Towards a Knowledge Economy

Today politicians, academics, journalists and entrepreneurs often refer to the knowledge economy. It is relevant to remember that although this might seem as a new buzz phrase it is far from a new phenomenon. In the influential book The Age of Discontinuity, Peter Drucker explains that the knowledge economy has gradually developed since early industrialism. Systematic use of knowledge in business was for example evident already among British toolmakers in the early 19th century. In contrast to traditional smiths, whose craftsmanship varied significantly in quality, the British toolmakers developed detailed plans for how each product would be developed. Thus it became possible for them to move towards a standardized production through which each tool produced was given the same measures and function. These tools were in turned used to build the early factories of the industrialized world, which made possible standardized manufacturing in larger scale.

This combined focus on skill development amongst the employees and investments in immaterial knowledge capital amongst organizations was quite unique in the early 19th century, but has since become a key part of the operations of many modern enterprises

The transition towards the knowledge intensive economy can be said to have occurred through two closely related trends. The first is that the skill sets and knowledge of individual workers have increased. The second is that enterprises and other organizations increasingly have been investing in various forms of knowledge capital. The toolmakers of the early 19th century Britain exemplify both trends. They were highly qualified experts with specialist knowledge about the cutting edge technology of the time. In addition, they worked in businesses where specific designs were produced for the products that were to be manufactured, while detailed plans were set up regarding how the work was to be conducted. Research and development continuously occurred in order to improve the products and the work procedures. The tools that were being manufactured where physical products, but the knowledge of how to produce them was an early form of immaterial investment in knowledge. This combined focus on skill development amongst the employees and investments in immaterial knowledge capital amongst organizations was quite unique in the early 19th century, but has since become a key part of the operations of many modern enterprises.

Throughout Europe, a transition from poor agrarian societies to prosperous welfare nations has been made possible through an increased knowledge content in the economy. Successful businesses, which contribute considerable revenues to European countries, are often knowledge intensive. This is certainly true of the modern start-ups in Europe, whose creations largely is based on immaterial values. It is also true of the industrial firms which set the foundations for Europe’s wealth during the industrial era.

An illustrative example is the Swedish engineer Göran Fredrik Göransson who in 1857 bought the design for a new method of producing steel, two years earlier developed by British engineer Henry Bessemer. The early experiments to make the method to work in practice had failed. Göransson however managed to develop the Bassermethod so that it resulted in steel with good qualities, a highly demanded good at the time. This was the start of the industrial firm Sandvik, founded in 1862, which since continuously has been focused on research and development. The firm invests heavily in new ideas, illustrated by the fact that it was granted fully 800 new patents in 2014 alone.

Knowledge capital and physical capital co-operate to create growth

Knowledge capital and physical capital

Siemens – the German company that continues to push industrial development, smart energy and modern infrastructure around the world – was likewise founded on a new technology. Werner von Siemens and Johann Georg Halske founded the company in 1847. The pair developed the technology of the telegraph, at the time based on Morse code, so that it instead used a needle to point to the sequence of letters. This invention, which made the telegraph much easier to use, became the foundation for the company that throughout its history has been investing in new inventions. During recent years the firm has moved towards a number of innovations with environmental benefits, including improvements in clean energy provision, technologies for intelligent power grids and development of a system for comprehensive traffic management.

Unilever, the Anglo-Dutch multinational consumer goods company that is ranked amongst the most prosperous businesses in the world, can track its origins to 1872. In that year Antoon Jurgens founded the first margarine factory in the world in Oss, Netherlands. A new technology was used to produce a more affordable alternative to butter for the growing middle class. The margarine was promoted with ads stating that the product was both “economical” and “nourishing”; important values in times where many children in Europe were still malnourished. With time the firm would merge with other firms that used technological advancements in food production, such as fisheries, to form Unilever. Today the firm aims to help people improve their health and well-being with new food technologies, while reducing the environmental impact of food production.

Immaterial capital increasingly important

Immaterial capital increasingly important

Source: OECD (2013). “Supporting Investment in Knowledge Capital, Growth and Innovation”.

Yet another example is Renault, formed in France by Louis Renault and his brothers Marcel and Fernand. Louis was an aspiring young engineers who teamed up with his brothers, who had developed business skills working for their father’s textile firm. Together they developed their first car in 1898. Research and development in the firm has since focused ever more on increasing traffic safety, while reducing the environmental footprint of the cars.

Without knowledge investments Renault, Unilever, Siemens and Sandvik would not have grown to successful ventures. In today’s marketplace, immaterial value creation is even more important.

These early examples of industrial firms, developed many generations ago, owe their success to a combination of immaterial and material value creation. Without knowledge investments Renault, Unilever, Siemens and Sandvik would not have grown to successful ventures. In today’s marketplace, immaterial value creation is even more important. Fashion companies rely on design rights, software companies on program code, entertainment companies on digital recordings and specialized service firms on service innovations and novel business models in order to thrive. It is also increasingly important for firms to invest in trademarks, through which they signal social and economic responsibility.

The top ten list of the fastest growing private companies in Europe, compiled by business magazine Inc. in 2016, shows that the new successful firms are equally focused on new technologies and ideas. The number one spot for example goes to Spanish firm M P Vat Services, built upon the simple idea of creating new information technology tools, which simplify paying tolls and taxes for transport firms. The programs patented by the firm simplify trade throughout Europe, creating widespread societal benefits. The second spot goes to Latvian firm Creamfinance. The online consumer finance company uses scoring techniques to offer loans in a speedier way. Better use of information thus benefits both businesses and families in need of loan.

The third fastest growing business in Europe is German B2X Care Solutions. The global tech company providing customer care for smart phones and other electronic devices to manufacturers, insurance providers as well as carriers and retailers. The fourth fastest growing firm is Malta-based Co-Gaming, providing online-gaming. The fifth place goes to Leapp Group International, supplier of refurbished Apple products with stores in the Netherlands, Germany and Belgium as well as online. Next in line is Avicii Music, the production company behind Swedish electronic musician Tim Bergling, better known by his stage name Avicii, who recently retired. None of these businesses would have been able to thrive without innovative business ideas and without protection of the immaterial value production which is vital for them.

With time immaterial investments have gone from being important for a few innovative businesses to being of widespread importance for European enterprises. This is in line with international trends, wherein immaterial investments are increasingly important as a supplement to physical capital investments. As illustrated below, international statistics shows that immaterial assets have grown significantly during later years. In some economies, such as the UK and the US, such investments even exceed investments in physical capital. A general finding is that the more developed an economy is, the higher is the share of investments in immaterial values compared to physical ones. The result of the immaterial investments, so called intellectual property rights, play a key role for European businesses. This is supported by the data presented in this report.