Intellectual Capital as the Engine for Economical Growth

INTELLECTUAL CAPITAL AS THE ENGINE FOR ECONOMICAL GROWTH:

The Role of Organisational & Relational Capitals

INTRODUCTION

Intellectual capital[*] is categorized as an intangible assist and is increasingly recognized by industrialized nations as having a major impact on economic growth and productivity. Tangible assets include both fixed assets, such as major, machinery, buildings and land, and variable assets, such as inventory.  Intangible assets are nonphysical asset, such as patents, trademarks, copyrights, brand recognition. Other types of intangible assets may include internet domain names, performance events, licensing agreements, service contracts, computer software, blueprints, manuscripts, joint ventures agreements, permits, confidential business information (CBI) and trade secrets. Brand equity is also considered as an intangible asset because the value of a brand, not a physical asset, would be determined by consumers’ perception of the brand and hence a brand’s equity contributes to the overall valuation of the company’s overall assets.

Tangible Assets also referred to as physical assets have traditionally been exclusively accounted for in the measurement of industrial performance and economic growth. However, intangible assets, referred to as intellectual assets, are also seeing their contributions grow considerably in the economic growth measurement criteria as stated by OECD in its 2010 report indicating that  “The ability to create, distribute and exploit knowledge has become a major source of competitive advantage, wealth creation and improvement in the quality of life”. The increasing importance of intangible assets over tangible assets is also emphasised and reported by S&P 500 market value and shown on Figure 1.  This is also emphasised in a study in 2005 by OECD Science “Technology & Industry Scoreboard” as shown on Figure 2.  Depending on the type of business, intangible assets, add to a company’s potential worth is increasingly becoming more valuable than its tangible assets.

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OECD countries and other emerging economies are increasingly basing their growth strategies on Intellectual Capital or knowledge-based considerations.  Together with these strategies in place, OECD countries all have well established policies and implementing measures whereas emerging and certainly developing countries have yet to establish dedicated business models and imbed into them Intellectual capital contribution for growth purposes .  It is well recognised among developed countries that production, dissemination, and valorization of intellectual capital are crucial factors for taking up the challenge of becoming technology developer. As a consumer of innovation and technology through the acquisition of tangible assets is certainly a non-sustainable strategy and modus-operandi to support job creation, competitiveness, and welfare. The transition from mostly transactional-based business model of most developing and developed nations to intellectual capital-based economies has demonstrated how national intellectual capital is a major driver for the economic growth and performance.

The role and impact of intellectual capital on economic growth has been assessed over the past decades through various measuring models.  A common understanding on the on types of measurements are based on the model namely the “taxonomy of three” covering (1) human capital, (2) organizational capital (3) relational capital both at company and country levels as elucidated by Andriessen and Stam, 2004, p. 10)¹.  This “taxonomy of three” classification has also been used by international, regional organisations as a standard in ranking knowledge based economies.

Figure 1: Evolution of Intangible Assets versus Tangible Assets

Source: S&P 500 market value

In the “Taxonomy of three” classification, Human Capital is expressed as knowledge and competences of employees.  Relational Capital is measured as relations with external subjects (scope of external outreach) namely research centers, joint industry and research platforms, partners, clients and customers). As for Organizational Capital measurement, it is reflected and assessed on the scope of R&D efforts, technology portfolio, patents, innovations, intellectual property, information systems, databases etc. However, while developed countries are increasingly including the share in the financial return from a company or national, this is certainly not the case for most emerging economies and certainly not for developing countries. 

While major investments to build up a strong (1) Human Capital are being made globally through various measures and particularly higher education and technical skill capacity building, developing and largely emerging economies are still extracting their economic growth from investments made in tangible assets such as large capital projects in the oil and gas and related sectors.  This paper looks mainly at the contribution of (2) Relational Capital and (3) Organizational Capital on how, if in place, could enable and/or facilitate developing and emergingeconomies transition from consumers of technologies of “of the shelf commodities” or “production licenses” to producers of technologies through Intellectual property valorisation.

ORGANIZATIONAL CAPITAL

 Organizational Capital is reflected R&D efforts, technology development portfolio, patents awarded and their commercialisation, innovations, and related dissemination systems such as IT systems (relational databases and block-chains etc…). In particular, R&D investment and valorisation (commercialisation) is one of the most important factors fostering intellectual capital and creating wealth as a result of IP value generated in a synergic manner with all the above listed enablers that are essential contributing of Organizational Capital.   Indeed, Intellectual capital is increasingly becoming a major economic value driveras economies transition to become more knowledge-based or innovation-driven.  Research from Ocean Tomo², a leading IPR Investment Banking firm, shows that the Intellectual Property contribution represents a significant portion of this intangible value.  Data from the US, Europe & Japan indicates that the more intellectual property a company holds, the higher its valuation.

Figure 2: Investment in Knowledge versus Investment in Machinery & Equipment

Figure 3 illustrates that an enabling value chain as pursued in developed economies should incorporate product development that should enabled by basic and applied R&D with commercialization of resulting Intellectual Property  for  the purposes of marketing.

It is a common understanding that a major contribution in the measure of a company’s technology and innovation portfolio and its impact on economic growth can be assessed through the strength of its Organisation Capital.  As an illustration for oil & gas and chemical companies of OECD economies, Total or Shell account for 6% of their total valuation and BASF for nearly 20% of its total valuation³.  However, intangible assets valuation for National Oil Companies (NOCs) in developing and/or emerging countries would be estimated to be much lower and hence more efforts are needed to enable and further catalyse the growth in the valuation of their technology and innovation portfolio.  

Figure 3:  Overall Supplier Value Chain

THE ROLE OF R&D IN ECONOMIC GROWTH

Research & Developments efforts within at company and/or government levels are the key drivers for the production of technologies and innovations, the latter being enablers for more productivity and economic growth. In addition to a vast literature scope coverage in this regard, it was also reported in a study by Begun Erdil Sahin from a sample of 15 OECD countries, including US⁴.

References to Studies in on the role and impact of research & development in the economic growth go have historical sources going back to the 17th and 18th century until recently all confirmed that Research and Development play a significant role in the economic growth of a country⁵. In economic terms, global investments levels in R&D are clear indicators on the impact of R&D on economic growth. Figure 4 provides an insight into R&D investments in the global world as percent of the country GDP highlighting that economic growth is highly dependent on the scope of expenditure⁵.

THE IMPACT OF IP COMMERCIALISATION ON ECONOMIC GROWTH

IP is certainly at the source of innovation and will only be meaningful if commercialized. While intensive research is being pursued to generate IP in the majority of economies, Europe and Japan for example have an increasing IP portfolio on research topics pertaining to climate change mitigation technologies as shown on figure 5.

The European Patent Office reports that approximately 60% of patents in the EU ‘PatVal’ survey ⁶ are used for commercial purposes.

A research conducted in the UK shows that investment in IP makes a major contribution to productivity excellence and innovation.  In the UK,   in 2014 132.6 billion pounds invested in IP (intangible assets) versus 121.3 billion pounds in tangible assets⁷. Figure 5shows Investments in Intangible Assests vs Tangibles Assets in the UK.

Figure 4: R&D Intensity of Selected Countries, 2000-2013. Source: World Bank Data

Figure 5: Global Climate Change Mitigation Technologies Number of patents

The Organization for Economic Cooperation and Development (OECD emphasises through its various studies and published work that Sustainable economic growth highly depends on putting in place the right policies and incentives to mobilise efforts for the development and commercialisation and use of technologies and innovations^8,9,10,11,.

Academia, R&D Institutions and Industry all ascertained that IP is a key driving force for commercialization related initiatives and hence investments decisions for the purposes of product/process development as shown above on Figure 5.  In the process of booting the Organizational Capital, Policies and related implementing measures to include incentives by companies and/or governments will mobilise further for increased investments in R&D and hence enable economic growth. For illustration purposes, the importance of technology innovation within the European Union (EU) is underlined   in the Lisbon Agenda if EU was to position itself as the most competitive a knowledge-based economy in the World by 2010^11,12.

As reported by theGlobal Intellectual Property Center in 2018¹³, Intellectual property generated owing to the valorization of R&D results is a strong reflection of innovation in the global economy and as key indicator; EU has seven (7) of top 10 nations with the strongest IP environment  as shown on Table 1.                      

Table 1:  Leading Innovative Countries

With regard to the share of IP valorisation in the oil & gas and chemical sectors as a percentage of market value,  Table 2 shows the importance and share of Intellectual Assets valorization through commercialization/monetisation within two (2) of the oil majors (Shell and Total) in Europe and within the world leader in chemicals (BASF)¹⁴. It is clear from all these reported data and information that Intellectual Property drives economic growth and hence competitiveness. For further illustration,

It is reported that in Europe 42 % of the total economic activity (GDP) in the EU is attributable to IP-intensive industries, worth as much as EUR 5.7 trillion.  More important is that Intellectual capital-intensive industries account for about 90 % of EU trade with the rest of the world, generating a trade surplus for the EU of EUR 96 billion¹⁵. Table 3 shows data reported by the World Bank¹⁶ on the contributions from royalties/licenses as income as a total percent of trade for some European leaders on technology & innovation. Figure provides data from OECD on the percent breakdown of the patents in accordance to their values in Million Euros.

Table 2: Share of IP valorization for major European OIL & Gas and Chemicals companies as % of the company market value

Table 3: Income from Royalty and License fees

In light of the above, it is very indicative that Organizational Capital leveraged through its main components namely R&D efforts and related IP valuation and commercialisation as the final product is a major element in the strategies of technology producers and innovators. This should also be the case for other than OECD economies to launch and sustain their transition from technology consumers (acquisition of technology licenses needed capital projects investment as well as related commodities) to producers of technology together with a real commercialisation strategy in place. Table 4 lists top technology licensing companies¹⁷and related licenses that are marketed to support project capital investments for the purposes of enabling economic growth.

It is clear that increasing   investments, while still at low levels, are being made for R&D activities based on fundamental and applied research working within the range of low Technology Readiness levels (TRL< 4).   It is also a fact that, if  the number of patents filed and/or awarded at these TRL levels are comparable and sometimes higher¹⁸ in economies other than in OECD economies, commercialization and marketing strategies are nevertheless nonexistent or very limited.  For commercialisation and market creation to generate subsequent to R&D and IP efforts, the requirement for addition TRL to a full commercial deployment (TRL 9) should be pursued.

Figure 6: The Distribution of Patent Value in OECD Countries

Source: OECD Science, technology and Industry Scoreboard (OECD 2005a)

Table 4: Top technology Licensing Companies-Oil& Gas /Petrochemicals

It is evident that innovation is the engine for growth and that increasing growth will only take place through increasing innovation, as is the case for OECD countries. An illustrative European example is the case of UK companies that by introducing product innovation experienced growth in employment and sales twice the rate experienced by non-innovators¹⁹. The UK ranks as the 5^th innovator and among the innovation leaders (Germany, Sweden, Denmark, Finland & the Netherlands) according to WIPO’s Global Innovation Index²⁰¹ .

RELATIONAL CAPITAL

As indicated above Relational capital is the third item in the “Taxonomy of Three” discussed above . While undertaking R&D in “solo” can be pursued for the purposes of developing a targeted competitive advantage, it is recognised that strong emphasis must be placed on the development of strategic partnerships for the joint development of technology with technology leaders from the academic and industrial world.

In the context of the Millennium Development Goals (MDGs), building on key partnership will boost access to public and private resources in the areas of research, technology, innovation, finance and human capacity for the benefit of advancing sustainable solutions to crosscutting industrial development issues such as climate change and biodiversity related challenges²¹.

Initiatives from the European Union to promote innovation among Europeans members is a good reference model for collaboration that has adopted a cluster policy across EU industrial sectors and to enable additional economic growth. The approach shows the emphasis on the role of clusters in facilitating cross-sectoral and cross-border collaboration, and in helping EU SMEs to grow and internationalise. There are about 2000 statistical clusters in Europe, of which 150 are considered excellent in terms of employment, size, focus and specialization. In light of this, and to leverage on the concentration of expertise in specific industrial sectors of relevance to developing and/or emerging economies, a strategic partnership adopting a country approach to identify partnerships and collaboration opportunities is to be sought before assessing in more detail capabilities and research programmes coordinated by specific entities.

In addition, particular focus will be placed on multilateral collaboration platforms, involving academia, research institutes and industry through the subscription to relevant joint industry and joint research collaboration platforms can be instrumental in this regard.

In the context of climate change and biodiversity, governments and companies are increasingly seeking to establish partnerships and/or collaborations with European leading R&D Institutes, universities and major oil & Gas & energy companies for the purposes of creating value from technology development with the different networks.

As a relevant highlight, some of the ongoing R&D efforts to address strategic initiates with global impact are those relate to climate change mitigation and adaptation technologies to safeguard against the impact of climate change. It is clear that the scope of relational capital to be put in place global economies should expand through collegial R&D efforts and partnerships. Now that it is accepted that climate change is a reality as a global threat, then strategic partnerships should be pursued to contain this threat. Figure 4 shows R&D efforts through patenting of mitigation technologies by some of the world leading economies²².  Other global challenges such as emissions management, water footprints, recycling and biodegradability of materials, biodiversity and related global potential initiatives should also fall under the preview of strategic partnerships to be put in place.

It is clear that a technology strategy powered by a strategic partnership/collaboration for the advancement of technology programmes and results thereof through commercialisation is essential at least for many challenges with a global impact on sustainability (emissions management, GHGs impact on climate change, Life cycle analysis  etc..)

Figure 6 provides for a common conceptual approach for the interaction and synergies between the Organization capital & the Relational to enable and promote sustainable economic growth.

Figure 6:  Valorisation from Organisational & Relational Capitals

CONCLUSION

As illustrative statements for the role of science and technology in economic growth, , Albert Einstein stated, “We shall require a substantially new manner of thinking if mankind is to survive, whereas Benjamin Franklin claims, “An investment in knowledge pays the best interest”.

REFERENCES

1. Andriessen, D. and Stam, C. (2004). The Intellectual Capital of the European Union / Measuring the Lisbon Agenda. Available at http://www.intellectualcapital.nl/artikelen/ICofEU 2004.pdf.
2. Research from Ocean Tomo.
3. Shell , total, BASF
4. 4.  John Wu ·  https://www.innovationfiles.org/fueling-innovation-the-role-of-rd-in-economic-growth/; December 7, 2015
5. Jangraiz Khan; “The Role of Research and Development in Economic Growth: A Review”; Munich Personal RePEc Archive; 30. September 2015, at “https://mpra.ub.uni-muenchen.de/67303/”.
6.  EU Patval Survey (EPO); 2005, in “http://www.ipeg.com/wp-content/uploads/2015/02/PatVal-EU-study-2005.pdf”.
7. UK Intangible Investment & Growth (2016) and Intellectual property Rights Intensive Industries: Contribution to Economic Performance and Employment (2013)
8. The New Economy: Beyond the Hype. Final Report on the OECD Growth Project. Executive Summary. OECD. Paris 2005.
9. Available at: http://www.oecd.org/dataoecd/2/26/2380634.pdf (Last accessed 10th September 2005).
10. The Sources of Economic Growth in the OECD Countries. OECD. Paris 2003. Available at: http://www1.oecd.org/publications/ebook/1103011E.PDF (Last accessed 10th September 2005)
11.  Innovation Policies: Innovation in the Business Sector. OECD, Paris. 2005.
12. Professor Rifat Atun; Ian Harvey; Joff Wild, Tanaka Business School, Imperial College London in “Innovation, Patents and Economic Growth’ Discussion paper, 2006.
13.  Commission of the European Communities. Communication from the Commission: More Research for Europe. Towards 3% of GDP. Available at: http://europa.eu.int/eurlex/ en/com/cnc/2002/com2002_0499en01.pdf (Last accessed 10th September 2005).
14.  Global Intellectual Property Center in 2018
15.  SHELL. TOTAL, BASF
16.  https://euipo.europa.eu/ohimportal/en/web/observatory/ip-contribution.
17.  The World Bank – Promoting Intellectual Property Monetization in Developing Countries, 2015.
18.  Hydrocarbon Processing Handbook, 2014.
19.  KSA and others.
20.  http://www.wipo.int/publications/en/details.jsp?id=4193
21.  http://ec.europa.eu/growth/industry/innovation/facts-figures/scoreboards_en
22. The General Assembly and ECOSOC Joint Thematic Debate/Forum on Partnerships Trusteeship Council; Chamber, United Nations Headquarters; 9 and 10 April 2014.
23. EPO/UNEP Report

[*] The term intellectual capital has many complex connotations and is often used as a synonym for intellectual property.  Intellectual property, however, is legally defined and represents property rights such as patents, trademarks and copyrights. These assets are the only form of intellectual capital that is regularly recognised for accounting purposes.