The knowledge capital of nations

Knowledge as the new source of wealth

Knowledge has become the key source of wealth at an organisational and indeed a national level, and enterprises are in danger of undermining their future success by focusing exclusively on financial assets in their accounting procedures. Leif Edvinsson describes the global transition towards an economy based on intellectual capital assets, and calls for organisations to recognise the importance of adopting an IC-based approach.

Only knowledge will give us the opportunity to improve the wealth of nations. As such, we need to develop a new map of knowledge assets and intellectual capital (IC); a map of regional IC, instead of the old agricultural and industrial plans so often found in regional planning offices. The key mapping dimension should stem from the need to locate where wealth is created in a given region/country. Could this process perhaps reveal a huge knowledge repository in the public sector, with a significant – but idle – potential for collective wealth creation?

A new political leadership agenda is evolving around the IC and KM of nations, with the focus on:

How to visualise the knowledge capital of nations;
How to cultivate efficiency and renewal of the knowledge capital of nations;
How to capitalise on knowledge capital in terms of the collective wealth of nations.

According to the OECD report, Scoreboard 2001 – Towards a Knowledge-Based Economy, the countries with knowledge intensive activities will be the winners in terms of future wealth creation. In this report, the 30 member countries are scored according to IC investments such as R&D, education, patents, ICT etc. The top-five list of countries according to their potential future wealth looks like this:

Switzerland;
Sweden;
USA;
Ireland;
The Netherlands.

In the knowledge economy, the value of corporations, organisations and individuals is directly related to their knowledge and intellectual capital. But spread the net a little wider and you begin to understand the real possibilities. Think of entire nations, in addition to the public sector. If intangibles are important to private enterprise organisations, they are also important to the productivity and competitiveness of the public sector, and so to nations as a whole. So how can we seek to understand the dynamics of the intangibles at work on a national scale? Can the new corporate longitude be translated into a new perspective on national performance?

The new corporate longitude

The logic behind the idea of corporate longitude is based on a story from the 18^th century[1]. At the time, the British Navy could not navigate with any precision from east to west. Consequently, many 18th century ships lost their bearings, in the same way that today’s analysts who only concentrate on financial capital do. The case of Enron illustrates a recent example of a similar problem in the world of accounting. In the public sector it might be even worse, as the focus today is strongly on balancing the budget of financial capital. The result is that public sector organisations are being starved of the assets that will safeguard their future, with cutbacks robbing them of the crucial nourishment offered by intangibles such as knowledge, R&D and learning.

The solution to the longitude problem was discovered not by Navy professionals, nor by leading university academics, but instead by an outsider: a watchmaker by the name of John Harrison, who discovered an innovative answer to the problem. In order to get a deeper understanding about the principles of wealth creation, it is essential to develop a similar lateral perspective. An approach whereby assets are simply recorded on a balance sheet is far too narrow. A lateral approach to accounting is necessary to include the intangibles and non-financial assets of knowledge creation, networks and relationships. The wealth of organisations, as well as the wealth of nations, lies in the space in which human capital and structural capital interact.

Currently, organisations, as well as societies as a whole, are like 18th century ships, charting their positions with only north/south navigational tools. Plotting a course solely based on traditional financial reference points leaves them blind to the opportunities on the lateral horizon. Lost on a turbulent sea of change and without a lateral navigational tool to guide them, they cannot navigate the uncharted challenges the management of intangibles is presenting, in particular to the public sector.

Profit measurement and reporting systems emphasise efficiency and cost control, using money as the basis of decision making. This on-going obsession with planning, budgeting and charting progress against tangible indicators of wealth will ultimately impoverish society and devalue the wealth of nations, because it overlooks the contribution of intangibles. For example, public sector activities are automatically undervalued because there is no way to measure their contribution in terms of the service they provide, so we also lose talent from the system as workers search for more lucrative openings elsewhere.

Adding value in the knowledge economy is inextricably linked to radical change in both societal assumptions and business models. Capitalism may not, in the end, create value if it is obsessed with competition to the detriment of collaboration. Social values must be re-considered in the light of their value generation potential. Allocating resources to education, health and social services, and our communication infrastructure should not be based on cost but on the potential for value creation through knowledge. If employment in private industry represents only 25 per cent of the total potential ‘mind value’ of society, leveraging the rest of it more effectively depends on education and opportunity. Research suggests that educational systems have a high degree of influence in determining national wealth rankings, so efficient resource allocation would mean they should receive proportionately larger elements of funding than is currently the case.

Strong infrastructure is essential too. Consider which cities and countries are truly poised for value creation. It won’t be those that isolate themselves, or those with a poor communication infrastructure. Primarily they will be the ones that are well connected, with an infrastructure designed to encourage access to the knowledge and human resources that create value. Arab countries have traditionally relied on oil as their source of wealth, so intellectual capital has to an extent been neglected. If they don’t start navigating for the future in terms of renewal through education, making relationships with other countries and infrastructure for networking, their wealth is set to decline.

IC reporting of nations

The IC evolution has already begun. In 1991, Skandia appointed me as the world’s first director of IC to develop a new paradigm for the renewal of the organisation. This work resulted in, among other things, a refined taxonomy, new measurement and accounting systems for IC, as well as innovation systems linked to intellectual capital. IC reporting of nations, regions and, indeed, the public sector, is also already happening

In 1996, the Skandia Future Centre was established under my leadership. I then invited Caroline Stenfelt and some student colleagues from the University of Stockholm to prototype how our work at Skandia on IC could be transferred to a national level.[2] Her pioneering work led to the formation of the first IC of nations. Later she and I organised the Vaxholm Summit, the first international meeting focused on visualising and measuring the IC of nations, which took place in August 1998. As a result, the Swedish government adapted Skandia’s Navigator to visualise its national intellectual capital. Later, countries including Israel, Holland and Denmark began working towards visualising their intellectual capital.

The Invest in Sweden Agency (ISA) was the first national investment organisation to apply the latest understanding of intellectual capital to assess and compare national competitiveness and performance. “Intellectual capital forms the root of a corporation – and of a nation – that supplies the nourishment for future strength and growth. A new analytical method enables these previously unevaluated resources to be assessed and compared. This can be an important tool for selecting an international location for knowledge-based companies. Sweden offers highly attractive and competitive intellectual capital assets – assets of superior value for leading edge companies,” said the ISA’s 1999 annual report.

In fact, the Navigator was easily translated from the corporate to both the public and national environment. Its main points of focus remained intact, but covered a range of different issues:

Financial Focus, including per capita GDP, national debt, etc;
Market Focus, including tourism statistics, standards of honesty, balance of services, balance of trade, balance of trade in intellectual property;
Human Focus, including quality of life, average age expectancy, infant survival rate, health levels, education, level of education for immigrants, crime rate, age statistics;
Process Focus, including service-producing organisations, public consumption as a percentage of GDP, business leadership, information technology (using such measures as the number of personal computers connected by LANs), employment, etc;
Renewal and Development Focus, including R&D expenses as a percentage of GDP, number of genuine business start-ups, trademarks, factors important to high school students, and so on.

According to the above-mentioned OECD report, Sweden sits among the leading nations in the knowledge-based economy. Sweden also has among the highest R&D per capita investments in the world. Investments in intangibles constitute around 20 per cent of GDP. As all the statistics on the country’s capital show, Sweden has embraced technology with enthusiasm. According to one survey, Sweden is among world’s leaders in terms of IT. This position has not been achieved overnight, however. There has been long-term public and governmental support for technology: tax-breaks for employees buying a computer, programmes designed to provide free internet access for students and efforts to provide all children with access to PCs. These initiatives have helped shape an infrastructure and structural capital to more easily achieve future wealth. This serves as one illustration of how governance of the public sector in a knowledge society may focus on the interaction between the structural capital of society and human capital, in order to reach a higher collective yield of prosperity.

This year, some outstanding research relating to this area was conducted by Dr Nick Bontis. Based on the above-mentioned model, Bontis and his colleagues, sponsored by the United Nations Development Programme, conducted a study of ten Arab states. In the study, Bontis quantifies the state of IC for each nation and outlines an IC index, which can be used by each nation to rank themselves against their peers, and indeed to learn from the experiences of other countries[3].

By looking at the IC wealth of nations rather than standard measures of national competitiveness, we gain new insights into where a country’s strengths and weaknesses might lie. We can then more effectively nourish social innovation and society entrepreneurship.[4]

Bontis’s research suggests that the following represent the key areas for the political agenda to address:

National agenda for renewal, research and development, ie, innovation capital;
National agenda for education, ie, human capital;
National agenda for foreign trade, ie, relationship capital;
National agenda for industrial productivity, ie, process capital.

IC in the world

Sweden is not alone. At an international level, there is a great deal of activity focused on coming to terms with the power of intangible assets and the rise of intellectual capital. The Dutch Central Planning Office now has a Knowledge Economy Unit. Dutch initiatives include long-term analysis of the role of knowledge in the Dutch economy, as well as other work on knowledge creation in networks and the availability of human capital.[5] The pan-European body, Eurostat, is taking the lead in developing statistical tools and techniques, which will enable a more comprehensive understanding of the knowledge economy.[6] “The transition from the industrial to the information society is characterised by the rapid growth of intangible assets, whereas economic and social activity still relies substantially on physical, tangible goods. The relation between the two has to be defined and measured,” says Eurostat.[7] In Israel, Dr Edna Pasher has worked in close collaboration with Stenfelt to develop a variety of alternative measures in addition to those used in Sweden.[8]

In Denmark progress is also rapidly being made, and the country has long been at the forefront of examining the role of intangibles. Jan Mouritsen, a professor at the Copenhagen Business School, has been working in the area for a number of years and has carried out several surveys and literature studies, the most recent of which was published in 2001[9]. At the beginning of 1998, Denmark launched a project looking at intellectual accounting that aimed to help transform Denmark from an industry to a knowledge-based economy. A Special Competence Council was organised, with Lars Kolind as chairman. This has produced a great deal of interesting work relating to Denmark’s position in the new global knowledge competition. In 2000, the Danish government also published guidelines for intellectual capital statements, similar to those produced by Skandia.[10] A law is also being drafted to support these initiatives, while in February of this year the Ministry of Economics launched Mind Lab, a centre whose purpose is to nourish knowledge management in the public sector.

As mentioned previously, intellectual capital is also making an impact in the Netherlands. The country’s minister of economic affairs recently observed: “The Netherlands is rapidly developing into a knowledge-intensive economy. It is therefore strange that financial accounts are dominated by information on buildings and machinery; in other words the ‘classical’ or physical production factors. The value of knowledge – R&D work, training, intellectual property, etc – is not easy to identify in accounts. And that is in fact the reason why young knowledge-intensive businesses in particular have very great difficulty in finding external financiers.” The Dutch government has shifted from emphasising the role of technology to emphasising the importance of innovation. In 1998 it published a report, The Immeasurable Wealth of Knowledge, which found that in excess of 35 per cent of Dutch national investments were of an intangible nature.

Another nation strongly transforming itself into the knowledge economy is Singapore. It has renamed its Ministry of Labour the Ministry of Manpower, and has spent decades building an impressive system of structural capital, especially for IT and telecommunications sectors. The effect on wealth is highly visible.

The new deal for the new wealth of nations

The emphasis being made on examining the intellectual wealth of nations is in itself a major advancement. But progress is also being made on a number of other fronts as the true impact of the knowledge economy is beginning to be understood.

“Today we’re a society awash in networks, yet starved for community,” says Peter Katz, author of The New Urbanism. True communities built around knowledge are now emerging. Many of these are web-based, and within them knowledge is free flowing, restlessly criss-crossing the globe all day long. Furthermore, it is these infrastructures that can serve to leverage the human capital of societies, and unless they are rolled out and applied to fields such as healthcare and urban renewal, the importance of human capital is in danger of being eroded.

Intellectual capital can also have an impact on city planning. Planners must now create a context in which knowledge workers can be at their most productive. This may bring about radical changes in the way our urban environments are conceived. Consider, for example, a harbour. Traditionally, harbours were designed to allow for the flow of goods. But it is more important today to look at the flow of knowledge; we need to create knowledge harbours.

Society entrepreneurship

Society entrepreneurship is an interesting concept that is gaining credence in countries such as Norway. It describes a role for society renewal that fits in the space between the business community and society; a space for collaborative prototyping based on the structural capital of each partner, but leveraged by individual human capital and innovative talent. The challenge is to speed up the returns we are realising from the existing societal IC, or in other words to increase the productivity of existing knowledge investments – IC that is waiting to be tapped by society’s entrepreneurs.

Leif Edvinsson is CEO of UNIC. He can be contacted at: leif.edvinsson@unic.net

References

1. Edvinsson, L., Corporate Longitude (Bookhouse, 2002, www.corporatelongitude.com)

2. Stenfelt, C. et al, ‘IC at a national level’ in Invest In Sweden Agency Annual Report (1999) and Edvinsson, L. & Stenfelt, C., Journal of Human Resource (1999)

3. National Intellectual Capital Index – IC Development in the Arab Region (UNDP 2002)

4. See also the work of Mack McElroy, founder of Macro Innovation Inc.

5. See the Dutch Central Planning Office at www.cpb.nl and Statistics Netherlands at www.cbs.nl

6. EPROS – The European Plan for Research in Official Statistics (European Union, 2000)

7. Statistical Indicators for the New Economy (Eurostat, 2000)

8. Pasher, E., IC of Israel (1998)

9. Mouritsen, J., IC and the Capable Firm (Copenhagen Business School, 2001)

10. Danish Ministry of Industry Guidelines for Knowledge Accounts (2001, www.efs.dk)