given the relevance of such soft issues, it is the author’s recommendation that researchers and practitioners need to develop more rigorous measures of such constructs. Seminal work done by Malhotra (1998) that has tried to develop “hard” measures for such “soft” issues in the context of effective use of information systems could provide a base for developing better understanding of human capital. Based on this work, one may argue that many published accounts have incorrectly assumed that ‘organizational capital’ is what remains after the employees “go home.” Based on existing research on motivation, compliance and commitment, one may argue that many employees may be on the job, but they may still be “at home,” while others may telecommute from home, and yet may contribute more to the human capital. In essence, given the increasing importance of knowledge work, the post-industrial concepts of organization and work need to be reconsidered in the same hard terms of ‘outcomes’ and ‘performance.’
Intellectual Capital Entangled with Networked Systems
Several popular accounts of the intellectual capital framework, including the one discussed in this article, have taken a simplistic view of the role of information systems. For instance, many such accounts have assumed that information systems, hardware, software and databases form a part of the structural capital or process capital. However, it is the author’s argument that given the new networked economy, the advent of ‘free agents’ and ‘knowledge intrapreneurs’ (Malhotra, 2000d), individual education, knowledge and experience is more related to personal pursuits related to quality of life. In essence, as the new workers empower themselves by appropriating the networked technologies, they assume self-control and self-leadership for their own development regardless of their affiliation with a ‘closed’ concept of an organization or a nation. In other words, they become denizens of the global electronic village.
Similarly, with increasing automation, production processes become increasingly efficient, however, the ability to produce as such does not generate sufficient market differentiation. The focus shifts more towards excellence in marketing, product development, quality assurance and customer management as evident from the more recent popularity of e-business issues such as customer relationship management, supply chain management, selling chain management (Kalakota and Robinson, 1999). The role of knowledge management and information systems in developing new market niches, creating and distributing innovative products, and ensuring “stickiness” of ‘portals’ by cultivating the loyalty of customers has also been recognized (cf: Malhotra 2000c). Hence, information and communication systems also become a key part of the market capital as well as the renewal and development capital with increasing ‘virtualization’ of the products, processes and the delivery agents (Turban et al. 1999).
Post-Industrialization of Intellectual Capital Measures
As suggested by existing research in information systems, investments in information technologies may not necessarily correlate with increases in performance (Brown, 1996; Strassmann, 1997). Hence, in all such contexts, the emphasis should not only be on investments in relevant technologies, but effective utilization of such technologies. Large number of desktops or PCs may not necessarily correlate with higher performance in terms of outcomes. In other words, the concept of ‘intellectual capital’ is based on the notion of ‘intangible assets,’ however many of the indicators seem to be grounded in the world of ‘tangible assets.’ For instance, use of an indicator such as per capita distribution of newspapers needs to be reassessed given that such information is not a ‘scarce good’ but an ‘abundant product.’ Those not subscribing to any print based publications may be using more updated and multifarious push- and pull- based channels – many of which are free -- for remaining on top of what is important and relevant to them.
Similarly, the number of scientific publications and citations as an indicator needs to be assessed in terms of its relevance as an indicator in terms of ‘real outcomes’ in the form of economic growth or performance. As has been demonstrated by many authors (Kealey, 1996; Sobel, 1996) there is convincing evidence that the new knowledge (and its economic value) generated in the cause of technological or application-oriented research, far outweighs that of basic research. The latter is the subject of publications, while the former is not. As peer recognition is traditionally based on the number of publications and citations, the wrong conclusion is inevitably drawn that basic research adds more to the body of knowledge than technological or application-oriented research.
Transition of most developing and developed nations to knowledge economies has resulted in an increasing awareness of ‘knowledge’ as a key lever for economic growth and performance. Despite increasing importance of knowledge as a factor of production, most accounting systems are still based on the traditional factors of production. While accountants have been trying to determine how to capitalize the knowledge assets captive in the minds of the human employees, information system designers have been attempting to capture those assets into technology based databases and programmed logic.
The article discussed the framework for developing an
understanding of intellectual capital and knowledge assets, and provided an
illustrative case study of a nation state that has applied this assessment
method. The framework of intellectual
capital – popularized by a Swedish company Skandia – was described and then
illustrated through its application for national intellectual capital assessment
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