RIETI Report Nov 2005

Intellectual Capital in the Knowledge Economy

This month's featured article

Intellectual Capital in the Knowledge Economy

Ahmed BOUNFOURProfessor, University Paris 11 / Professor, University of Marne-La-Vallee

Greetings from RIETI

Both in Japan and overseas, there is increasing interest in measuring and managing intellectual assets that play an important role in corporate value creation. Research, policy debates and corporate efforts in this area are being carried out worldwide. However, there is yet to be a common way of thinking or a common approach to intellectual asset management, be it on a national or international level. Against this backdrop, RIETI will hold a policy symposium titled "Corporate Value Creation through the Strengthening of Intellectual Asset Management" on November 30, 2005, aiming to explore how Japanese corporations should combine the different approaches to intellectual asset management in order to increase corporate value. It will also attempt to provide insights into policy actions that can widely disseminate these approaches, and propagate them globally as best practices. Ahead of the symposium, RIETI Report interviewed Dr. Ahmed BOUNFOUR, one of the keynote speakers, about the factors behind the growing importance of Intellectual Capital (IC), the major attributes of the best European players in IC management, and a cultural perspective on managing intangibles.

Special Interview

Dr. Bounfour is Professor at the University Paris 11 and Professor at the University of Marne-La-Vallee. He was previously the manager of a high tech program within Euroconsult, in particular charge of space projects. He has carried out numerous assessments of public policy and performed consulting work in myriad sectors such as automobile, high tech, telecommunications, space and financial services. Dr. Bounfour has also completed many assignments on European industrial competitiveness, particularly for the European Commission, the European Space Agency, the Ministry of Industry (France), and the Ministry of Telecommunications (France). In the fields of intangible investment, he has conducted extensive research and developed guidelines for reporting and measurement of intangibles for the IC-dVAL (Intellectual Capital dynamic Value). The IC-dVAL guidelines are currently used in several contexts (enterprise, cities, regions, nations) as a framework for benchmarking intangible resource performance. Dr. Bounfour holds a doctorate in Economics and Strategic Planning from the Paris-Dauphine University. His major publications include Le Management des Ressources Immatérielles, Maîtriser les nouveaux leviers de l'avantage competitive (Managing Intangible Resources: control the new levers of competitive advantages), Dunod, Paris, 1998; The Management of Intangibles, The Organisation's Most Valuable Assets, Routledge, London and New York, 2003; and Intellectual Capital for Communities, Nations, Regions and Cities, Elsevier Butterworth-Heinemann, Boston, 2005.

RIETI Report: What are the primary factors behind the growing importance of Intellectual Capital (IC) in the knowledge-based economy?

Bounfour: To answer your question, I will take a global perspective, by observing the deep tendency of what might be called "cognitive capitalism." Several factors can be put forward:

  • There is rapid growth of service activities and it is having deep impact on how value is created. Here my main concern is with the organizational dimension; e.g. the importance of "constellation" and "combination" as something of a substitute to the value chain.
  • There is dematerialization of manufacturing activities themselves. My Ph.D. dissertation presented in 1984 dealt with the global automotive industry's strategies. In mid-1980s industrial economics, the main focus of strategic thinking was on economies of scale and production function. The archetype concept was "lean production," a Japanese concept imported by the MIT program on the future of the automobile and disseminated on a global scale. Nowadays, the main focus of the industry is on marketing, branding and organizational processes along the value system, all items more related to IC than to physical capital (e.g. the production function, per se).
  • At least at the input level (expenditure) a great increase in investment in IC items per unit of GDP can be observed: this is the case for R&D, but also for other items such as training, advertising or intellectual property rights (IPRs) expenditures. This is observed at least for the OECD area.
  • Correlatively, there is more volatility in "value created," and therefore risk related to intangible investment. You can invest all your resources in R&D. This does not ensure in any way a creation of value in a form of patents, for instance, with rent generation for these items. Therefore, there is no more close (and clear) relationship between inputs (investments in) and outputs (performance). Volatility and "furtivité" are more and more predominant.
  • Rent generation is a major issue, and IPRs. IPRs are of particularly high importance in the knowledge economy, considering the forthcoming battles among nations in this field: traditional knowledge versus "modern" (sometimes recycled) knowledge, biotech knowledge, commercial methods knowledge, etc. The search by the majority of companies to reinforce their structural capital, such as their "autonomous" intangible assets, is closely related to this issue of IPRs and rent generation. IPRs are also important due to the probable emergence of "communities" and networks as a strong substitute, or at least as a complement to existing organizational forms (hierarchical forms: companies, divisions, departments). The community perspective goes beyond IPRs, and concerns not only all the existing forms of intangibles, but also emerging ones (for instance those I named: the "recognition resources/assets").
  • Natural communities -- nations, regions and cities -- are aggressively looking for new policy instruments to manage their intellectual capital.
  • There is the role of new information and communication technologies and the transparency requirement; this constraint is particularly imposed upon listed companies, for which the fluidity of knowledge and its "valorization" in the market place is a major requirement, especially by the financial markets.
  • The relationship to time (the time span of business and society). This is an important issue, often underestimated by scholars and analysts. First of all, we all know that financial markets are putting a great emphasis on shortermist behaviors, whereas, a priori, building intellectual capabilities takes time. This is naturally an obvious and already largely emphasized issue. But more deeply, the way we are thinking in relation to time is being challenged. Look for instance at the way we are educating our students and executives to establish their business plans. Linear thinking is still dominant, which is characterized by an apparently great confidence in figures and certainty, whereas, in reality things are more and more uncertain and volatile because of the intangible dimension of business. The crisis in organizational implicit order reinforces this dimension.
  • Indeed, the crisis in what I called "organizational implicit order" reinforces the uncertainty about value creation. Indeed, the generalization of managerial practices, such as outsourcing and networking, reduces the social links between individuals and organizations, and therefore creates a major issue for knowledge (intellectual capital) assets creation and valorization. Therefore, at least in a western context, individual perspective becomes predominant in comparison with the corporate (collective) one. Hence the importance of considering building individual intellectual capital as a policy perspective in order to increase its use and fluidity. But I am not sure whether governments and trade unions are prepared to undertake such a discourse, or consider this perspective as a necessary one, especially for reducing the level of unemployment.
  • Demography plays a role in innovation (the aging population). This is certainly an important issue for research and action in intellectual capital. One of the critical questions for our aging societies is the following one: how to maintain (reinforce) the level of innovation and risk of our societies, in a context of an aging population. This is an important issue for most OECD countries, including Japan.
  • Finally, the knowledge divides within and among countries, on a global scale, is a major issue. IC can contribute to defining and prototyping new policy instruments with governments, communities and local authorities. This is one of the mandates of The New Club of Paris, which I initiated recently with Leif Edvinsson, Günter Koch and another 40 founding members all over the world, including from Japan (Takayuki Sumita of METI is among the founding members).

RIETI Report: According to your book, Intellectual Capital for Communities (2005), northern European countries such as Finland, Sweden, Denmark and the Netherlands are highly rated in the National IC Performance Index. What lessons can other regions learn from those countries?

Bounfour: This is one of the conclusions of IC rating of countries I have arrived at in Europe. These countries are indeed the best players in Europe and can be referred to in a benchlearning exercise. Performance of these countries presents a doubly interesting characteristic: first, they perform well according to traditional metrics (R&D, patents, employment, etc.), but (secondly), they are achieving results while maintaining a high level of social cohesion (one of the parameters of the so-called Lisbon Agenda). Using Hofstede terminology, these countries seem to be more collectively oriented, more feminine, refusing hierarchical distance and more open to risk. As far as lessons are concerned, I would say these countries' performances tend to suggest that there is no absolute contradiction between social cohesion and performance. From my understanding, this is among the present concerns for Japan, and I guess, by adopting an IC perspective, Japan will open a benchlearning dialogue with Europe. But here again, these performances cannot necessarily be guaranteed over a long-term period (these are the limits of any rating exercise); their maintenance will depend upon these countries' selected future paths, which will necessarily be specific (idiosyncratic) to each of them.

RIETI Report: How can cultural idiosyncrasies be accommodated in a measuring and reporting system for intangible assets?

Bounfour: In my book, The Management of Intangibles, I suggested considering two dimensions for intangibles reporting: The Horizontal dimension (the standardized one) and the Vertical dimension (the idiosyncratic one). From my perspective, to be credible, intangible reporting for the horizontal dimension should only tackle very simple, auditable and difficult to manipulate items: investment (expenditures) on R&D, software, organizational processes, brand, patents, etc. Reporting on the vertical (idiosyncratic) dimension is hard to address because it relates to the grammar of companies and organizations, even if a certain level of standardization here can be also considered.

I would then say that cultural idiosyncrasies (whether they are national and corporate) can be addressed in intangible reporting both at the horizontal and more importantly at the vertical levels. But anyway, we need a grammar for understanding intellectual capital performance for each of these dimensions.

RIETI Report: Establishing a system of action based on a company's identified intangibles seems to be positively feed off itself (e.g. training employees can increase morale and productivity). However, in what case can a company's actions produce negative outcomes, and how can they be avoided?

Bounfour: Your question is very difficult to address. Some scholars and analysts develop to a certain extent a naïve and tautological view of intellectual capital: the more you invest in intangibles, the more you get result. However, this equation is true only if you manage these investments correctly. And even in this case, one cannot be certain about the results. As I have said, there is no clear and automatic link between investments in intangibles and valuable outputs from these intangibles. But obviously these investments are necessary in order to expect getting some of these fruits (outputs). To summarize my answer, a company's actions might produce negative outcomes, in a situation characterized by a weak absorptive capacity in relation to intangibles or for instance in a situation where it does control (legally or by other means such as market power) the necessary complementary assets to innovation. From the managerial perspective, management should then pay particular attention to its organizational absorptive capacity in relationship to intangible investment (which is also a particularly critical intangible asset), as well as to control of the critical complementary assets (for instance distribution channels in relationship to a specific innovation), especially in a weak appropriability regime (which is generally the case in the services economy).

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The program for the RIETI Symposium "Corporate Value Creation through the Strengthening of Intellectual Asset Management" is available at:
http://www.rieti.go.jp/en/events/05113001/info.html

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