The Competitiveness of Nations
in a Global Knowledge-Based Economy
H.H. Chartrand
April 2002
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. Index
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 strength of
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,
Dollar Exchange Rate: 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 currency.
External Debt: 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.
Productivity within 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
Market Capital: Market capital reflects the intellectual
capital embedded in
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.
International 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 Use: 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 Bank report,
Extent of Software Use: 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 software places
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 assessing
Top Management International
Experience: International
experience of management provides the country’s enterprises better ability for
penetrating global markets and exploiting opportunities.
Entrepreneurship and Risk
Taking: Government’s
support in entrepreneurship and risk- taking through financial support is
necessary for technological innovation.
Venture Capital Funding: Venture capital fund is an important
basis for supporting entrepreneurship and in ensuring the success of start-ups.
Employment:
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.
Immigration and 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.
Equal 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.
Registration of Patents: In terms of per capita patent
registrations,
Work Force Employed in
R&D: Human capital in
technological fields is considered as
Start-up Companies: The study reports that
Biotechnology 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
Synopsis of
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 for
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