From quantity to sustainable quality Increasing intellectual capital: can this objective guide policy development and can it be measured Warsaw, 30 November 2009 Prof. dr hab. Krzysztof Rybinski Warsaw School of Economics and Ernst & Young Email: rybinski@rybinski.eu Blog: www.rybinski.eu

Not everything you count counts; not everything that counts is counted Albert Einstein

Paper structure (1) Why GDP as a measure of country/region development fails to capture the most important aspects of country and regional development in XXI century? How to create a policy evaluation metric that can be easily understood by citizens and engages citizens in a lively debate about policy outcomes? Can intellectual capital methodology be a useful policy evaluation metric: brief history and recent applications to countries, regions, cities, universities and companies. Can evaluation methodology be transformed/expanded to include intellectual capital of countries/regions?

Paper structure (2) Can Europe gain competitive edge in the global knowledge economy by adopting intellectual capital framework in policy planning and evaluation? Can future Cohesion policy be based on intellectual capital? Will it help to integrate new Cohesion policy with post-Lisbon agenda? Intellectual capital as a tool to generate new strategic momentum for policies in the new financial perspective after 2013.

Disconnect EU citizen Source: Eurorometer, June-July 2009

Example: www.gapminder.org

Intellectual capital: brief history Late 1980s – early attempts to create intellectual capital statements. Karl Sveiby’s Intellectual Asset monitor was created. Sveiby used the term knowledge based assets which were divided into three categories: competence, external structure and internal structure. The model was used by several Scandinavian companies. Early 1990s – Pioneering initiatives to systematically report on intellectual capital to external parties. Skandia’s intellectual report dates back to 1994. Mid-1990s – several important books on intellectual capital are published: Sveiby (1997) Skandia (1994). Leif Edvinsson was appointed the first director of intellectual capital in Scandia in 1991

IC initially applied to companies Historically intellectual capital methodology was applied in the corporate sector, to explain the difference between market value and book value of a company listed on the stock exchange. This difference rose over time and was explained as a price, that investors put on corporate intangible assets, which cannot be precisely measured today but have potential to generate value for investors in the future. The branch of intellectual capital that deals with company intangible assets reporting is most developed and researched. In December 2008 European Financial Reporting Advisory Group (EFRAG) has invited comments on paper prepared by Australian Accounting Standards Board, which proposed future path of changing accounting standards to better measure corporate intangible assets

Company market value is driven by intangible assets

From 80/20 in 20th century to 20/80 in 21st century

IC: applications Measuring intellectual capital of countries (Israel, Poland, Sweden, Malaysia, Denmark, Finland, multinational study of 40 countries, benchmarking of Arab countries). Measuring intellectual capital of regions, cities and communities (Poland, Spain, Norway) Measuring intellectual capital of cities (Poland, Spain) Measuring and reporting intellectual capital of companies (Germany, Japan, Poland, Brazil) Measuring and reporting intellectual capital of universities (Austria, Poland, Sweden)

IC: definition for companies Intellectual Capital has been defined as the combination of an organization’s Human, Organizational and Relational resources and activities. It includes the knowledge, skills, experiences and abilities of the employees, its R&D activities, organizational routines, procedures, systems, databases and its Intellectual Property rights, as well as all of the resources linked to its external relationships; such as with its customers, suppliers, R&D partners, etc. Source: EU funded projects MERITUM and RICARDIS

IC: definition for a country (PL) Country intellectual capital is defined as stock of intangible assets held by people, companies, communities, regions and institutions. These assets, if properly used, can be source of present and future well-being of the country. Human capital refers to each individual competences, which includes education, experience, attitudes, skills, which can be used to improve present and future well-being of the country. Structural capital refers to existing national education and innovation infrastructure – learning institutions, research entities, ICT infrastructure, intellectual property. Social capital is defined by existing social norms, trust and social engagement, which through high quality relationships contributes to national well-being Relationship capital comprises country perception abroad, level of integration with global economy, country attractiveness for external clients – investors, trade partners, tourists. Source: Poland Intellectual Capital Report, 2008

IC: standards yet to be developed Brief review of intellectual capital methodology presented in my paper shows that there is no standard of measurement. Each country or scientist uses different definition, different set of indicators, basing on his/her subjective judgment. Therefore at this stage the intellectual capital methodology cannot be easily used for policy planning and evaluation as such. There are no commonly accepted standards and empirical evidence is scarce. However, as shown in the paper, the intellectual capital methodology and framework can be used to improve the EU evaluation and policy planning in the new financial perspective.

What should be measured? To put it in the simplest possible way. If you give money to farmers, you need excellent measurement system of number of cows and number of cultivated acres of land, to make sure that right people get the right amount of money. In order to succeed in the global knowledge economy the EU will have put a lot of resources into knowledge-based assets. Therefore it will be more important to be able to properly measure the number and quality of innovations or number of cooperation initiatives between university and business, than to measure the number and quality of land farms or livestock. So we need to develop simple and efficient measurement system to quantify intangibles, to make sure that significant funds are given to right people and to proper initiatives. Measurement of intangibles is precisely the area of research covered by the intellectual capital.

Proper measurement matters An obese man came to a doctor asking for help. What should I change, he asked. Should I stop eating some meals? Do not change anything, doctor replied. Simply every time you eat something take down a note in a special notebook, and then read it every evening. This man lost 10 kg within one month without any forceful change of his eating habits.

EU strategic focus European Union vision 2020, with strong focus on climate, energy security and innovation Fewer priorities, consistent with the EU vision and with the desired global role of the EU More flexibility Simplification Performance determined funds allocation and stronger conditionality

EU strategic planning process (1) Creating EU2020 vision statement and strategic goals, which should be in a SMART form (Specific, Measurable, Achievable, Relevant, Timely) Create proper metric to measure progress (e.g. green GDP, national/regional intellectual capital, etc.) Cascade strategic goals to countries and regions, the new measurement metric should be used to determine what will be country region contribution to achieving the EU strategic goals, and accordingly what resources will be needed Create and implement new conditionality rule, country that contributes more to achieving EU goals receives more funds, countries/regions that fail to perform receive less funds

EU strategic planning process (2) Initially allocate only small part of the envelope to particular countries or regions based on ex-ante evaluation of projects that lead to fulfillment of cascaded strategic goals Further disbursements of EU funds should be based on ex post evaluation of completed projects, successful activities should be strengthened, failing activities should be terminated. Local national or regional policies that do not contribute to EU strategic goals should be funded locally.

IC cities, city X Source: Rybinski, Wodecki (2008)

City X władze metropolii

City Y władze metropolii

IC: proposed policy evaluation model Source: proposal based on Rybinski, Wodecki (2008)

Four recommendations Connect to the EU citizen. Policy goals and statistical data should be reported in terms which are important to the EU citizen. Playing with data should be fun and easy, the good benchmark is offered by www.gapminder.org Start several projects of measuring intellectual capital of selected regions. Some 10-15 regions should suffice to account for the EU heterogeneity. If launched soon the first results should be ready by the end of 2010. Build EU intellectual capital model, which will offer a strategic framework for the future EU policy evaluation. Cascade this model down to member states. It will ensure that the same policy language – connected to EU citizens – is spoken at all EU governance levels. Take seriously Albert Einstein statement: “Not everything you count counts; not everything that counts is counted”. Stop counting cows and start measuring the quality of intangible assets.