The links between R&D, technological change, and economic growth have been demonstrated theoretically and have also been empirically established at the firm, industry and national levels.
In particular, R&D has led to subsequent gains in productivity, earnings, and shareholder value. The findings suggest that the R&D and technological change expenditures may help drive economic growth, and that these expenditures should be capitalized in order to present a better, cumulative, picture of the totality of a firm’s assets that may help drive the future growth of the firm.
Being more practical, economy is driven by what enables business or industry to generate revenue and to secure a competitive position in the market.
August 31, 1928: The Gold Dust Corporation presented a balance sheet in which Goodwill was carried at one dollar (an accepted practice at that time) and Land, Buildings & Equipment were also carried at one dollar. The annual report contained the following:
In view of the available surplus, and of the fact that the corporation carries its most valuable asset, viz, its goodwill at US$ 1, and also because of the uncertain market value of industrial plants, it was concluded that it would be entirely appropriate for the corporation to carry its plants in a similar manner as its goodwill, viz., at the nominal value of US$ 1.
It would appear that when it comes to the recording of intangibles, very little has changed in the past 80 years. What has changed is the dollar amount of unrecorded intangibles.
Knowledge capital estimates by 2000 for Microsoft were US$ 211 billion, Intel, US$ 170 billion, GE, US$ 112 billion, and Merck US$ 110 billion, to name just a few. As Statement of Financial Accounting Standards No. 142 states:
Analysts and other users of financial statements, as well as company managements, noted that intangible assets are increasingly important economic resources for many entities and are an increasing proportion of the assets acquired in many transactions. As a result, better information about intangible assets was needed. Even though, this need was highlighted, there are not many success stories of organizations that capitalized on intellectual capital - the asset of the knowledge economy. It is an economy, where knowledge and technology has the highest value as a business asset based on which the organization’s commercial success depends on. This led to the emergence of the new booming field of Intellectual Capital Management (ICM) or as often called as Intangibles Asset Management. ICM is concerned with the management of ideas, knowledge, innovation and practices, in addition to inventions, patents, trademarks, copyrights, and other intellectual property rights.
The majority of corporate shareholder value today is created by intangible assets or Intellectual Capital Assets (ICAs). Most companies are incapable of properly managing these critical assets. State of the art accounting systems do not permit senior management to measure nor develop growth strategies based on the performance of their intangible assets. Clearly what is missing is optimization of methodologies that will measure the effectiveness of capital use for Intellectual Capital Assets.
However, no specific strategy seems to be widely consolidated for supporting the assessment process of organizational knowledge. Existing business models designed for the management of tangible and financial assets (often called Asset Management) are ineffective at managing the intellectual capital of an organization where such intangible assets (human, knowledge, and innovation) exist.
The Knowledge management (KM) approach has been implemented in the past, with mixed results. One reason of failure is that these projects often rely on a top down scheme. The dedicated knowledge management staff lacks subject expertise in the material they are interpreting, which leads in results in knowledge that lacks similarity to the original meaning. Another factor that leads to unsatisfactory results, often seen, is that many knowledge management solutions require a classification and categorization of information. This “structural” approach causes knowledge to be lost or misrepresented.
The shift of focus towards economic driven software engineering research - EDSER workshops are a representative example http://www.cs.virginia.edu/~sullivan/edser3/ - positively affect the field of ICM, as has been enriched by knowledge management approaches that blend traditional software engineering practices with financial models aim to provide Knowledge Audits.
The first attempts shown, employed Balanced Scorecard classification schemes of the business objectives and goals or Intellectual Capital Assets (ICA) representation models.
This was a step forward and a breakthrough in the traditional management way of thinking, as for the first time the reasoning behind business strategies was knowledge assets directly related to financial growth and ROI. Current approaches adopt more financial concepts as those of Portfolio Management and of Real Options promising to better capture the hidden value of knowledge and to increase the transparency between knowledge management and financial reporting.
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