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Thought Leadership


Intellectual Capital-India's hidden wealth

The Hindu, Monday March 27, 2006
Intangibles are scoring over physical assets

Corporate leaders are looking for tools to monitor the Intellectual Capital of their organizations.

KNOWLEDGE BUILDING: Students acquiring knowledge through satellite based education in India. – FILE PHOTO
WHILE ACKNOWLEDGING that foreign direct investment (FDI) and infrastructure contributed in a large measure to China's blistering growth, economists are beginning to express concern over the efficiency with which this capital is being used. They are also beginning to recognize that India makes much better use of its overall capital.

In a recent article in Financial Times, Yasheng Huang points out that in 2003 and 2004, China was investing 50 per cent of its GDP in plant and equipment — a rate twice that of India. Yet, in the period April-June 2005, by which time this investment would have started showing results, India's GDP grew at 8.1 per cent, not too far behind China's 9 per cent. The author also points out that during 2001- 05, the Shanghai stock market index dropped from 2200 points to 1135 points. In the same period, India's main stock market index zoomed from 2500 points to 10000! Not too difficult to conclude that the growth rate of wealth in India in recent years has been higher than in China. The secret: the ability of India's thought capital, or Intellectual Capital, to unleash human potential resulting in more efficient use of physical capital.

Take another interesting article by Andy Gessler in Wall Street Journal in December 2004. He says that at a time when economists were concerned about the mounting trade deficit in the U.S. and when the outsourcing of iPod manufactures to China alone resulted in a $1.5 million trade deficit, Apple added $16 billion to the wealth in the U.S. In this piece aptly titled "we think, they sweat", he points out that "as we move to an intellectual property economy, our wealth will come from exporting our profitable designs and importing more finished goods".

Power of intangibles
Stock markets are more adept than economists and accountants in recognizing future value, which accounts for the apparently high multiples of market value to book value. In recent years, the value of financial assets has grown much more than that of physical assets evidencing that intangibles are growing in importance in their contribution to economic growth. It has also been empirically established that intangibles play a greater role than physical assets in creating future value.

The very rig our of economics and accounting has, however, prevented these disciplines from measuring and quantifying intangibles. The measures that these disciplines use are primarily transaction based, reflect historic tangible performance and are designed to be conservative. Consequently neither balance sheets nor measures of national wealth reflect the true value of intangibles.

The primary job of both country and industry leaders is to maximize prosperity. Just as more country leaders are using human metrics (education and health, for example) to measure progress, corporate leaders are looking for means that enable them to monitor and manage the intellectual capital of their organizations and take appropriate decisions in critical areas such as resource allocation. Not surprisingly, discussions on metrics and tools that can measure and monitor intangible assets like human capital, brands and processes are occupying centre stage at boardrooms from Manhattan to Mumbai.

The management of intellectual capital of corporations is a developing science. While the balanced scorecard methodology implicitly recognizes the need for going beyond financial metrics, other methodologies such as IC Rating, developed by Sweden's Intellectual Capital AB, based on concepts of Leif Edvinsson, go a step further and focus exclusively on Intellectual Capital.

A good method for Intellectual Capital measurement covers all aspects of intellectual capital and their interplay, rather than focusing on just human capital valuation or brand value as some measures are apt to do. While human resources, brand and R&D are the intangibles that first come to mind and are therefore easily understood, other forms such as quality of networks, customers and processes are equally important. Most important is to assess how well all of these elements are working together to create present and future value. It is hoped that in the years to come, progressive Indian corporations will commence formally managing their Intellectual Capital for enhancing shareholder value.

S. R. GOPALAN Founder, Bizworth India Private Limited. srg@bizworth.net

For more information contact SR Gopalan at +91 80 41142626
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