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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 (Commonwealth English The use of the English language English is a of the , originally spoken by the inhabitants of . It is named after the , one of the ancient that migrated from , a peninsu ...

organization
), covering the competencies of its people (
human capital Human capital is a concept used by human resource professionals to designate personal attributes considered useful in the production process. It encompasses employee knowledge Knowledge is a familiarity or awareness, of someone or somet ...

human capital
), the value relating to its relationships (
relational capital Relational capital is one of the three primary components of intellectual capitalIntellectual 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 ( organ ...
), and everything that is left when the
employees Employment is the relationship between two parties Image:'Hip, Hip, Hurrah! Artist Festival at Skagen', by Peder Severin Krøyer (1888) Demisted with DXO PhotoLab Clearview; cropped away black border edge.jpg, 300px, ''Hip, Hip, Hurrah!'' ...

employees
go home (
structural capitalStructural 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 o ...
), of which
intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner o ...
(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 In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economi ...
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 is a familiarity or awareness, of someone or something, such as facts A fact is something that is truth, true. The usual test for a statement of fact is verifiability—that is whether it can be demonstrated to correspond to e ...
via
knowledge management Knowledge management (KM) is the collection of methods relating to creating, sharing, using and managing the knowledge Knowledge is a familiarity or awareness, of someone or something, such as facts A fact is something that is truth, ...

knowledge management
and
intellectual capital managementIntellectual capitalIntellectual 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), covering the competencies of its people (human capit ...
(ICM). Creating, shaping and updating the stock of intellectual capital requires the formulation of a
strategic vision
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 Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a Market (economics), competitive ...
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 The knowledge economy (or the knowledge-based economy) is an economic system An economic system, or economic order, is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of ru ...
and
Information Age#REDIRECT Information Age The Information Age (also known as the Computer Age, Digital Age, or New Media Age) is a historical periodHuman history is commonly divided into three main Era, eras — Ancient history, Ancient, Post-classical history, ...
. Understanding the intellectual capital in an enterprise allows leveraging of its intellectual assets. For a corporation, the result will optimize its
stock price A share price is the price of a single Share (finance), share of a number of saleable share capital, equity shares of a company. In layman's terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount ...
. The
IFRS International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus a ...
(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 Human capital is a concept used by human resource professionals to designate personal attributes considered useful in the production process. It encompasses employee knowledge Knowledge is a familiarity or awareness, of someone or somet ...

Human capital
, the value that the employees of a business provide through the application of
skill A skill is the learned ability to perform an action with determined results with good execution often within a given amount of time, energy, or both. Skills can often be divided into Departmentalization, domain-general and domain-specific skills. ...
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 smarts ...
and
expertise An expert is somebody who has a broad and deep understanding Understanding is a psychological process related to an abstract or physical thing, such as a person, situation, or message whereby one is able to use concepts to model that thing ...

expertise
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 Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner o ...
. 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 An organization, or organisation (Commonwealth English The use of the English language English is a West Germanic languages, West Germanic language first spok ...

management
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 In common usage and in philosophy Philosophy (from , ) is the study of general and fundamental questions, suc ...

creativity
and
Innovation Innovation is the practical implementation of ideas A mental representation (or cognitive representation), in philosophy of mind Philosophy of mind is a branch of philosophy that studies the ontology and nature of the mind and its relation ...

Innovation
. *
Structural capitalStructural 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 o ...
, the supportive non-physical infrastructure, processes and
database In computing Computing is any goal-oriented activity requiring, benefiting from, or creating computing machinery. It includes the study and experimentation of algorithmic processes and development of both computer hardware , hardware and sof ...

database
s of the organisation that enable human capital to function Structural capital includes processes,
patent A patent is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depe ...

patent
s, and
trademark A trademark (also written trade mark or trade-mark) is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also r ...

trademark
s, as well as the organization's image,
organization An organization, or organisation (Commonwealth English The use of the English language English is a of the , originally spoken by the inhabitants of . It is named after the , one of the ancient that migrated from , a peninsu ...
,
information system An information system (IS) is a formal, sociotechnical, organizational system designed to collect, process, information storage, store, and information distribution, distribute information. From a sociotechnical perspective, information systems ar ...
, and proprietary
software Software is a collection of instructions Instruction or instructions may refer to: Computing * Instruction, one operation of a processor within a computer architecture instruction set * Computer program, a collection of instructions Music * I ...

software
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 Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner o ...
such as patents, trademarks and
copyright Copyright is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. ...

copyright
s, and intangible assets. Intellectual properties are protected commercial rights such as patents,
trade secret Trade secrets are a type of intellectual property that comprise formulas, best practice, practices, business process, processes, designs, legal instrument, instruments, patterns, or compilations of information that have inherent economic value be ...
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 capitalIntellectual 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 ( organ ...
, consisting of such elements as
customer In sales Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale. The seller, or the provider of the goods or services, comple ...

customer
relationships, supplier relationships, trademarks and
trade name A trade name, trading name, or business name is a pseudonym A pseudonym () (originally: ψευδώνυμος in Greek) or alias () is a fictitious name that a person or group assumes for a particular purpose, which differs from their original ...
s (which have value only by virtue of customer relationships), , 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 pro ...
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 Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depe ...

patent
s,
copyright Copyright is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. ...

copyright
s, and
trade secret Trade secrets are a type of intellectual property that comprise formulas, best practice, practices, business process, processes, designs, legal instrument, instruments, patterns, or compilations of information that have inherent economic value be ...
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 the labour Labour or labor may refer to: * Childbirth Childbirth, also known as labour or delivery, is the ending of pregnancy where one or more babies leaves the uterus by passing through the vagina or ...
-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 In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of fin ...
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 Knowledge is a familiarity or awareness, of someone or something, such as facts A fact is something that is truth, ...

knowledge management
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 A subsidiary, subsidiary company or daughter company is a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture o ...
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 jurisdict ...
.


Measurement

An intellectual capital audit is an
audit An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditin ...

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) {{Cat main This category is about the Capital (economics), economic concept of capital; for capital cities, see :Capitals, Capitals; other uses, see Capital (disambiguation). Factors of production Capitalism ...
Intellectual property law