1. Intellectual Capital as the New Wealth of Nations

Where is value being created in your country, region or city? What is the knowledge creating of your nation? How does the map of the nation knowledge and intellectual capital look like? Which major social innovations can be seen during the last five years? Is there another value logistics emerging, calling for another knowledge and society entrepreneurship for the intellectual capital? Who will be in charge of the IC cultivation?

Only knowledge will give us the opportunity to create a better wealth of nations. So we need to develop the new map of knowledge assets and the intellectual capital (IC) of nations. A map of regional IC, instead of the old agricultural and industrial map of societies, often found in regional planning offices. The key mapping dimension should be around the quest for; where is wealth created in our region/country and who is mastering IC? Could it perhaps reveal a huge knowledge repository in the public sector, perhaps with idle potential for the collective wealth creation? A kind of mine of IC? Further more there is a huge social cost of not leveraging that brain potential that now. For Europe as a whole this social opportunity cost might be estimated to be as high as 5.000 billion Euro. And the value of not leveraged IC cannot be stored as value of raw material mines.

A new political leadership agenda is necessary around the IC and KM of Nations with the focus on:

• how to visualise knowledge capital of Nations as well as it flows
• how to cultivate the efficiency and renewal of knowledge capital of Nations
• how to capitalise on knowledge capital into the collective wealth of Nations

According to the OECD report Scoreboard 2001 -Towards a Knowledge-based Economy the countries with knowledge intensive activities will be the winners of future wealth. In this report the 30 member countries are scored according to IC investments such as R&D, education, patents, ICT etc ¹. If summarised as by Financial Times/DI in Sweden, the top list of potentials to future wealth will look like this:

1. - Switzerland
2. - Sweden
3. - USA
4. - Ireland
5. - Netherlands

In the knowledge economy, the value of corporations, organisations and individuals is directly related to their knowledge and intellectual capital. But spread the net little wider and you begin to understand the possibilities. Think of nations, as well as the public sector. If intangibles are important to private enterprise organisations, they are also important to the productivity and competitiveness of the public sector as well the whole of nations. How can we understand the dynamics of intangibles at work on a national scale? Can the new corporate longitude be translated into a new perspective on national performance?

2. The new corporate longitude

The logic of the corporate longitude² is based on the story from early 1700. Then the British Navy could not navigate with precision east - west, but only north - south. Consequently the 18th century ships were lost in the fog, like today’s analysts of only financial capital. So today we are facing the problem of accounting in the same way, for example in the case of ENRON. In the public sector it might be even worse, where the focus today is strongly on balancing the budget of financial capital. This is resulting in anorectic leadership behaviour, trying to starve the public sector into the future, especially by savings on the important nourishment of intangibles such as knowledge, R&D and schools.

The problem of the longitude found its solution, not by the professionals in the Navy, not by the academics at Universities but by a knowledge outsider, - a watchmaker at the name of John Harrison. He came up with an innovative way to the east-west measurement approach that solved the longitude problem. To get a deeper understanding of wealth creation it is essential to have such a lateral perspective. The altitude of stapling assets into a balance sheet, with a traditional bottom line is to narrow. A lateral accounting is necessary to include the intangibles and the non-financial assets of knowledge creation, knowledge recipes networks, culture and relationships. The longitude logic is focused on sustainability, lateral, outside and interactive value creating dimensions of intangibles. The new space of wealth of organisations as well as wealth of nations is in the interaction space of human capital and structural capital resulting in financial prosperity. What is needed is not a cash register of transactions but a chronometer of interactions, i.e. time dimension of futurizing. IC is about future earnings potential, i.e. the space between the present and the future. That space is a longitude dimensions, that is assessed mainly in time dimensions or current dimensions, not cash and currency dimensions.

Currently organisations as well as societies are like 18^th century ships charting their position with only North South navigation tools. Plotting a course solely from historical financial wealth reference points leaves them blind to the lateral horizons opportunities and society innovation perspectives. Lost on a turbulent sea of change without a lateral navigation tool to guide them, they can not navigate the uncharted challenges exposed to the public sector evolution that is coming more and more from the intangibles.

Profit measurement and reporting systems emphasise efficiency and cost control, using money as the basis of decision making. This ongoing obsession with planning, budgeting and charting progress against tangible indicators of wealth will ultimately impoverish society and devalue the wealth of nations, because they overlook the contribution of intangibles. For example, public service sector activities are automatically undervalued because there is no way to measure their contribution, so we lose talent from the system, because they search for more lucrative openings elsewhere.

Networked Nations

Adding value in the knowledge economy is inextricably linked to radical change in both societal assumptions and business models. Capitalism may not create value if it is obsessed with competition to the detriment of collaboration. Social values must be re-considered in the light their value generation potential. For example allocating resources to education, health and social services, and communication infrastructure should not be based on cost but on the potential for value creation through knowledge. If employment in private industry is only about 25% of total potential mind value of the society, leveraging the rest of it more effectively depends on education and opportunity. Research suggests that educational systems have a high degree of explanatory value in national wealth rankings, so efficient resource allocation would mean they should receive much larger elements of funding than currently they do.

Infrastructure is extremely essential too. Think about which cities and countries are truly poised for value creation? It won’t be those that isolate themselves, or those with a poor communication infrastructure. Primarily they will be ones that are well connected, with an infrastructure designed to encourage access to the knowledge and human resources that create new value. Arab countries traditionally have relied on oil as the source of wealth, so intellectual capital represents only 20% of their wealth. If they don’t start navigating for the future in terms of renewal through education, making relationships with other countries and infrastructure for networking, their wealth is set to decline.

So the map of knowledge logistics or flow might give birth to new value adding clusters of knowledge communities beyond the traditional national borders. The new value is in the networked constellations, connection, synapses and contactivity. The knowledge society entrepreneurs shape those bridges and alliances.

If on the corporate level we face a new theory of the firm, sometimes referred to as "blown to bits" or the new theory of the un-firm, is there a similar pattern emerging for nations. A theory of the Networked Nations with high interdependencies with high fluidity of knowledge, instead of traditional trade theory, based on chaordic knowledge management approaches ³ for the New Wealth of Nations.

4. IC reporting of Nations

The IC-evolution is in progress. In 1991 Skandia appointed me as the world’s first director of IC to develop another logic for the renewal of Skandia. This work resulted in among others a refined taxonomy, measurement and accounting systems for IC as well as innovations systems for IC. IC reporting of Nations, regions as well as the public sector is also already happening

In 1996 the Skandia Future Center was established under my leadership of that I then invited Caroline Stenfelt from the University of Stockholm and some student colleagues to prototype how our work at Skandia on IC could be translated to a national stage.⁴ The first IC of Nations was born due to her pioneering work, labelled as Welfare and Security. Later she and I organised the Vaxholm Summit – the First International Meeting on Visualising and Measuring the IC of Nations in August 1998. As a result, the Swedish government adapted Skandia’s Navigator to visualise its national intellectual capital. Later, countries including Israel, Holland and, in particular, Denmark, began to visualise their respective intellectual capitals. Recently in 2002 the Nordic Industrial Fond has also presented a report, called the Nordica, on IC perspectives of the Nordic Countries.

Invest in Sweden Agency, ISA, was the first national investment organisation to apply the latest knowledge of intellectual capital to assess and compare national competitiveness and performance. "Intellectual capital forms the root of a corporation – and of a nation – that supplies the nourishment for future strength and growth. A new analytical method enables these previously unevaluated resources to be assessed and compared. This can be an important tool for selecting an international location for knowledge-based companies. Sweden offers highly attractive and competitive intellectual capital assets – assets of superior value for leading edge companies," said ISA’s 1999 Annual Report.

In fact, the Navigator was easily translated from the corporate to both the public and national environment. Its focuses remained intact, but covered a range of different issues:

• Financial Focus including per capita GDP, national debt, the mean value of the US dollar
• Market Focus including tourism statistics, standards of honesty, balance of services, balance of trade, balance of trade in intellectual property
• Human Focus including quality of life, average age expectancy, infant survival rate, health levels, education, level of education for immigrants, crime rate, age statistics
• Process Focus including service-producing organizations, public consumption as a percentage of GDP, business leadership, information technology such as personal computers connected by LAN’s, survivors in traffic accidents, employment
• Renewal and Development Focus including R&D expenses as a percentage of GDP, number of genuine business start-ups, trademarks, factors important to high school students.

According to the above-mentioned OECD report in October 2001 Sweden is among the leading nations in the knowledge-based economy. Sweden has actually also among the highest R&D per capita investments in the world. Investments in intangibles constitute around 20 percent of GDP.

As all the statistics on the country’s capital show, Sweden has embraced technology with enthusiasm. According to one survey, Sweden is among the leading IT country in the world. This has not happened overnight. There has been long-term public government support for technology – tax-breaks for employees buying a computer, following on from initiatives such as free Internet access for students and earlier programs to give children access to PCs. It has shaped an infrastructure and structural capital for future wealth. This might be an illustration of how the public sector governance in a knowledge society is to focus on the interaction space between structural capital of society and the human citizen capital to reach a higher collective yield of prosperity.

One of the most recent, in 2002, and outstandingly interesting research in the area is done by Dr. Nick Bontis, McMaster University⁵. Based on the above mentioned model he and his colleagues has studied sponsored by United Nations Development Program, a study of 10 Arab States. In this study he is quantifying the state of IC for the nations and launches an IC Index for Nations that can be used for ranking as well as bench learning between nations.

By looking at the IC wealth of nations rather than standard measures of national competitiveness, we gain new insights into where a country’s strengths and weaknesses might lie. We can then nourish social innovation and society entrepreneurship and social innovations⁶for new wealth creating configurations

In the research case from Dr. Nick Bontis one can so far be concluded that the following ingredients, in the stated order, are key areas for the political agenda to shape IC of Nations

1. National agenda for Renewal, Research and Development, i.e. Innovation Capital

2. National agenda for Education, i.e. Human Capital upgrading and leveraging

3. National agenda for Foreign Trade, i.e. Relationship Capital and Knowledge flows

4. National agenda for Productivity, i.e. Process Capital with special focus on cultural context

5. IC in the world

Sweden is not alone. At a national level there is a great deal of activity in coming to terms with the power of intangible assets and the rise of intellectual capital.

The Dutch Central Planning Office now has a Knowledge Economy Unit. Dutch initiatives include long-term analysis of the role of knowledge in the Dutch economy as well as other work on knowledge creation in networks and the availability of human capital.⁷

The pan-European body Eurostat is taking the lead in developing statistical tools and techniques, which enable more full understanding of the knowledge economy⁸. "The transition from the industrial to the information society is characterised by the rapid growth of intangible assets, whereas economic and social activity still relies substantially on physical, tangible goods. The relation between the two has to be defined and measured," says Eurostat.⁹

In Israel, where the country’s IC was published in 1998, based on a work of Dr. E. Pasher in close collaboration with C. Stenfelt a variety of alternative measures have been added to those used in Sweden.¹⁰

In Denmark progress is also being rapidly made. The country has long been at the forefront of examining the role of intangibles. Copenhagen Business School’s professor Jan Mouritsen has been working in the area for a number of years and has carried out several surveys and literature studies (the most recent of which was published in 2001).¹¹

At the beginning of 1998, Denmark launched a project looking at intellectual accounting, which aimed to help transform Denmark from an industry to a knowledge economy. A special Competence Council was organised with Lars Kolind as chairman. This has produced interesting work on Denmark’s position in the new global knowledge competition. In 2000 the Danish government also published guidelines for Intellectual Capital Statements – akin to those produced by Skandia.¹² A Danish law is now in progress to support these various initiatives. Furthermore in February 2002 the Ministry of Economics launched a kind of Future Center called Mind Lab, to nourish the public sector management of knowledge.

Intellectual capital is also making an impact in the Netherlands. Its Minister of Economic Affairs recently observed: "The Netherlands is rapidly developing into a knowledge-intensive economy… It is therefore strange that financial accounts are dominated by information on buildings and machinery, in other words the ‘classical’ or physical production factors. The value of knowledge – the R&D work, training, intellectual property etc – is not easy to identify in accounts. And that is in fact the reason why young knowledge-intensive businesses in particular have very great difficulty in finding external financiers."

The Dutch government’s shift has been one from having an emphasis on technology to emphasising innovation. In 1998 it published a report, "The Immeasurable Wealth of Knowledge", which found that in excess of 35 percent of Dutch national investments were of an intangible nature.

Another nation strongly transforming itself into the knowledge economy is Singapore. It has renamed its Ministry of Labour the Ministry of Manpower as well as spending decades building an impressive system of structural capital especially for IT and telecommunications. The effect on wealth is highly visible.

6. The New Deal for New Wealth of Nations

Examining the intellectual wealth of nations is a major advancement. But progress is being made on a number of other fronts as the true impact of the knowledge economy is beginning to be understood for a New Deal for New Wealth of Nations, or Public Sector Governance of IC and Knowledge Capital.

"Today’s we’re a society awash in networks, yet starved for community," says Peter Katz, author of The New Urbanism. True communities built around knowledge are now emerging. Many of these are web-based. In them knowledge is free flowing, restlessly criss-crossing the globe all day long. Furthermore it is these infrastructures that can give leverage to human capital of societies. Unless we innovate and prototype such new structures and delivery systems for health, work places, urban areas etc. we might erode the important human capital and get an increasing society cost for burn outs and brain stress.

Intellectual capital can also have an impact on city planning. Planners must now create the context in which knowledge workers can be at their most productivity. This may bring about radical changes in the way our urban environments are conceived. Think of a harbour. Traditionally, harbours used to be for the flow of goods. But as the value of logistics has declined we have to look at the flow of knowledge. We need to create knowledge harbours.

7. Society Entrepreneurship for IC Mastering

Society entrepreneurship is a new interesting concept emerging in among others Norway. It highlights a role for society renewal that is in the space between business community and society. It is a space for collaborative prototyping based on the structural capital from each partner, but leveraged by the individual human capital and innovative talent. The challenge is to get a turbo on the existing IC of societies, or in other words increasing the turbo or productivity on existing knowledge investments. A kind of IC in waiting to be tapped by challenging society entrepreneurs.

A new map is needed for the new constellations of value adding clusters. Cities or regions might be the new spaces. Furthermore is there another eco system needed for IC of Nations and its knowledge logistics? This might be social innovations space in waiting.. And whom would you like to nominate as one among the top ten society entrepreneurs of today – for the shaping of IC spaces of tomorrow?

Notes:

[1] OECD Scoreboard 2001 - Towards a knowledge based economy.

[2] Corporate Longitude, Bookhouse, Stockholm, by Leif Edvinsson, 2002- www.corporatelongitude.com

[3] see www.chaordic.org

[4] Stenfelt, Caroline et al, "IC at national level", University of Stockholm, 1998, ISA-Invest In Sweden Agency Annual report 1999. And Edvinsson & Stenfelt, Journal of Human Resource, Stockholm , No. 1:1999.

[5] National Intellectual Capital Index - IC Development in the Arab region, UNDP 2002

[6] See the work of Mack M. Elroy, founder of Macro Innovation Inc.

[7] See Dutch Central Planning Office at www.cpb.nl and Statistics Netherlands www.cbs.nl

[8] "EPROS - The European Plan for Research in official Statistics", European Union 2000

[9] "Statistical indicators for the new economy", Eurostat, 2000

[10] "IC of Israel 1998", E Pasher & Associates, Israel

[11] Mouritsen, Jan, "IC and the capable firm", Copenhagen Business School 2001

[1] Danish Ministry of Industry Guidelines for Knowledge Accounts, 2001, - www.efs.dk