Intellectual Capital Ratings of Nations and Economies

1. CHAPTER 8
The Intellectual Capital of Nations
Leif Edvinsson
Universal Networking Intellectual Capital (www.unic.net) and University of Lund, Sweden
Just as an organization’s value is a function of its intellectual capital, the wealth of a nation
– present and potential – is linked to its intellectual capital (IC). This chapter argues that it
is imperative for leaders to recognize and address the IC potentials of their nations. Issues
pertaining to consideration and reporting of a nation’s IC are outlined. Activities along
these lines in several nations are described.
Keywords: Financial Capital; Intellectual Capital; Longitude; Nations; Navigator;
1 Introduction
This chapter builds on what has been accomplished in understanding the intellec-
tual capital (IC) of organizations to develop an appreciation of the IC of nations.
Such an appreciation is important in addressing such questions as:
• What is the knowledge capital of your nation?
• What is the GDP per capita of your nation?
• What is the potential GDP per capita of your nation?
• What is the gap as a percentage?
• Which leader is in charge of bridging this gap of potential future wealth?
A seminal characterization of intellectual capital for organizations is as follows: it
is what an organization’s participants know that gives the organization a competi-
tive advantage relative to others in its marketplace (Stewart, 1991). In a similar
vein, IC is knowledge that can be applied to yield value (Edvinsson and Sullivan,
1996). IC can be seen as roughly accounting for the difference between an organi-
zation’s market value and its book value. Understanding, guaging, and cultivating
this difference is a major issue for leaders of organizations (and of nations). One
approach to doing so is found in the IC Navigator I developed at Skandia.
The Navigator is a management and reporting approach that furnishes a per-
spective encompassing both the financial capital and intellectual capital of an or-
ganization (Edvinsson and Malone, 1997; Edvinsson and Grafstrom, 1998). It is a
model that structures, packages, and measures IC as a guide for management and
knowledge worker activity. It sees IC as including human capital and structural
capital. The former involves the knowledge and skills of an organization’s partici-
pants. The latter concerns all other organizational capabilities and traits that sup-
port the work of these participants. As a structure for IC management, Navigator
C. W. Holsapple (ed.), Handbook on Knowledge Management 1
© Springer-Verlag Berlin Heidelberg 2004

2. 154 Leif Edvinsson
helps orient the setting of objectives and guide the performance of knowledge
workers in terms of five focus areas: financial, customer, human, process, and re-
newal/development. To these, it also adds global context.
The remainder of this chapter concentrates on the intellectual capital of nations
and adapts the Navigator model in doing so.
2 The New Wealth of Nations
“Only knowledge will give us the opportunity to create a better world with a
global economy in which we all will be able to share our limited resources in the
best ways,” says Lars Larsson of Ericsson. Former Oticon chief Lars Kolind poses
a simple challenge: “Find out how nations may develop their countries into com-
petence countries.” Still another challenge is to develop a map of regional intellec-
tual capital, instead of the old agricultural and industrial maps of societies, often
found in regional planning offices. The key mapping dimension should be situated
around the quest for finding Where is wealth created in our region/country?
A new political leadership agenda is evolving around the IC of nations with the
focus on:
• how to visualize IC of nations
• how to cultivate IC of nations
• how to capitalize into wealth of nations
According to the Organization for Economic Co-operation and Development
(OECD, 2001), the countries with knowledge-intensive activities will be the win-
ners of future wealth. In the OECD report, the 30 member countries are scored ac-
cording to IC investments such as R&D, education, patents, ICT, and so forth. As
summarized by the Financial Times and Dagens Industri, the list of top potentials
for future wealth looks like this:
1. Switzerland
2. Sweden
3. USA
4. Ireland
5. Netherlands
6. Hungary
7. Canada
8. Belgium
9. UK
10. South Korea
In the knowledge economy, the value of corporations, organizations, and indi-
viduals is directly related to their intellectual capital. But spread the net little wider
and you begin to understand the possibilities. Think of nations. If intangibles are
important to organizations, they are also important to the productivity and com-
petitiveness of individual nations. How can we understand the dynamics of intan-
gibles at work on a national scale? Can corporate longitude be translated into a
new perspective on national performance?

3. The Intellectual Capital of Nations 155
3 Corporate Longitude
The logic of corporate longitude is based on a little story from early 1700s
(Edvinsson, 2002). Then, the British Navy could not navigate with precision
east-west, but only north-south. Consequently, the 18th century ships were lost
in the fog, like today’s analysts of only financial capital. So today, we are facing
the problem of accounting in much the same way, as for example in the case of
Enron.
The problem of the longitude found its solution, not by the professionals in the
Navy, not by the academics at universities, but by a knowledge outsider – a
watchmaker by the name of John Harrison. He innovated the east-west measure-
ment approach that solved the longitude problem. To get a deeper understanding
of wealth creation, it is essential to have such a lateral perspective. The latitude of
stapling assets into a balance sheet, with a traditional bottom line is too narrow. A
lateral accounting is necessary to include the intangibles and the non-financial as-
sets of knowledge creation, networks, and relationships. The longitude logic is fo-
cused on sustainability, lateral, outside, and interactive value-creating dimensions
of intangibles. The new space of wealth of organizations, as well as nations, is in
the interaction space of human capital and structural capital resulting in financial
prosperity (see Figure 1). So, a nation’s wealth can be visualized in a map of both
financial wealth as well as intellectual capital. Furthermore, the elements of IC
form the enablers and drivers for financial wealth. So, from a leadership perspec-
tive, the strategic development focus should be on the IC components of a nation
(as illustrated in Figure 2 and described in section 4).
Currently, organizations as well as societies are like 18th
century ships charting
their positions with only north-south navigation tools. Plotting a course solely
from historical financial wealth reference points leaves them blind to the lateral
horizon’s opportunities and novel perspectives. Lost on a turbulent sea of change,
without a lateral navigation tool to guide them, they cannot navigate the uncharted
expanse of a networked world where value is derived primarily from intangible
rather than tangible assets.
Profit measurement and reporting systems emphasize efficiency and cost con-
trol, using money as the basis of decision making. This ongoing obsession with
planning and charting progress against tangible indicators of wealth will ulti-
mately impoverish society and devalue the wealth of nations, because they over-
look the contribution of intangibles. For example, public service sector activities
are automatically undervalued because there is no way to measure their contribu-
tion, so we lose talent from the system, because they search for more lucrative
openings elsewhere.
Adding value in the knowledge economy is inextricably linked to radical
change in both societal assumptions and business models. Capitalism may not
create value if it is obsessed with competition to the detriment of collaboration.
Social values must be re-considered in the light their value generation potential.
For example, allocating resources to education, health and social services, and
communication infrastructure should not be based on cost, but on the potential for
value creation through knowledge. If employment in private industry is only about

4. 156 Leif Edvinsson
External
Relations
Internal
Capacity
and IT
Renewal, Development & Innovation
Financial Perspective
Human Capital
Tangibles
Intangibles
Global Context
Figure 1. IC Navigator for Nations
25% of total potential mind value of the society, leveraging the rest of it more ef-
fectively depends on education and opportunity. Research suggests that educa-
tional systems have a high degree of explanatory value in national wealth rank-
ings, so efficient resource allocation would mean they should receive much larger
elements of funding than currently they do.
Infrastructure is extremely essential too. Think about which cities and countries
are truly poised for value creation? It won’t be those that isolate themselves, or
those with a poor communication infrastructure. Primarily, they will be ones that
are well connected, with an infrastructure designed to encourage access to the
knowledge and human resources that create new value. Arab countries tradition-
ally have relied on oil as the source of wealth, so intellectual capital represents
only 20% of their wealth. If they don’t start navigating for the future in terms of
renewal through education, making relationships with other countries, and infra-
structure for networking, then their wealth is set to decline.

5. The Intellectual Capital of Nations 157
4 IC Reporting of Nations
The evolution is in progress. IC reporting of nations is already happening. Indeed,
it was as long ago as 1986 that a voluntary pilot study was launched in Sweden to
look at intangible assets. National statistics now increasingly cover intangibles,
but they are mostly related to manufacturing companies with over 500 employees
(OECD, 2001).
Then, in 1987, a group met to discuss the area of intangibles. They met on Kon-
rad Day, 12 November, and became known as the Konrad Group. This group in-
cluded Karl-Erik Sveiby who soon went on to do pioneering research for his Ph.D.
and to write about customer capital, structural capital, and human capital as the
three categories of knowledge capital. From the Konrad Group emerged the proto-
typing work on intellectual capital at a corporate level at Skandia. At the same
time, another parallel cluster of IC pioneers emerged in the U.S.A. including,
among others, Debra Amidon, Tom Stewart, Larry Prusak, and Juanita Brown. In
1991, Skandia appointed me as the world’s first Director of IC to develop another
logic for the renewal of Skandia. Results of this work included a refined taxon-
omy, measurement and accounting systems for IC, as well as innovation systems
for IC.
In 1996, Sweden announced the “Year of Innovation” and the Skandia Future
Center was established. As leader of that Future Center, I invited Caroline Stenfelt
from the University of Stockholm and some student colleagues to prototype how
our work on IC at Skandia could be translated to a national stage (Edvinsson and
Stenfelt,, 1998; Rembe and ISA, 1999). The first IC of nations was born due to her
pioneering work, labelled as “Welfare and Security.” Later, she organized the
Vaxholm Summit – the First International Meeting on Visualizing and Measuring
the IC of nations, held in August 1998. As a result, the Swedish government
adapted Skandia’s Navigator to visualize its national intellectual capital. Later,
countries such as Israel, Holland and, in particular, Denmark, began to visualize
their respective intellectual capitals.
Sweden was an interesting nation on which to prototype this thinking. “Sweden
appears to be a showplace for the theory of intellectual entrepreneurship,” says the
country’s Invest in Sweden Agency, ISA.
The ISA was the first national investment organization to apply the latest
knowledge of intellectual capital to assess and compare national competitiveness
and performance. “Intellectual capital forms the root of a corporation – and of a
nation – that supplies the nourishment for future strength and growth. A new ana-
lytical method enables these previously unevaluated resources to be assessed and
compared. This can be an important tool for selecting an international location for
knowledge-based companies. Sweden offers highly attractive and competitive in-
tellectual capital assets – assets of superior value for leading edge companies,”
said ISA’s 1999 Annual Report.
In fact, the Skandia Navigator was easily translated from the corporate to na-
tional environment, yielding the structure shown in Figure 2. Its focuses remained
intact, but it covered a range of different issues:

6. 158 Leif Edvinsson
• Financial Focus including per capita GDP, national debt, the mean value
of the US dollar
• Market Focus including tourism statistics, standards of honesty, balance
of services, balance of trade, balance of trade in intellectual property
• Human Focus including quality of life, average age expectancy, infant
survival rate, health levels, education, level of education for immigrants,
crime rate, age statistics
• Process Focus including service-producing organizations, public con-
sumption as a percentage of GDP, business leadership, information tech-
nology such as personal computers connected by LAN’s, survivors in
traffic accidents, employment
• Renewal and Development Focus including R&D expenses as a percent-
age of GDP, number of genuine business start-ups, trademarks, factors
important to high school students.
As all the statistics on the country’s capital show, Sweden has embraced technol-
ogy with enthusiasm. According to one survey, Sweden is the leading IT country
in the world. This has not happened overnight. There has been long-term govern-
ment support for technology – tax-breaks for employees buying a computer, fol-
lowing on from initiatives such as free Internet access for students and earlier pro-
grams to give children access to PCs. It has shaped an infrastructure and structural
capital for future wealth.
One of the most striking IC elements in Swedish management is its interna-
tional networking perspective. When it comes to producing global companies,
Scandinavia is remarkably successful – the only worthwhile European comparisons
are with Switzerland and, perhaps, the Netherlands. Its companies transcend
boundaries in ways few others can manage. Internationalization is in the Swedish
genes. We are modern knowledge Vikings. Exports account for 40 percent of
Sweden’s GDP. In addition, Sweden has a positive trade balance in intellectual
property – indeed the value generated by music royalties is equivalent to the in-
comes generated by Saab. Sweden also has the highest rate of musical literacy.
Investments in intangibles constitute around 20 percent of GDP. According to the
above-mentioned OECD report in October 2001 Sweden is among the leading na-
tions in the knowledge-based economy. Sweden also has one of the highest R&D
per capita investments in the world.
Very interesting research in the area is being done by Nick Bontis. Based on the
above mentioned model and sponsored by the United Nations Development Pro-
gram, he and his colleagues have studied ten Arab States. In this study, he quanti-
fies the state of IC for these nations and launches an “IC Index for Nations” that
can be used for ranking as well as benchmarking learning between nations.
It is only by looking at such statistics through a holistic knowledge lens, like
the IC Navigator for nations, that they can make overall sense. Otherwise, they
appear to be idiosyncrasies. By looking at the IC wealth of nations rather than
standard measures of national competitiveness, we gain new insights into where a
country’s strengths and weaknesses might lie. We can then nourish social innova-
tion, society entrepreneurship, and social innovations (McElroy, 2000, 2002a,
2002b, 2002c).

7. The Intellectual Capital of Nations 159
National
Wealth
Financial
Wealth
Intellectual
Capital
Human
Capital
Structural
Capital
External
Relations
Capital
Domestic
Organizational
Capital
Innovation
Capital
Process
Capital
Other
Intangible Assets
Intellectual
Property
Figure 2. IC Value Scheme
In the Bontis research case, it can so far be concluded that the following ingredi-
ents, in the stated order, are key areas for the political agenda to shape the IC of
nations:
1. National agenda for Renewal, Research and Development (i.e., Innova-
tion Capital)
2. National agenda for Education (i.e., Human Capital)
3. National agenda for Foreign Trade (i.e., Relationship Capital)
4. National agenda for Industrial Productivity (i.e., Process Capital)
5 IC in the World
Sweden is not alone. At national levels, there is a great deal of activity in coming
to terms with the power of intangible assets and the rise of intellectual capital.
The Dutch Central Planning Office now has a Knowledge Economy Unit.
Dutch initiatives include long-term analysis of the role of knowledge in the Dutch
economy as well as other work on knowledge creation in networks and the avail-

8. 160 Leif Edvinsson
ability of human capital. See Dutch Central Planning Office at www.cpb.nl and
Statistics Netherlands www.cbs.nl.
The pan-European body Eurostat is taking the lead in developing statistical
tools and techniques that enable a more full understanding of the knowledge econ-
omy. “The transition from the industrial to the information society is characterized
by the rapid growth of intangible assets, whereas economic and social activity still
relies substantially on physical, tangible goods. The relation between the two has
to be defined and measured,” says Eurostat (2000).
In Israel, the country’s IC was published in 1998. Based on work of Edna
Pasher, in close collaboration with Caroline Stenfelt, a variety of alternative
measures have been added to those used in Sweden (Pasher, 1999). These include:
• external debt
• international events
• openness to different cultures
• language skills
• teaching effectiveness
• freedom of expression
• entrepreneurship
• risk-taking
• venture capital funds
• immigration and absorption
• women in the professional workforce,
• book publishing
• museum visits
• alcohol consumption
• scientific publications.
In Denmark progress is also being rapidly made. The country has long been at the
forefront in examining the role of intangibles. Copenhagen Business School’s Jan
Mouritsen has been working in the area for a number of years and has carried out
several surveys and literature studies (Mouritson et al., 2001).
At the beginning of 1998, Denmark launched a project looking at intellectual
accounting under the umbrella of its broader initiative “Ledelse, Organization og
Kompetence – LOK” which aimed to help transform Denmark from an industrial
to a knowledge economy. A special Competence Council was organized with Lars
Kolind as chairman. This has produced interesting work on Denmark’s position in
the new global knowledge competition. In 2000, the Danish government also pub-
lished guidelines for Intellectual Capital Statements – akin to those produced by
Skandia (Danish Ministry of Industry, 2001). A Danish law is now in progress to
support these various initiatives. In 2002, the Danish Ministry of Industry also in-
augurated a Future Centre called Mind Lab.
Intellectual capital is also making an impact in the Netherlands. Its Minister of
Economic Affairs recently observed: “The Netherlands is rapidly developing into
a knowledge-intensive economy… It is therefore strange that financial accounts
are dominated by information on buildings and machinery, in other words the

9. The Intellectual Capital of Nations 161
‘classical’ or physical production factors. The value of knowledge – the R&D
work, training, intellectual property, etc. – is not easy to identify in accounts. And
that is in fact the reason why young knowledge-intensive businesses in particular
have very great difficulty in finding external financiers.”
The Dutch government’s shift has been one from having an emphasis on tech-
nology to emphasizing innovation. In 1998, it published a report, “The Immeasur-
able Wealth of Knowledge,” which found that in excess of 35 percent of Dutch
national investments were of an intangible nature.
Another nation strongly transforming itself into the knowledge economy is
Singapore. It has renamed its Ministry of Labour the Ministry of Manpower as
well as spending decades building an impressive system of structural capital, es-
pecially for IT and telecommunications. The effect on wealth is highly visible.
Examining the intellectual wealth of nations is a major advancement. But fur-
ther challenges exist on a number of other fronts as the true impact of the knowl-
edge economy is beginning to be understood as a New Deal for New Wealth of
Nations. These are summarized in the remainder of this chapter.
5.1 Knowledge Communities and Societies
“Today we’re a society awash in networks, yet starved for community,” says Peter
Katz, author of The New Urbanism. True communities built around knowledge
are now emerging. Many of these are Web-based. In them, knowledge is free-
flowing, restlessly criss-crossing the globe all day long. Furthermore, it is these
infrastructures that can give leverage to human capital of societies. Unless we in-
novate and prototype such new structures and delivery systems for health, work
places, urban areas, and so forth, we might erode the important human capital and
get an increasing society cost for burn outs and brain stress.
5.2 Society Entrepreneurship
Society entrepreneurship is a new, interesting concept emerging in Norway,
among others (Nordisk Industrifond, 2002). It highlights a role for society renewal
that is in the space between business community and society. It is a space for col-
laborative prototyping based on the structural capital from each partner, but lever-
aged by the individual human capital and innovative talent. The challenge is to get
a turbo-charge on the existing IC of societies, or in other words increasing the
turbo or productivity on existing knowledge investments . A kind of IC in waiting
to be tapped by challenging society entrepreneurs. Whom would you like to
nominate as one among the top ten society entrepreneurs of today – for shaping
tomorrow?
5.3 Knowledge Cities and Harbours
Intellectual capital can also have an impact on city planning. Planners must now
create the context in which knowledge workers can be their most productive. This
may bring about radical changes in the way our urban environments are con-

10. 162 Leif Edvinsson
ceived. Think of a harbour. Traditionally, harbours used to be for the flow of
goods. But as the value of logistics has declined, we have to look at the flow of
knowledge. We need to create knowledge harbours. After all, closeness to water is
important for knowledge workers. It is calming – all Japanese gardens have a wa-
ter feature for this very reason.
5.4 Knowledge Universities
These, you may think, already exist. But, in many ways, people are now effec-
tively “dis-educated” for the future: they are not prepared for the challenges that
will arise. Universities need to be re-configured to fit changing times. At the mo-
ment, future learning is not taking place in universities; it is mostly taking place
outside in industry. It still takes four years to receive a Ph.D. Why? Learning
needs to be accelerated. Otherwise, there is a tremendous inefficiency and oppor-
tunity cost for knowledge workers.
6 Key Message
The wave of IC is increasing. It has gathered within it universities, accounting
standards groups, political and business communities. The message is that we
need to surf the wave of knowledge economics or drown. It is a leadership liability
not to address the potential or IC in waiting.
The opportunity is great (Amidon, 2002). There are a great many people who
are lost at sea, lost in the fog of the labour market, the stock market, or confused
by the political world. They need to understand corporate longitude; otherwise,
they will continue to go around in befuddled circles. Knowledge navigation will
continue on the quest for the new wealth of nations.
Links for further reading related to intellectual capital include the following:
www.corporatelongitude.com
www.isa.se
www.oecd.org/publications
www.entovation.com
www.kmcluster.com
www.bontis.com
www.minez.nl
www.ll-a.fr/intangibles/
www.cbs.nl
www.efs.dk/icaccounts
www.monday.dk

11. The Intellectual Capital of Nations 163
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