Intellectual capital

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Intellectual capital is the intangible value of a business, covering its people (human capital), the value relating to its relationships (relational capital), and everything that is left when the employees go home [1] (structural capital), of which intellectual property (IP) is but one component. [2] It is the sum of everything everybody in a company knows that gives it a competitive edge. [3] The term is used in academia in an attempt to account for the value of intangible assets not listed explicitly on a company's balance sheets. [4] On a national level intellectual capital refers to national intangible capital, NIC. [5]
A second meaning that is used in academia and was adopted in large corporations is focused on the recycling of knowledge via knowledge management and intellectual capital management (ICM). [6] [7] [8] Creating, shaping and updating the stock of intellectual capital requires the formulation of a strategic vision, which blends together all three dimensions of intellectual capital within the organisational context through exploration, exploitation, measurement, and disclosure. [9] Intellectual capital is used in the context of assessing the wealth of organizations. [10] A metric for the value of intellectual capital is the amount by which the enterprise value of a firm exceeds the value of its tangible (physical and financial) assets. [11] [12] Directly visible on corporate books is capital embodied in its physical assets and financial capital; however all three make up the value of an enterprise. [13] Measuring the real value and the total performance of intellectual capital's components is a critical part of running a company in the knowledge economy and Information Age. Understanding the intellectual capital in an enterprise allows leveraging of its intellectual assets. [14] For a corporation, the result will optimize its stock price.

Business organization involved in commercial, industrial, or professional activity

Business is the activity of making one's living or making money by producing or buying and selling products. Simply put, it is "any activity or enterprise entered into for profit. It does not mean it is a company, a corporation, partnership, or have any such formal organization, but it can range from a street peddler to General Motors."

Human capital is the stock of knowledge, habits, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value. Human capital theory is closely associated with the study of human resources management as found in the practice of business administration and macroeconomics. The original idea of human capital can be traced back at least to Adam Smith in the 18th century. The modern theory was popularized by Gary Becker, an economist and Nobel Laureate from the University of Chicago, Jacob Mincer, and Theodore Schultz. As a result of his conceptualization and modeling work using Human Capital as a key factor, the Nobel Prize for Economics, 2018, was awarded (jointly) to Paul Romer who founded the modern innovation-driven approach to understanding economic growth.

Relational capital is one of the three primary components of intellectual capital, and is the value inherent in a company's relationships with its customers, vendors, and other important constituencies. It also includes knowledge, capabilities, procedures and systems which are developed from relationships with external agents.

Contents

The IFRS (International Financial Reporting Standards) committee developed the International Accounting System 38 with the purpose of prescribing the accounting treatment for intangible assets. IAS 38.8 defines an intangible asset as an identifiable non-monetary asset without physical substance. An asset is a resource that is controlled by the entity as the result of past events (for example purchase or self-creation) and from which future economic benefits (inflows of cash or other benefits) are expected.

International Financial Reporting Standards technical standard

International Financial Reporting Standards, usually called IFRS, are standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB) to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. They are the rules to be followed by accountants to maintain books of accounts which are comparable, understandable, reliable and relevant as per the users internal or external. IFRS, with the exception of IAS 29 Financial Reporting in Hyperinflationary Economies and IFRIC 7 Applying the Restatement Approach under IAS 29, are authorized in terms of the historical cost paradigm. IAS 29 and IFRIC 7 are authorized in terms of the units of constant purchasing power paradigm. IAS 2 is related to inventories in this standard we talk about the stock its production process etc IFRS began as an attempt to harmonize accounting across the European Union but the value of harmonization quickly made the concept attractive around the world. However, it has been debated whether or not de facto harmonization has occurred. Standards that were issued by IASC are still within use today and go by the name International Accounting Standards (IAS), while standards issued by IASB are called IFRS. IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new International Accounting Standards Board (IASB) took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards "International Financial Reporting Standards".

Classification

Intellectual capital is normally classified as follows:

A skill is the ability to carry out a task with determined results often within a given amount of time, energy, or both. Skills can often be divided into domain-general and domain-specific skills. For example, in the domain of work, some general skills would include time management, teamwork and leadership, self-motivation and others, whereas domain-specific skills would be used only for a certain job. Skill usually requires certain environmental stimuli and situations to assess the level of skill being shown and used.

Know-how is a term for practical knowledge on how to accomplish something, as opposed to "know-what" (facts), "know-why" (science), or "know-who" (communication). Know-how is often tacit knowledge, which means that it is difficult to transfer to another person by means of writing it down or verbalising it. Dubickis and Gaile-Sarkane (2017) states that the performance of know-how transfer is affected by accuracy of the stated aim, applied teaching, learning and assessment methods and both internal and external environment characteristics of the stakeholders involved in the process. It is also often referred to as Street smarts, and a person employing their street smarts as being Street Wise. The opposite of tacit knowledge is explicit knowledge.

Management Coordinating the efforts of people

Management is the administration of an organization, whether it is a business, a not-for-profit organization, or government body. Management includes the activities of setting the strategy of an organization and coordinating the efforts of its employees to accomplish its objectives through the application of available resources, such as financial, natural, technological, and human resources. The term "management" may also refer to those people who manage an organization.

Management

The intangible nature of many knowledge products and processes, in combination with the increasing importance of their value in corporate balance sheets leads to a growing interest in management of intellectual capital. Creating, shaping and updating the stock of intellectual capital requires the formulation of a strategic vision, which blends together all three dimensions of intellectual capital (Human, Structural and Relational Capital) within the organisational context through exploration and exploitation, measurement and disclosure [19] . Therefore, the organisational value of intellectual capital is developed via an ongoing and emergent process focused on the capability to leverage, develop and change the dimensions [20] . The management of intellectual capital is conceptualised as occurring via a multiple stage process, governed by an evolutionary logic. Intellectual capital management is defined as a cycle of four inter-related sets of practices: Strategic Alignment, Exploration and Exploitation, Measurement, and Reporting of intellectual capital. [21]

Exploitation

The management of intellectual capital is conceptualised as occurring via a multiple stage process, governed by an evolutionary logic [22] . For a business, translating the potential of its intellectual capital is crucial. [23] Works that focus on the subset, namely the patents, copyrights, and trade secrets, ignore the benefits of their use with the business. [24] The term "intellectual capital" is not yet common; other terms include "intangible assets". [25] While corporate reports often stress the value and the know-how of its staff, this crucial asset cannot be considered property. A term "Workforce-in-place" can be used as a category when companies with their staff are purchased. [26] Without that category, most of the excess purchase price over the tangible book value would just appear as goodwill. In order to profit from intellectual capital, knowledge management has become a task for management. [27] Often, intellectual capital, or at least rights to it, are moved off-shore for exploitation, which entails risks that are hard to value. [28] The transfer of rights to intellectual capital to offshore subsidiaries is a major enabler of corporate tax avoidance. [29]

Patent set of exclusive rights granted by a sovereign state to an inventor or their assignee so that he has a temporary monopoly

A patent is a form of intellectual property. A patent gives its owner the right to exclude others from making, using, selling, and importing an invention for a limited period of time, usually twenty years. The patent rights are granted in exchange for an enabling public disclosure of the invention. In most countries patent rights fall under civil law and the patent holder needs to sue someone infringing the patent in order to enforce his or her rights. In some industries patents are an essential form of competitive advantage; in others they are irrelevant.

Copyright is a legal right, existing in many countries, that grants the creator of an original work exclusive rights to determine whether, and under what conditions, this original work may be used by others. This is usually only for a limited time. Copyright is one of two types of intellectual property rights, the other is industrial property rights. The exclusive rights are not absolute but limited by limitations and exceptions to copyright law, including fair use. A major limitation on copyright on ideas is that copyright protects only the original expression of ideas, and not the underlying ideas themselves.

A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information not generally known or reasonably ascertainable by others by which a business can obtain an economic advantage over competitors or customers. In some jurisdictions, such secrets are referred to as confidential information.

Measurement

An intellectual capital audit is an audit of a company’s intellectual capital to monitor and oversee the intellectual capital of a firm in order to capitalize on intellectual capital already within the company, and to identify opportunities to increase the intellectual capital of the company. [30]

Audit systematic and independent examination of books, accounts, documents and vouchers of an organization

An audit is a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization to ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern. It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law. Auditing has become such a ubiquitous phenomenon in the corporate and the public sector that academics started identifying an "Audit Society". The auditor perceives and recognises the propositions before them for examination, obtains evidence, evaluates the same and formulates an opinion on the basis of his judgement which is communicated through their audit report.

Early methods of intellectual capital measurement include the balanced scorecard framework (BSC), the Skandia Navigator, and the Intangible Asset Monitor. Additionally, the Value-Added Intellectual Coefficient method (VAIC) was introduced in 1993 to measure the value created by intellectual capital. [31]

See also

Related Research Articles

In economics, capital consists of an asset that can enhance one's power to perform economically useful work. For example, in a fundamental sense a stone or an arrow is capital for a caveman who can use it as a hunting instrument, while roads are capital for inhabitants of a city.

An intangible asset is an asset that lacks physical substance. It is defined in opposition to physical assets such as machinery and buildings. An intangible asset is usually very hard to evaluate. Patents, copyrights, franchises, goodwill, trademarks, and trade names. The general interpretation also includes software and other intangible computer based assets are all examples of intangible assets. Intangible assets generally—though not necessarily—suffer from typical market failures of non-rivalry and non-excludability.

Technocapitalism or tech-capitalism refers to changes in capitalism associated with the emergence of new technology sectors, the power of corporations, and new forms of organization.

A value network is a business analysis perspective that describes social and technical resources within and between businesses. The nodes in a value network represent people. The nodes are connected by interactions that represent tangible and intangible deliverables. These deliverables take the form of knowledge or other intangibles and/or financial value. Value networks exhibit interdependence. They account for the overall worth of products and services. Companies have both internal and external value networks.

A chief knowledge officer (CKO) is an organizational leader, responsible for ensuring that the organization maximizes the value it achieves through "knowledge". The CKO is responsible for managing intellectual capital and the custodian of Knowledge Management practices in an organization. CKO is not just a relabelling of the title "chief information officer" - the CKO role is much broader. CKOs can help an organization maximize the returns on investment in knowledge, exploit their intangible assets, repeat successes, share best practices, improve innovation, and avoid knowledge loss after organizational restructuring.

Intellectual capital is the sum of all knowledge; implying that knowledge that exists at different levels both within or outside the organisation has to be taken into account for intellectual capital. The intangible nature of many knowledge products and processes, in combination with the increasing importance of their value in corporate balance sheets leads to a growing interest in management of intellectual capital. Creating, shaping and updating the stock of intellectual capital requires the formulation of a strategic vision, which blends together all three dimensions of intellectual capital within the organisational context through exploration and exploitation, measurement and disclosure. Therefore, the organisational value of intellectual capital is developed via an ongoing and emergent process focused on the capability to leverage, develop and change the dimensions. The management of intellectual capital is conceptualised as occurring via a multiple stage process, governed by an evolutionary logic. The intellectual capital management is defined as a cycle of four inter-related sets of practices: Strategic Alignment, Exploration and Exploitation, Measurement and Reporting of intellectual capitals.

Intellectual property assets such as patents are the core of many organizations and transactions related to technology. Licenses and assignments of intellectual property rights are common operations in the technology markets, as well as the use of these types of assets as loan security. These uses give rise to the growing importance of financial valuation of intellectual property, since knowing the economic value of patents is a critical factor in order to define their trading conditions.

Value network analysis (VNA) is a methodology for understanding, using, visualizing, optimizing internal and external value networks and complex economic ecosystems. The methods include visualizing sets of relationships from a dynamic whole systems perspective. Robust network analysis approaches are used for understanding value conversion of financial and non-financial assets, such as intellectual capital, into other forms of value.

Asset management refers to systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets and to intangible assets. Asset management is a systematic process of developing, operating, maintaining, upgrading, and disposing of assets in the most cost-effective manner.

Intangible Asset Finance is the branch of finance that deals with intangible assets such as patents and reputation. Like other areas of finance, intangible asset finance is concerned with the interdependence of value, risk, and time.

Keith Daniel Bergelt is an American corporate executive and former U.S. diplomat. He is CEO of Open Invention Network where he is responsible for coordinating the establishment and maintenance of a patent ‘‘no-fly” zone around Linux. As such, he is responsible for safeguarding an open and competitive landscape in key technology markets such as back-office transaction processing, mission critical IT applications, mobile communications/smartphones, and desktop computing.

A knowledge balance sheet is an instrument for structured identification, representation and development of intellectual capital. It shows the connections between organizational goals, business processes, intellectual capital and business success. It is able to reveal the mutual influence between the factors of success and the most efficient investment levers, specifies the strategic direction for knowledge management processes and checks the degree to which they have been implemented.

Structural capital is one of the three primary components of intellectual capital, and consists of the supportive infrastructure, processes, and databases of the organisation that enable human capital to function. Structural capital is owned by an organization and remains with an organization even when people leave. It includes: capabilities, routines, methods, procedures and methodologies embedded in organisation

International Institute of Business (IIB-Ukraine) is a Ukrainian business school founded in 1993.

Exit planning is the preparation for the exit of an entrepreneur from his company to maximize the enterprise value of the company in a mergers and acquisitions transaction and thus his shareholder value, although other non-financial objectives may be pursued including the transition of the company to the next generation, sale to employees or management, or other altruistic, non-financial objectives. Exit planning differs from succession planning in that the later is a sub-component of exit planning, and refers to the hiring, training and retention of a successor President/CEO of the company in a planned manner. Succession Planning is but one of the many considerations when conducting exit planning. Company owners commonly do not see their company from the standpoint of a potential buyer, and thus, ignore the strategic management of the company.

Process capital is the value to an enterprise which is derived from the techniques, procedures, and programs that implement and enhance the delivery of goods and services. Process capital is one of the three components of structural capital, itself a component of intellectual capital. Process capital can be seen as the value of processes to any entity, whether for profit or not-for profit, but is most commonly used in reference to for-profit entities.

Organizational capital is the value to an enterprise which is derived from organization philosophy and systems which leverage the organization’s capability in delivering goods or services.

Network Orchestrator Companies are defined as:

... companies [that] create a network of peers in which the participants interact and share in the value creation. They may sell products or services, build relationships, share advice, give reviews, collaborate, co-create and more. Examples include eBay, Red Hat, Visa, Uber, Tripadvisor, and Alibaba.

References

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