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
An organization or organisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -ization), see spelling differences), is an legal entity, entity—such as ...
), covering the competencies of its people (
human capital), the value relating to its relationships (
relational capital
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, pr ...
), and everything that is left when the
employees go home (
structural capital 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 ...
),
of which
intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
(IP) is but one component. It is the sum of everything everybody in a company knows that gives it a competitive edge.
The term is used in academia in an attempt to account for the value of
intangible asset
An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software. This is in contrast to physical assets (machinery, buildings, etc.) and fin ...
s not listed explicitly on a company's
balance sheets.
On a national level, intellectual capital refers to national intangible capital (NIC).
A second meaning that is used in academia and was adopted in large corporations is focused on the recycling of
knowledge
Knowledge can be defined as Descriptive knowledge, awareness of facts or as Procedural knowledge, practical skills, and may also refer to Knowledge by acquaintance, familiarity with objects or situations. Knowledge of facts, also called pro ...
via
knowledge management
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 organisational objectives by making ...
and
intellectual capital management 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 ...
(ICM).
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.
Intellectual capital is used in assessing the wealth of organizations.
[ A metric for the value of intellectual capital is the amount by which the ]enterprise value Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business (i.e. as distinct from market price). It is a sum of claims by all claimants: creditors (secured and unsecured) ...
of a firm exceeds the value of its tangible (physical and financial) assets. 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. 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
The Information Age (also known as the Computer Age, Digital Age, Silicon Age, or New Media Age) is a historical period that began in the mid-20th century. It is characterized by a rapid shift from traditional industries, as established during ...
. Understanding the intellectual capital in an enterprise allows leveraging of its intellectual assets.[ For a corporation, the result will optimize its stock price.
The ]IFRS
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's fina ...
(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:
* Human capital, the value that the employees of a business provide through the application of skill
A skill is the learned ability to act with determined results with good execution 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 wo ...
s, know-how
Know-how (or knowhow, or procedural knowledge) is a term for practical knowledge on how to accomplish something, as opposed to "know-what" (facts), "know-why" (science), or "know-who" (communication). It is also often referred to as street smar ...
and expertise
An expert is somebody who has a broad and deep understanding and competence in terms of knowledge, skill and experience through practice and education in a particular field. Informally, an expert is someone widely recognized as a reliable s ...
Human capital is an organization's combined human capability for solving business problems and exploiting its intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
. Human capital is inherent in people and cannot be owned by an organization. Therefore, human capital can leave an organization when people leave, and if the management
Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a Government agency, government body. It is the art and science of managing resources of the business.
Management includ ...
has failed to provide a setting where others can pick up their know-how. Human capital also encompasses how effectively an organization uses its people resources as measured by creativity
Creativity is a phenomenon whereby something new and valuable is formed. The created item may be intangible (such as an idea, a scientific theory, a musical composition, or a joke) or a physical object (such as an invention, a printed Literature ...
and Innovation
Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entit ...
.
*Structural capital 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 ...
, the supportive non-physical infrastructure, processes and database
In computing, a database is an organized collection of data stored and accessed electronically. Small databases can be stored on a file system, while large databases are hosted on computer clusters or cloud storage. The design of databases s ...
s of the organisation that enable human capital to function Structural capital includes processes, patent
A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A ...
s, and trademark
A trademark (also written trade mark or trade-mark) is a type of intellectual property consisting of a recognizable sign, design, or expression that identifies products or services from a particular source and distinguishes them from othe ...
s, as well as the organization's image, organization
An organization or organisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -ization), see spelling differences), is an legal entity, entity—such as ...
, information system
An information system (IS) is a formal, sociotechnical, organizational system designed to collect, process, store, and distribute information. From a sociotechnical perspective, information systems are composed by four components: task, people ...
, and proprietary software
Software is a set of computer programs and associated software documentation, documentation and data (computing), data. This is in contrast to Computer hardware, hardware, from which the system is built and which actually performs the work.
...
and databases. Because of its diverse components, structural capital can be classified further into organization, process and innovation capital. Organizational capital includes the organization philosophy and systems for leveraging the organization's capability. Process capital includes the techniques, procedures, and programs that implement and enhance the delivery of goods and services. Innovation capital includes intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
such as patents, trademarks and copyright
A copyright is a type of intellectual property that gives its owner the exclusive right to copy, distribute, adapt, display, and perform a creative work, usually for a limited time. The creative work may be in a literary, artistic, educatio ...
s, and intangible assets.[ Intellectual properties are protected commercial rights such as patents, ]trade secret
Trade secrets are a type of intellectual property that includes formulas, practices, processes, designs, instruments, patterns, or compilations of information that have inherent economic value because they are not generally known or readily ...
s, copyrights and trademarks. Intangible assets are all of the other talents and theory by which an organization is run.
*Relational capital
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, pr ...
, consisting of such elements as customer relationships, supplier relationships, trademarks and trade name
A trade name, trading name, or business name, is a pseudonym used by companies that do not operate under their registered company name. The term for this type of alternative name is a "fictitious" business name. Registering the fictitious name w ...
s (which have value only by virtue of customer relationships), licences, and franchises
Franchise may refer to:
Business and law
* Franchising, a business method that involves licensing of trademarks and methods of doing business to franchisees
* Franchise, a privilege to operate a type of business such as a cable television ...
The notion that customer capital is separate from human and structural capital indicates its central importance to an organization's worth. The value of the relationships a business maintains with its customers and suppliers is also referred as goodwill, but often poorly booked in corporate accounts, because of accounting rules.
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.[ 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. 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.][
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.
]
Exploitation
The management of intellectual capital is conceptualised as occurring via a multiple stage process, governed by an evolutionary logic.[ For a business, translating the potential of its intellectual capital is crucial. Works that focus on the subset, namely the ]patent
A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A ...
s, copyright
A copyright is a type of intellectual property that gives its owner the exclusive right to copy, distribute, adapt, display, and perform a creative work, usually for a limited time. The creative work may be in a literary, artistic, educatio ...
s, and trade secret
Trade secrets are a type of intellectual property that includes formulas, practices, processes, designs, instruments, patterns, or compilations of information that have inherent economic value because they are not generally known or readily ...
s, ignore the benefits of their use with the business. Other terms include "intangible assets". While corporate reports often stress the value and the know-how of its staff, this crucial asset cannot be considered property. The term "workforce
The workforce or labour force is a concept referring to the pool of human beings either in employment or in unemployment. It is generally used to describe those working for a single company or industry, but can also apply to a geographic reg ...
-in-place" can be used as a category when companies with their staff are purchased. Without that category, most of the excess purchase price over the tangible book value
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. T ...
would just appear as goodwill. In order to profit from intellectual capital, knowledge management
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 organisational objectives by making ...
has become a task for management. Often, intellectual capital, or at least rights to it, are moved off-shore for exploitation, which entails risks that are hard to value.[ The transfer of rights to intellectual capital to offshore subsidiaries is a major enabler of ]corporate tax avoidance
Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdic ...
.
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.[
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.
]
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.
References
{{DEFAULTSORT:Intellectual Capital
Capital (economics)
Intellectual property law