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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), covering the competencies of its people ( human capital), the value relating to its relationships ( relational capital), and everything that is left when the
employees Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and gover ...
go home ( structural capital), 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 ...
(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 assets 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 awareness of facts or as practical skills, and may also refer to familiarity with objects or situations. Knowledge of facts, also called propositional knowledge, is often defined as true belief that is dist ...
via
knowledge management Knowledge management (KM) is the collection of methods relating to creating, sharing, using and managing the knowledge Knowledge can be defined as awareness of facts or as practical skills, and may also refer to familiarity with obj ...
and intellectual capital management (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 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 in which the production of goods and services is based principally on knowledge-intensive activities that contribute to advancement in technical and scientific in ...
and
Information Age The Information Age (also known as the Computer Age, Digital Age, Silicon Age, or New Media Age) is a historical period Human history, also called world history, is the narrative of human Humans (''Homo sapiens'') are the most ab ...
. 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) 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 ...
s, know-how and 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 ...
. 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 Business is the practice of making one's living or making money by producing or buying and selling products (such as goods and services). It is ...
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 scientific theory is an explanation of an aspect of the natural world and universe that has ...
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 en ...
. * Structural capital, 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 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 o ...
s, as well as the organization's image, organization, information system, and proprietary
software Software is a set of computer programs and associated documentation and data. This is in contrast to hardware, from which the system is built and which actually performs the work. At the lowest programming level, executable code consis ...
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 ...
such as patents, trademarks and
copyright A 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 themselv ...
s, and intangible assets. Intellectual properties are protected commercial rights such as patents, trade secrets, copyrights and trademarks. Intangible assets are all of the other talents and theory by which an organization is run. * Relational capital, 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 ...
s (which have value only by virtue of customer relationships), licences, and
franchises Franchise may refer to: Business and law * Franchising Franchising is based on a marketing concept which can be adopted by an organization as a strategy for business expansion. Where implemented, a franchisor licenses some or all of i ...
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 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 themselv ...
s, and trade secrets, 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-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 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 can be defined as awareness of facts or as practical skills, and may also refer to familiarity with obj ...
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.


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