From quantity to sustainable From quantity to sustainable qualityquality

Increasing intellectual capital: can this Increasing intellectual capital: can this objective guide policy development and can objective guide policy development and can

it be measuredit be measured

Warsaw, 30 November 2009Warsaw, 30 November 2009

Prof. dProf. dr r hab. hab. Krzysztof RybiKrzysztof RybinnskiskiWarsaw School of Economics and Ernst & YoungWarsaw School of Economics and Ernst & Young

Email: Email: rybinski@rybinski.euBlog: Blog: www.rybinski.eu

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NNot everything you count counts; not ot everything you count counts; not everything thateverything that counts is countedcounts is counted

Albert EinsteinAlbert Einstein

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Paper structure (1)Paper structure (1)• Why GDP as a measure of country/region development Why GDP as a measure of country/region development

fails to capture the most important aspects of country fails to capture the most important aspects of country and regional development in XXI century?and regional development in XXI century?

• How to create a policy evaluation metric that can be How to create a policy evaluation metric that can be easily understood by citizens and engages citizens in a easily understood by citizens and engages citizens in a lively debate about policy outcomes?lively debate about policy outcomes?

• Can intellectual capital methodology be a useful policy Can intellectual capital methodology be a useful policy evaluation metric: brief history and recent applications evaluation metric: brief history and recent applications to countries, regions, cities, universities and to countries, regions, cities, universities and companies.companies.

• Can evaluation methodology be transformed/expanded Can evaluation methodology be transformed/expanded to include intellectual capital of countries/regions?to include intellectual capital of countries/regions?

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Paper structure (2)Paper structure (2)• Can Europe gain competitive edge in the Can Europe gain competitive edge in the

global knowledge economy by adopting global knowledge economy by adopting intellectual capital framework in policy intellectual capital framework in policy planning and evaluationplanning and evaluation??

• Can future Cohesion policy be based on Can future Cohesion policy be based on intellectual capital? Will it help to integrate intellectual capital? Will it help to integrate new Cohesion policy with post-Lisbon new Cohesion policy with post-Lisbon agenda? agenda?

• Intellectual capital as a tool to generate Intellectual capital as a tool to generate new strategic momentum for policies in the new strategic momentum for policies in the new financial perspective after 2013.new financial perspective after 2013.

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Disconnect EU citizenDisconnect EU citizen

55Source: Eurorometer, June-July 2009

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Example: www.gapminder.orgExample: www.gapminder.org

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Intellectual capital: brief Intellectual capital: brief historyhistory• Late 1980s – early attempts to create intellectual capital Late 1980s – early attempts to create intellectual capital

statements. Karl Sveiby’s Intellectual Asset monitor was statements. Karl Sveiby’s Intellectual Asset monitor was created. Sveiby used the term knowledge based assets which created. Sveiby used the term knowledge based assets which were divided into three categories: competence, external were divided into three categories: competence, external structure and internal structure. The model was used by structure and internal structure. The model was used by several Scandinavian companies. several Scandinavian companies.

• Early 1990s – Pioneering initiatives to systematically report Early 1990s – Pioneering initiatives to systematically report on intellectual capital to external parties. Skandia’s on intellectual capital to external parties. Skandia’s intellectual report dates back to 1994. intellectual report dates back to 1994.

• Mid-1990s – several important books on intellectual capital Mid-1990s – several important books on intellectual capital are publishedare published: Sveiby (1997): Sveiby (1997)

• Skandia (1994). Leif Edvinsson was appointed the first Skandia (1994). Leif Edvinsson was appointed the first director of intellectual capital in Scandia in 1991director of intellectual capital in Scandia in 1991

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IC initially applied to IC initially applied to companiescompanies

• Historically intellectual capital methodology was applied in the Historically intellectual capital methodology was applied in the corporate sector, to explain the difference between market corporate sector, to explain the difference between market value and book value of a company listed on the stock value and book value of a company listed on the stock exchange. This difference rose over time and was explained as a exchange. This difference rose over time and was explained as a price, that investors put on corporate intangible assets, which price, that investors put on corporate intangible assets, which cannot be precisely measured today but have potential to cannot be precisely measured today but have potential to generate value for investors in the future. generate value for investors in the future.

• The branch of intellectual capital that deals with company The branch of intellectual capital that deals with company intangible assets reporting is most developed and researched. In intangible assets reporting is most developed and researched. In December 2008 European Financial Reporting Advisory Group December 2008 European Financial Reporting Advisory Group (EFRAG) has invited comments on paper prepared by Australian (EFRAG) has invited comments on paper prepared by Australian Accounting Standards Board, which proposed future path of Accounting Standards Board, which proposed future path of changing accounting standards to better measure corporate changing accounting standards to better measure corporate intangible assetsintangible assets

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Company market value is driven by Company market value is driven by intangible assetsintangible assets

Components of

- 2,000 4,000

6,000 8,000

10,000

12,000 14,000

1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Market Premium Intangible Book Value Tangible Book Value

Components of S&P 500® Market Capitalization

- 2,000 4,000

6,000 8,000

10,000

12,000 14,000

1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

S&P

500

Mar

ket C

ap ($

bill

ions

) Market Premium Intangible Book Value Tangible Book Value

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FromFrom 80/20 80/20 in 20th century to in 20th century to 20/80 in 21st century20/80 in 21st century

S&P500®Intangible Value as % of Market Capitalization

16.8%32.4%

68.4%79.7%

0%

20%

40%

60%

80%

100%

1975 1985 1995 2005

S&P500®Intangible Value as % of Market Capitalization

16.8%32.4%

68.4%79.7%

0%

20%

40%

60%

80%

100%

1975 1985 1995 2005

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IC: applicationsIC: applications

• Measuring intellectual capital of countries (Israel, Measuring intellectual capital of countries (Israel, Poland, Sweden, Malaysia, Denmark, Finland, Poland, Sweden, Malaysia, Denmark, Finland, multinational study of 40 countries, benchmarking of multinational study of 40 countries, benchmarking of Arab countries).Arab countries).

• Measuring intellectual capital of regions, cities and Measuring intellectual capital of regions, cities and communities (Poland, Spain, Norway)communities (Poland, Spain, Norway)

• Measuring intellectual capital of cities (Poland, Spain)Measuring intellectual capital of cities (Poland, Spain)

• Measuring and reporting intellectual capital of Measuring and reporting intellectual capital of companies (Germany, Japan, Poland, Brazil)companies (Germany, Japan, Poland, Brazil)

• Measuring and reporting intellectual capital of Measuring and reporting intellectual capital of universities (Austria, Poland, Sweden)universities (Austria, Poland, Sweden)

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IC: definition for companiesIC: definition for companies

• Intellectual Capital has been defined as the Intellectual Capital has been defined as the combination of an organization’s Human, combination of an organization’s Human, Organizational and Relational resources and Organizational and Relational resources and activities. It includes the knowledge, skills, activities. It includes the knowledge, skills, experiences and abilities of the employees, its experiences and abilities of the employees, its R&D activities, organizational routines, R&D activities, organizational routines, procedures, systems, databases and its procedures, systems, databases and its Intellectual Property rights, as well as all of the Intellectual Property rights, as well as all of the resources linked to its external relationships; such resources linked to its external relationships; such as with its customers, suppliers, R&D partners, as with its customers, suppliers, R&D partners, etcetc..

1212Source: EU funded projects MERITUM and RICARDIS

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IC: definition for a country (PL)IC: definition for a country (PL)• Country intellectual capitalCountry intellectual capital is defined as stock of intangible assets held is defined as stock of intangible assets held

by people, companies, communities, regions and institutions. These by people, companies, communities, regions and institutions. These assets, if properly used, can be source of present and future well-being of assets, if properly used, can be source of present and future well-being of the country. the country.

• Human capitalHuman capital refers to each individual competences, which includes refers to each individual competences, which includes education, experience, attitudes, skills, which can be used to improve education, experience, attitudes, skills, which can be used to improve present and future well-being of the country.present and future well-being of the country.

• Structural capitalStructural capital refers to existing national education and innovation refers to existing national education and innovation infrastructure – learning institutions, research entities, ICT infrastructure, infrastructure – learning institutions, research entities, ICT infrastructure, intellectual property.intellectual property.

• Social capitalSocial capital is defined by existing social norms, trust and social is defined by existing social norms, trust and social engagement, which through high quality relationships contributes to engagement, which through high quality relationships contributes to national well-beingnational well-being

• Relationship capitalRelationship capital comprises country perception abroad, level of comprises country perception abroad, level of integration with global economy, country attractiveness for external integration with global economy, country attractiveness for external clients – investors, trade partners, tourists.clients – investors, trade partners, tourists.

1313Source: Poland Intellectual Capital Report, 2008

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IC: standards yet to be IC: standards yet to be developeddeveloped• BBrief review of intellectual capital methodology presented rief review of intellectual capital methodology presented

in my paper shows that there is no standard of in my paper shows that there is no standard of measurement. Each country or scientist uses different measurement. Each country or scientist uses different definition, different set of indicators, basing on his/her definition, different set of indicators, basing on his/her subjective judgment. subjective judgment.

• Therefore at this stage the intellectual capital methodology Therefore at this stage the intellectual capital methodology cannot be easily used for policy planning and evaluation as cannot be easily used for policy planning and evaluation as such. There are no commonly accepted standards and such. There are no commonly accepted standards and empirical evidence is scarce. empirical evidence is scarce.

• However, as shown in the paper, the intellectual capital However, as shown in the paper, the intellectual capital methodology and framework can be used to improve the methodology and framework can be used to improve the EU evaluation and policy planning in the new financial EU evaluation and policy planning in the new financial perspective.perspective.

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What should be measured?What should be measured?• To put it in the simplest possible way. If you give money to farmers, To put it in the simplest possible way. If you give money to farmers,

you need excellent measurement system of number of cows and you need excellent measurement system of number of cows and number of cultivated acres of land, to make sure that right people number of cultivated acres of land, to make sure that right people get the right amount of money. get the right amount of money.

• In order to succeed in the global knowledge economy the EU will In order to succeed in the global knowledge economy the EU will have put a lot of resources into knowledge-based assets. Therefore it have put a lot of resources into knowledge-based assets. Therefore it will be more important to be able to properly measure the number will be more important to be able to properly measure the number and quality of innovations or number of cooperation initiatives and quality of innovations or number of cooperation initiatives between university and business, than to measure the number and between university and business, than to measure the number and quality of land farms or livestock. quality of land farms or livestock.

• So we need to develop simple and efficient measurement system to So we need to develop simple and efficient measurement system to quantify intangibles, to make sure that significant funds are given to quantify intangibles, to make sure that significant funds are given to right people and to proper initiatives. Measurement of intangibles is right people and to proper initiatives. Measurement of intangibles is precisely the area of research covered by the intellectual capital. precisely the area of research covered by the intellectual capital.

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Proper measurement mattersProper measurement matters• An obese man came to a doctor asking for help. An obese man came to a doctor asking for help.

What should I change, he asked. Should I stop What should I change, he asked. Should I stop eating some meals? Do not change anything, eating some meals? Do not change anything, doctor replied. Simply every time you eat doctor replied. Simply every time you eat something take down a note in a special something take down a note in a special notebook, and then read it every evening. This notebook, and then read it every evening. This man lost 10 kg within one month without any man lost 10 kg within one month without any forceful change of his eating habits.forceful change of his eating habits.

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EU strategic focusEU strategic focus

• European Union vision 2020, with strong focus on European Union vision 2020, with strong focus on climate, energy security and innovationclimate, energy security and innovation

• Fewer priorities, consistent with the EU vision and Fewer priorities, consistent with the EU vision and with the desired global role of the EUwith the desired global role of the EU

• More flexibility More flexibility

• SimplificationSimplification

• Performance determined funds allocation and Performance determined funds allocation and stronger conditionalitystronger conditionality

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EU strategic planning process EU strategic planning process (1)(1)• Creating EU2020 vision statement and strategic goals, Creating EU2020 vision statement and strategic goals,

which should be in a SMART form (Specific, Measurable, which should be in a SMART form (Specific, Measurable, Achievable, Relevant, Timely) Achievable, Relevant, Timely)

• Create proper metric to measure progress (e.g. green GDP, Create proper metric to measure progress (e.g. green GDP, national/regional intellectual capital, etc.)national/regional intellectual capital, etc.)

• Cascade strategic goals to countries and regions, the new Cascade strategic goals to countries and regions, the new measurement metric should be used to determine what will measurement metric should be used to determine what will be country region contribution to achieving the EU strategic be country region contribution to achieving the EU strategic goals, and accordingly what resources will goals, and accordingly what resources will be be needed needed

• Create and implement new conditionality rule, country that Create and implement new conditionality rule, country that contributes more to achieving EU goals receives more contributes more to achieving EU goals receives more funds, countries/regions that fail to perform receive less funds, countries/regions that fail to perform receive less fundsfunds

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EU strategic planning process EU strategic planning process (2)(2)

• Initially allocate only small part of the envelope to Initially allocate only small part of the envelope to particular countries or regions based on ex-ante particular countries or regions based on ex-ante evaluation of projects that lead to fulfillment of evaluation of projects that lead to fulfillment of cascaded strategic goalscascaded strategic goals

• Further disbursements of EU funds should be based Further disbursements of EU funds should be based on ex post evaluation of completed projects, on ex post evaluation of completed projects, successful activities should be strengthened, failing successful activities should be strengthened, failing activities should be terminated.activities should be terminated.

• Local national or regional policies that do not Local national or regional policies that do not contribute to EU strategic goals should be funded contribute to EU strategic goals should be funded locally.locally.

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IC cities, city XIC cities, city X

2020Source: Rybinski, Wodecki (2008)

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City XCity X

2121

władzemetropolii

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City YCity Y

2222

władzemetropolii

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IC: proposed policy evaluation model IC: proposed policy evaluation model

2323Source: proposal based on Rybinski, Wodecki (2008)

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Four recommendationsFour recommendations• Connect to the EU citizen. Policy goals and statistical data should be Connect to the EU citizen. Policy goals and statistical data should be

reported in terms which are important to the EU citizen. Playing with reported in terms which are important to the EU citizen. Playing with data should be fun and easy, the good benchmark is offered by data should be fun and easy, the good benchmark is offered by www.gapminder.org

• Start several projects of measuring intellectual capital of selected Start several projects of measuring intellectual capital of selected regions. Some 10-15 regions should suffice to account for the EU regions. Some 10-15 regions should suffice to account for the EU heterogeneity. If launched soon the first results should be ready by heterogeneity. If launched soon the first results should be ready by the end of 2010. the end of 2010.

• Build EU intellectual capital model, which will offer a strategic Build EU intellectual capital model, which will offer a strategic framework for the future EU policy evaluation. Cascade this model framework for the future EU policy evaluation. Cascade this model down to member states. It will ensure that the same policy language down to member states. It will ensure that the same policy language – connected to EU citizens – is spoken at all EU governance levels.– connected to EU citizens – is spoken at all EU governance levels.

• Take seriously Albert Einstein statement: “Not everything you count Take seriously Albert Einstein statement: “Not everything you count counts; not everything that counts is counted”. Stop counting cows counts; not everything that counts is counted”. Stop counting cows and start measuring the quality of intangible assets.and start measuring the quality of intangible assets.

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