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| D6: | The Economics of Knowledge Capital: Analysis of European Firms | ||
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By contrast, the custodianship of financial assets has become a well-defined discipline that depends on procedures and regulations on how to account for and report these resources. Over a period of many years, an elaborate framework involving accountants, auditors, reporting standards and government oversight has been developed to do that.
What has changed now is the discovery that the financial assets of corporations represent only a portion of the total corporate assets. In many cases the valuation of the financial assets is dwarfed by the implied valuation of its knowledge assets. As society evolves from an industrial model how an economy functions to an information based economy, knowledge assets become increasingly important.
Financial executives have shown a remarkable reluctance to put numbers on something many consider to be intangible. However, with the rising importance of non-financial assets the time has come to place the management of knowledge on the agenda of executive managers, financial analysts and shareholders. To that end, one must start by developing an independently verifiable quantification of the worth of knowledge assets.
Knowledge capital can be calculated because it reveals itself as the most important contributory influence in explaining how a firm earns its profits in excess of its cost of financial capital. The allocation of the respective contributions of knowledge capital and financial capital to profits can be made if one recognizes that financial capital is now a commodity - readily available at a price that reflects the interest rate that a firm pays for its borrowings, the price a shareholder can earn for an investment made at a lower risk. However, what makes a company prosper is not financial capital - which anyone can obtain for a price - but the effectiveness with which knowledge capital is put to use. Therefore, the annual returns realized on knowledge capital can be isolated after paying a "rental" for the financial capital and then subtracting that amount from profits as reported by the accountants.
What remains is what economists call an "economic profit" and what some consultants call the "economic value-added." I label that residual as the "knowledge value-added" because it accounts for those missing elements that represent everything not shown on a conventional balance sheet. By filtering out the contributions of financial capital from the reported profits, we are left with a residual that is entirely attributable to what knowledge capital has actually delivered. In other words, knowledge value-added is the annual yield a firm realizes from its knowledge capital assets.
Once you know the yield from a capital asset, calculating the value of its principal is straightforward. All you have to do is to divide the value of knowledge value-added by the costs of that capital and you get a verifiable and independently reproducible worth of a firm's knowledge capital.
To provide an overview of Knowledge Capital® in Europe is a vast undertaking. Such a study would have to cover issues related to economic growth, corporate structure, the costs of capital and the rates at which various firms have demonstrated a consistent capability of accumulating Knowledge Capital in preference to financial assets.
This report should be seen as a first installment in a more comprehensive effort to map the characteristics of Knowledge Capital formation in Europe. This study comes in two parts.
Part I examines the overall characteristics of the distribution of Knowledge Capital without dwelling in greater detail into the relationships and trends that lead to its influence of corporate profitability and long term viability. The financial statistics are expressed in terms of Euros currency to reflect the plans to apply similar analyses to other European countries for comparability. All information cited herein is available form public sources and reflects results of audited financial reports for public corporations, as tabulated by the Standard & Poor's Global financial services databases.
Part II examines some of the patterns of Knowledge Capital of the U.K. economy. The corporate population covered includes detailed data about 1,152 U.K firms with a total workforce of 7.1 million which represents a large share of what I term as the engines of knowledge capital creation. Similar analyses will be prepared for other European countries in due course.
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