Intellectual capital

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Intellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people (human capital), the value relating to its relationships (relational capital), and everything that is left when the employees go home (structural capital), [1] 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]

Contents

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 assessing the wealth of organizations. [3] 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. [10] [11] 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. [12] 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. [6] For a corporation, the result will optimize its stock price.

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.

Classification

Intellectual capital is normally classified as follows:

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. [9] 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. [17] 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. [6]

The recognizing and managing of intellectual capital within organizations is not always evident and straightforward; for example, what IC means differ from organization to organization; thus requiring a contextual understanding. [18]

Exploitation

The management of intellectual capital is conceptualised as occurring via a multiple stage process, governed by an evolutionary logic. [9] For a business, translating the potential of its intellectual capital is crucial. [19] Works that focus on the subset, namely the patents, copyrights, and trade secrets, ignore the benefits of their use with the business. [20] Other terms include "intangible assets". [21] While corporate reports often stress the value and the know-how of its staff, this crucial asset cannot be considered property. The term "workforce-in-place" can be used as a category when companies with their staff are purchased. [22] 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. [23] Often, intellectual capital, or at least rights to it, are moved off-shore for exploitation, which entails risks that are hard to value. [12] The transfer of rights to intellectual capital to offshore subsidiaries is a major enabler of corporate tax avoidance. [24]

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. [4] :86

Early methods of intellectual capital measurement include the balanced scorecard (BSC) framework, 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. [25]

Intellectual capital and stock returns growth

Changes in stock returns are primarily determined by external factors such as inflation, exchange rates, and socioeconomic conditions. Intellectual capital does not affect a company stock's current earnings. Intellectual capital contributes to a stock's return growth. [26]

Related Research Articles

Business is the practice of making one's living or making money by producing or buying and selling products. It is also "any activity or enterprise entered into for profit."

Human capital or human assets is a concept used by economists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial impact on individual earnings. Research indicates that human capital investments have high economic returns throughout childhood and young adulthood.

<span class="mw-page-title-main">Knowledge management</span> Process of creating, sharing, using and managing the knowledge and information of an organization

Knowledge management (KM) is the collection of methods relating to creating, sharing, using and managing the knowledge and information of an organization. It refers to a multidisciplinary approach to achieve organizational objectives by making the best use of knowledge.

In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. A typical example is the machinery used in a factory. At the macroeconomic level, "the nation's capital stock includes buildings, equipment, software, and inventories during a given year."

In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both. The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be tangible book value.

<span class="mw-page-title-main">Valuation (finance)</span> Process of estimating what something is worth, used in the finance industry

In finance, valuation is the process of determining the value of a (potential) investment, asset, or security. Generally, there are three approaches taken, namely discounted cashflow valuation, relative valuation, and contingent claim valuation.

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. Technocapitalism is characterised by constant innovation, global competition, the digitisation of information and communication, and the growing importance of digital networks and platforms.

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.

Intangible asset finance, also known as "IP finance", is the branch of finance that uses intangible assets such as intellectual property and reputation to gain access to credit. Like other areas of finance, intangible asset finance is concerned with the interdependence of value, risk, and time.

<span class="mw-page-title-main">Asset</span> Economic resource, from which future economic benefits are expected

In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything that can be used to produce positive economic value. Assets represent value of ownership that can be converted into cash . The balance sheet of a firm records the monetary value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business.

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.

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.

National intangible capital (NIC) performance for 59 countries 2014 as measured by the ELSS (Edvinsson-Lin-Ståhle-Ståhle) methodology for measuring stock of national intangible capital, economic impacts and efficiency of NIC: Research is supported as an initiative by The New Club of Paris.

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.

<span class="mw-page-title-main">Outline of corporate finance</span> Overview of corporate finance and corporate finance-related topics

The following outline is provided as an overview of and topical guide to corporate finance:

References

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