Demystifying Intellectual Capital and Intellectual Property
Part I


By
G Bharathi
Asst. Professor (Economics)
Aurora's Post Graduate College
Chikkadpally, Hyderabad-500 020
 


In Today's Knowledge Based Economy, where the physical assets are losing their significance as a factor of competitiveness for the firm as well as the economy, the terms intellectual Property and Intellectual Capital have come to acquire greater prominence, these have become a set of commonly used terms but their meaning and difference least understood by many; this is a two part article where an attempt is made to demystify the two terms in the simplest manner, the First part discusses the difference between several interchangeably used terms and traces the history of the terms.

The Second part deals with the meaning of the term Intellectual Property (IP) and the various types of rights (IPRs) that exist with it. The article also briefly discusses the Trade Related Intellectual Property Rights (TRIPs) and its implications.

PART I

A century ago, business corporations were identified by their physical assets: real estate, buildings and machinery. Over the course of the next hundred years, management and investor attention shifted toward businesses' intangible property: brand names, patents, business relationships and employee culture etc. The emerging knowledge-based economy stresses the importance of knowledge as a source of competitiveness and growth of firms. The stress has now changed from hard factors to that of soft ones. What is implied here are that the firms have shifted their focus from the tangible and physical assets to that of intangible and intellectual assets. Investment in soft factors is referred to as investment in intangible assets.

The fundamental change of companies' attitudes towards knowledge-based organizations is very clear in the recent times as these firms have started accounting for and valuing their intangible assets and also began to show them on to their annual balance sheet.  Businesses are investing less in physical goods such as capital investments, machines, building, etc, and more in soft factors such as human resources, research and development, organizational development, software, marketing, and relationships.

The expression Intellectual capital started gaining prominence and gathered momentum in the recent years due to the changes in the environment in which the firms operated. There has been a continuous shift of trend towards competition in the global market. Due to the increase in intensity of competitive pressures, the firms are looking for a specific factor that could increase their competitive advantage and competitiveness in the global market. The factor also had to be such so as to create a differentiation of their product from that of the competitors.

In this pursuit knowledge has become the most important fact of economic life of organizations; today the chief component of what they buy and sell and the raw material with which they work is Intellectual capital - not natural resources, machinery or even financial capital. Intellectual capital has become the one indispensable asset of corporations. The realization of this has led to the interest in "knowledge management" to exploit this often underutilized resource. Today the concern of organization along with earning profits and being economically viable is to retain and exploit the talent of the people who work in the organization; to gain the loyalty of the customers it serves and learns from; to estimate and increase the value of its brands, copyrights, patents and other intellectual capital; to harness the collective knowledge embodied in its systems, to keep its management techniques, and history unique to itself.

However, the paradox remains that though this intangible is gaining prominence, its measurement is quite difficult. Several methods and models have been designed and developed in the western world to account for these assets. In Indian context the firms are yet to use these models effectively since they need to be modified in Indian environmental context. Moreover, though the firms recognized that the above mentioned are vital assets that are rarely managed and almost never managed skillfully.

Through the transformation of the global economy these assets of a firm are becoming more important. The term intellectual capital is used to express the intangible capital of a business unit. The live capital, natural capital, social capital, intellectual capital, human capital, structural capital and relational capital are some of the commonly used terms interchangeably without realizing their innate meaning and purpose. An attempt is made in this paper to deal with the preliminary meaning of these specific terms and also bring out a relation of each with every other factor.

The concept of tapping knowledge or other Intellectual Capital became prominent since it was understood that if reaped, managed and nurtured properly it could be a resource, which can be used for adding value to the organization at various levels. Thus, the first reason for the development of Intellectual Capital was the concept of training, which made the organizations sure and gave them the confidence that the given level of Intellectual Capital could be taken further for organizational benefit.

The second factor that led the development of Intellectual Capital is the increasing importance given by organizations to research and development. Firms started realizing the importance of continuous innovation to maintain their positions and also move into another orbit of the organizational development. This was because of the changing profile of the end users of the products and services in a globalized world.

The Human resource development movement that gained prominence in the recent years is also an important factor in the development of Intellectual Capital. It was understood that human capital if managed properly could prove to be effective in increasing competitiveness and efficiency.

This does not imply that human capital management came later and after the development of Intellectual Capital. It should be well recognized that human capital existed since times immemorial and with the increase in the prominence of the knowledge the term Intellectual Capital also gained importance. The major corporate houses across the globe started looking at this capital to harness both economic and non-economic benefits. Their interest in these areas resulted in lots of studies of better ways of management of these resources so as to optimize the benefits.

Before entering into the details of ways and means or techniques of management of these capitals let us understand the dictionary definitions of these terms.

Human capital is the most complex and dynamic asset an organization has to manage. Here are a few ways in which it can be defined. As per a commonly used dictionary of English Human capital refers, in macro-economics, to the capacity of a workforce to yield financial capital, in parallel to the way physical capital yields goods.

Some economic system theories refer to it as labour , one of three factors of production, and considered it to be a commodity - easily interchangeable. Other analyses, for instance in human development theory, differentiate social trust (social capital ), sharable knowledge (instructional capital), and the individual leadership and creativity (individual capital) as three distinct capacities of a human applying him or her self in economic activity.

The term human capital thus refers to ambiguous combinations of these, and interactions with the welfare, education and health care systems can be modelled even past retirement - where, according to classical and neoclassical analysis, human capital must be zero, as no "labour", "employment" or "goods" are now involved.

There is a global debate regarding the fair distribution of human capital. This is most pointed with respect to educated individuals, who typically migrate from poorer places to richer places seeking opportunity, making 'the rich richer and the poor poorer'. African nations have invoked this argument with respect to slavery, other colonized peoples have invoked it with respect to the 'brain drain' or 'human capital flight' which occurs when the most talented individuals (those with the most individual capital) depart for education or opportunity to the colonizing country (historically, Britain and France and the U.S.A.). Even in Canada and other developed nations, the loss of human capital is considered a problem that can only be offset by further draws on the human capital of poorer nations via immigration.

The term human capital constitutes the social capital. The collective nature of human capital translates it into social capital. Social capital" is a term that refers to the goodwill, trust, and cooperation evident in any particular organization or society. Social capital has been informally recognized in the worlds of management and government for some time. Many believe that social capital is an under-leveraged intellectual capital asset which could be powerfully mobilized within both organizations and communities to deliver benefit.

Social capital is broadly recognized as an intangible asset of considerable value that resides within our many respective societies in the workplace, the community, and in our nation. Many believe, social capital, understood as goodwill and cooperation, can be consciously applied by us each, and thus used to drive effectiveness within organizations, economic development at the civic or state levels, and, as the natural result, the generation of the public good, prosperity, and well-being. Social capital also like any other capital requires management to reap real benefits from it. The human capital is the resource from which the social capital is generated.

Human capital is primary and acts as a resource and a fundamental base for development. As the human capital is tapped it results in economic benefits to the owner and also to the society. Thus, the human capital generates social capital. Here, it can be understood that all human capital may not result in economic benefits. There may be some human capital that has non economic utilization also. However, this capital is a part of society therefore, social capital. Thus, the human capital may surpass the stage of economic capital and end up being just social capital. This capital is secondary. This is wealth that has been derived from the primary resource of human capital. For e.g. the senior citizens in every economy constitute a part of human capital who were economically useful to the economy. Now they form a part of the social capital since they do not perform the wage earning function any more. However, their contribution to the society can be estimated and accounted in real terms. Thus, they form a part of the social capital. Similarly, the housewife's contribution is also non-economic but a inseparable part of social capital.

Tabular Representation of the Concepts

Human Capital

Primary

Resource

Human capital refers, in macro-economics, to the capacity of a workforce to yield financial capital , in parallel to the way physical capital yields goods

Social Capital

Secondary

Wealth

Social capital "refers to the collective value of all 'social networks A social network consists of any group of people connected through various social familiarities ranging from casual acquaintance to close familial bonds.

Intellectual Capital

Tertiary

Asset

Intellectual Capital it is defined as is any creation which emerges from the human mind.


Moving on the Intellectual Capital it is defined as is any creation which emerges from the human mind. It is capital because it can be created, transferred and also can be used/reused and most importantly it is a product of the human intellect. Therefore, intellectual capital is a narrow term when compared to the human capital since all human capital may not be intellectual, however all intellect comes from human mind. For example, an agricultural labour or a worker at a construction site is a human capital, however he is not contributing anything to the existing knowledge pool, therefore not an Intellectual Capital. However, as far as Intellectual Capital  is concerned it comes finally as it can be seen that all human capital need not be Intellectual Capital, in spite of the fact that they contribute towards the value addition of a business process. But all Intellectual Capital is human since the point of origin of all new knowledge is human brain.

History of Intellectual Capital1:

1987-89: Books about knowledge assets and "the invisible balance sheet", published by Karl- Erik Sveiby, Debra Amidon and Charles Handy.

1991: Leif Edvinsson is appointed the world's first Director of Intellectual Capital at Skandia. First cover story on IC by Thomas A. Stewart in Fortune. Writings by James Brian Quinn, Ikujiro Nonaka and others develop the knowledge concept further.

1993:   Skandia elaborates the IC Navigator and the prototype first IC Report internally.

1994: Thomas A. Stewart publishes 2nd cover story on IC in Fortune. Mill Valley Group on IC Networking meets for the first time.

1995: Skandia presents the first public IC Report, to be followed by a new one every sixth month. Kaplan and Norton expand their work on Balance Score Card.

1996:   Skandia establishes the first Future Center, an IC lab supervised by Leif Edvinsson. First IC of Nations report published (C. Stenfelt).

1997:   Numerous books on IC published by Edvinsson, Stewart, Roos, Sveiby &c. BBC produces video on IC - The New Wealth of Nations. ICM gathering for IPR start in California, instituted by Pat Sullivan, Leif Edvinsson and Gordon Petrash. Dr. Nick Bontis presents the world's first Ph.D. disputation on IC.

1998: Nick Bontis and McMaster University in Canada arranges first large academic IC conference. Professor Baruch Lev at New York University arranges first IC accounting conference. Brain Trust Foundation awards Leif Edvinsson the Brain of the Year prize for his pioneering IC work. SEC initiates research on Intangible Assets at Brookings Institute, Washington. IC Rating being launched by Intellectual Capital Sweden AB. 4

1999:   EU institutes measurement project on IC: Meritum and NIM Cube Future Center ABB inaugurated.

2000: Government of Denmark publishes first guidelines of IC accounting. Skandia initiates IC Vision and IC Community dot com. Sydkraft Future Center inaugurated.

2001: HLEG/EU publishes first major report on Intangible Assets. University of Lund establishes the world's first professorship on IC and appoints Leif Edvinsson the first holder of the position. Brookings Institute presents its report "The Unseen Wealth". Future Center Norway inaugurated.

Thus Intellectual Capital is an asset that comes of proper management of human capital, which is the primary resource. Any organization that wants value creation has to emphasize on human capital management to harness Intellectual Capital. Thus, Intellectual Capital is the end product for which a value can be assigned and which can be measured. Any increase in this asset is increase in value for the firm.

Thus a well managed organization is not that only manages its intellectual capital, but that which harnesses human capital which is a resource from which the social capital is derived as a wealth, further refinement and churning brings out the real asset in the form of intellectual capital.

Though India owns a rich heritage of intellectual capital generation, it is unfortunate today this concept has been mostly an area of the research in the developed nations. These researches of the western world consider some basic parameters to measure Intellectual Capital. According to them the Intellectual Capital constitutes Human capital, Structural Capital and Relational Capital. The main position that is taken in this paper is that Human Capital is a much wider concept as compared to Intellectual Capital. The Intellectual Capital is a part of the human capital and not the other way round. The Human capital is the resource that creates the Intellectual Capital; similarly the relational capital also emerges from the human resource. Therefore, the starting point of any analysis of the concept of Intellectual Capital is Human Capital not otherwise.

1. www.entovation.com
 


G Bharathi
Asst. Professor (Economics)
Aurora's Post Graduate College
Chikkadpally, Hyderabad-500 020
 

Source: E-mail May 18, 2005

 
 

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