Intangibles' Knowledge Diffusion Project II

On June 12, a new round of the Intangibles' Knowledge Diffusion Project starts at UFBA, Bahia. The first lecture will be held at 18:30 in room 20, 3rd floor of EA-UFBA (see lecture's invitation). Another lecture will be held at FTE - Faculdade de Tecnologia Empresarial - on June 14th, 19:00.

In this round, new features will be presented as Odebrecht's intellectual capital management proposal and the economic approach on intellectual capital creation.

Intangibles’ Knowledge Diffusion Project I

On March 13th, I had uttered the first lecture under the Intangibles Seminary Project. It occurred at UniverCidade – Campus Presidente Vargas, with an audience of more than 80 students and a few professors.

The first round of seminars is focused on the impact of intangibles’ investments in businesses’ value creation dynamics and tackles four general subjects: intangibles, intangible assets and intellectual capital; intangibles’ evidences and relevant research; the economics of intangibles and the economic perspective of intellectual capital management.

Although all subjects were treated in an oversimplified form, students had the opportunity to get in touch with the intangibles’ world and gave an unexpected feedback, posing relevant questions and trying to establish a link to diverse business’ contexts.

The “Intangible Assets and Businesses Value Creation Dynamics” seminar, is being offered, free of charge, to many universities in Rio de Janeiro and Bahia. Our objective is primarily to diffuse knowledge about intangibles’ management and economic assessment to graduate and post-graduate students as to motivate then to choose it as a new and relevant field of study.

Knowledge Management as a Strategic Choice

Firm’s knowledge management (KM) process and tools must be aligned to its competitive strategy: it depends on the way the company serves its clients, how it creates value and the people it hires. Choosing the wrong strategy can quickly undermine firms’ businesses.

According to Hansen et. al. (1999), companies can choose between a codification strategy and a personalization strategy. The first centers on the computer: knowledge is codified and stored in databases, where it can be easily accessed and used by anyone in the company. The latter motivates people to share knowledge mainly through direct contacts with others. Computers are used only to help people disseminate knowledge, not store it.

The choice between codification and personalization strategies determines how companies will generate value exploring economies of scale. The codification strategy pursues increases in efficiency and costs reductions through knowledge reutilization economies (supply-side economies of scale). Personalization focuses on enhancing the quality of the products/services offered by the firm, through the creation of newer and deeper knowledge. Network externalities (demand-side economies of scale) are generated as better products/services leads to new levels of client’s satisfaction.

As Ofek & Sarvary (2001: 1443) poses: “…the focus firms place on each form of increasing returns directly affects their competitive standing”. A deeper understanding of KM strategies and their impact on firm’s value creation can be harvested in the articles that follow:

HANSEN, M.T., Nohria, N. and Tierney, T. What’s Your Strategy for Managing Knowledge? Harvard Business Review, p. 106-116, March-April 1999.

OFEK, E. and Sarvary, M. Leveraging the Customer Base: Creating Competitive Advantage Through Knowledge Management. Management Science, vol. 47, no. 11, p. 1441-1456, November 2001.

IPRs' Economics

In California Management Review's last issue, Costello & Costello have done a very good job trying to develop a theoretical framework for the determinants of the level of definition of intellectual property rights (IPRs) over resources. Their model is based on the assumption that IPRs are defined to the extent that the benefits of definition exceeds the cost of definition.

The authors build the cost-benefit structure of IPR's definition based on five major economic attributes:

1. Capture costs and rent dissipation created by non-exclusivity (non-excludability);

2. Exchange and policing costs;

3. Cost of reduced ivestment created by non-exclusivity;

4. Exchange value of resource;

5. Social costs of exclusivity.

Costello & Costello's framework indicates that stricter enforcement of IPRs may not always be in the best interests of the firm. They conclude that knowledge-based resources' enforcement efforts diminish in result of its particular economic attributes.

COSTELLO, Ayse O. and Costello, Thomas G., "Defining Property Rights: The Case of Knowledge-Based Resources". California Management Review, Berkley (CA), vol. 47, no. 3, Spring 2005.

Technology changes, economic laws do not

The assertion above, contained in the introduction of Varian & Shapiro's book "Information Rules" (1999), is the tone of The Economist's survey on the new economy of September 21st, 2000. The report called "Untangling e-conomics" (look at the right sidebar on Documents & Reports) describes the economic benefits of new information technologies, but poses questions to the more optimistic observers in regard of its magnitude and impact on economic growth.

The Soft Revolution

Paul Romer is one of the major precursors of the new growth theory. Intangible assets underlie Romer's ideas. They are what he calls software. The title of this post replicate Romer's marvelous essay on the ideas behind the new growth theory. In this paper, Romer starts with an astonishing question: If the quantity of raw materials on earth has not changed over time, how could it be that we have more total wealth per person than we have ever had before?

Romer argues that the answer to this increase in wealth lies on human's capacity to rearrange things to make then more useful and valuable. This paper is worth reading for those who want to understand the role of intangibles on economic and corporate growth! See: "The Soft Revolution". In: Journal of Applied Corporate Finance, Summer 1998.

Toward a New Economic Approach

In the 1990s, Americans' savings rate fell badly, but their wealth increased at an astonishing pace. What underlies this economic paradox?

This question was posed by Leonard Nakamura in his 4Q 2001 PhilyFed Business Review article. Nakamura concludes that the divergence between saving and wealth gains derive from capital gain's treatment in the U.S. national income accounts. As U.S. corporations retained more of their earnings in the form of intangible investments, dividend payments slumped together with investor's wealth (only dividends and interest payments are accountable for investment income, capital gains are excluded). Nakamura's study also elaborates on the importance and magnitude of intangible investments in the U.S. economy and their potential impact on national accounts.

Nakamura's wonderful body of work on the intangible economy is a necessary first step for those who wish to understand intangibles' role in today's economy and businesses. A fundamental reference is his work on U.S. intangible investments (download it!), where he presents preliminary direct and indirect empirical evidence that U.S. private firms currently invest at least USD 1 trillion annually in intangibles, almost the same amount as in plant and equipment.

We provide a link to Leonard Nakamura's homepage in the right sidebar, where you can download most of his work related to intangibles' impact in the U.S. economy.

IPR LIMITS III

For a deeper understanding on IPR’s social benefits and costs, look up the recent work of Paul A. David and the discussion elaborated in David & Foray’s article. Below, we provide a link to David´s World Bank presentation.

DAVID, P. A. and Foray, D., “Economic Fundamentals of the Knowledge Society”. Policy Futures in Education – An e-Journal, Special Issue: “Education and the Knowledge Economy”, January 2003.

DASGUPTA, P. and David, P.A., “Towards a New Economics of Science”. Research Policy, no. 23, 1994, pp. 487-521.

DAVID, P. A., “The Digital Technology Boomerang: New Intellectual Property Rights Threaten Global”. Open Science, [Presented to World Bank ABCDE-Europe 2000, Paris, 26-28 June.], 2000.

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