Wealth, Competitiveness, and Intellectual Capital - ScienceDirect.com

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ScienceDirect Procedia Economics and Finance 27 (2015) 556 – 566

22nd International Economic Conference – IECS 2015 “Economic Prospects in the Context of Growing Global and Regional Interdependencies, IECS 2015

Wealth, Competitiveness, and Intellectual Capital – Sources for Economic Development Mihaela Herciua,*, Claudia Ogreana a

Lucian Blaga University of Sibiu, Faculty of Economic Sciences, 17 Dumbrvii Street , Sibiu, 550324, Romania

Abstract National wealth, national competitiveness and national intellectual capital were major objectives of a nation in the last century. By this paper we identify strong interrelations between national wealth, national competitiveness and national intellectual capital according to Pearson, R and R2 results. These interrelations demonstrate that national wealth, national competitiveness and intellectual capital are important sources for increasing the economic development based on data from 40 developed, emerging and developing countries. © 2015 2015 Published The Authors. Published Elsevier B.V.access article under the CC BY-NC-ND license © by Elsevier B.V.byThis is an open Peer-review under responsibility of Faculty of Economic Sciences, "Lucian Blaga" University of Sibiu". (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of Faculty of Economic Sciences, “Lucian Blaga” University of Sibiu” Keywords: national competitiveness; national wealt; national intellectual capital; interrelations

1. Introduction Generally, economists have measured the development of a nation (country) in terms of increasing per capita income, or gross domestic product. The Working Group on Statistics for Sustainable Development (Eurostat, 2008) sustains that if “the distribution of income is skewed and the poor part of the population is getting poorer even while average income increases, many people, including many economists, would hesitate to call this development. According to Hausmann and Rodrik (2003) “the theory and practice of economic development have converged in the last two decades on a remarkably simple view of growth fundamentals. Stated in its starkest form, this view is that economic growth requires two things: foreign technology and good institutions. This perspective is well grounded in the neoclassical model of economic growth, which predicts that poor countries will experience rapid convergence with

* Corresponding author. E-mail address: [email protected] (M. Herciu), claudia.ogrean@ulbsibiu (C. Ogrean)

2212-5671 © 2015 Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of Faculty of Economic Sciences, “Lucian Blaga” University of Sibiu” doi:10.1016/S2212-5671(15)01033-3

Mihaela Herciu and Claudia Ogrean / Procedia Economics and Finance 27 (2015) 556 – 566

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advanced economies once they have access to state-of-the-art technologies and their governments respect property rights. Economic development is in Todaro and Smith (2009) opinion “both a physical reality and a state of mind in which the society has secured the means for obtaining a better life. Whatever the specific components of this better life are, development in all societies must have at least the following three objectives: (1) To increase the availability and widen the distribution of basic life-sustaining goods; (2) To raise the levels of living including higher incomes, the provision of more jobs, a better education, and greater attention to the cultural and human value; (3) To expand the range of economic and social choices. Many other specialists considered that economic development is a system of differential equations the solution to which imitates some of the main features of the economic behavior that we observe in the world economy (Lucas Jr.,1988), a development that meets the needs of the present without compromising the ability of future generation to meet their own needs (World Commission on Environment and Development), not only national stocks of manufactured, human, and natural capital (Dasgupta, 2002). In this context, the level of economic development of a country can be influenced by a variety of factors such as: geography, modernization processes, culture, liberalization (Lynn and Vanhanen 2002; Yang, 2011); genuine savings as key indicators to measure change in sticks of critical nature assets (Pearce, Hamilton, and Atkinson, 1996); the state of education and health in the society, taking into consideration the fact that education creates knowledge, skills and capabilities (Bontis, 2001, Malhotra, 2002, Benhabib and Spiegel, 1994); competitiveness as the ability to produce welfare (Aiginger, 2006). Taking into consideration the following: (1) “Moving to an advanced economy requires that vigorous local rivalry develop… Competition must shift from imitation to innovation and from low investment to high investment in not only physical assets but also intangibles (Porter, 2000); (2) “The intelligence of the population has been a major factor responsible for the national differences in economic growth and for gap in per capita income between rich and poor nations (Lynn and Vanhanen, 2002); (3) Economic development is not only about per capita wealth, where wealth includes produced, natural, and human capital (Dasgupta and Maler 2000, Arrow et all. 2003, Lange 2004), it is “about a shift in focus from economic development as GNP growth to economic development as a process of portfolio management that seeks to optimize the management of each asset and the distribution of wealth among different kinds of assets (Lange 2004), we chouse national wealth, national competitiveness and national intellectual capital as sources for economic development. This paper presents, in the first part, a theoretical approach of the national wealth, national competitiveness and national intellectual capital in order to identify their role in increasing the economic development. It also describes the construction of the national intellectual capital index (NICI) taking into consideration four categories of capital, such as national human capital, national market capital, national renewal capital and national process capital, and the construction of growth competitiveness index (GCI) taking into consideration 12 pillars elaborated by the World Economic Forum. The national wealth is approached through GDP per capita. In the second part, the paper emphasizes some interrelations between national wealth, national competitiveness, and national intellectual capital. 2. Conceptual framework 2.1. National Wealth National wealth is “the aggregate of individuals’ wealth or the successful results of the efforts of individuals to improve their condition…The acquired elements of national wealth are capital, labor, skills, enterprise and talents of its inhabitants (Jennison, 1828). The most recognized measure used for economic growth is GDP per capita. This approach focuses on the growth of material living standards rather than on the growth of productivity. The GDP per capita level represents the best quantitative measure of growth (Ezeala-Harrison, 1996) and a quantitative indicator in order to compare countries across regions and monitor development progress through time (Bonini, 2008). In Shirras`s (1949) opinion each country should prepare not only annual estimates of national income or GDP, but also estimates of national wealth. By national wealth is meant the total goods within a country owned by the inhabitants in their individual or corporate capacity.

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According to Boldov (2010) national wealth is “an aggregate of there types of capital: natural capital (bio-resources, land, minerals), produced capital (machinery, equipment, urban land), and intangible capital (human capital and quality of institutions, governances). The higher the development level of country is, the higher the percentage of intangible capital in national wealth. The maximum wealth of an economic development level is characteristic for economies that produce innovative goods and have knowledge-intensive industries. In other specialists opinions, national wealth can be related to: the level of industrialization (Williamson and Moss, 1993), national culture (Moores, 2008), human and non-human real assets (Sadik and Bolbol 2003), social wealth (Stiglitz, 2007), achieving simultaneous internal and external balance in the short run and of as rapid growths of living standard as possible in the long run (Boltho, 1996). 2.2. National Competitiveness The definition of competitiveness by economists has been evolved from the theory of comparative advantage and factor pricing stated by Ricardo and Heckscher-Ohlin - that predicted a pattern of trade when prices, trade flows and exchange rates are in equilibrium (Adams, Gangnes and Shachmurove 2006; Coldwell 2000) – to recent theories emphasizing “our ability to produce goods and services that meet the test of international competitiveness while our citizen enjoy a standard of living that is both rising an sustainable (Council of Economic Advisors). What a theory of competitiveness must do is to establish the links between the growth and the balance-of-payments position of an open economy and the factors influencing this process (Fagerberg 1988). But that was available in the 90s. Today the notion of competitiveness has become a prominent concept in the assessment of countries, regions and locations. Sahin et al. (2006), Kao et al. (2008) and Cho et al.(2008) define competitiveness as the ability to create welfare, the relative ability of a nation to create and maintain an environment in which enterprises can compete so that the level of prosperity can be improved and suggest also that each comprehensive assessment of competitiveness should contain an outcome evaluation and a process evaluation, on one hand, and must be compared to other nations of similar economic development, on the other hand. According to Krugman (1996) the concept of competitiveness is “elusive or meaningless when applied to national economies; for economies with little international trade, competitiveness is a specifically maintained to be a funny way of saying productivity. Another author considers that international competitiveness is said to occur whenever the economic welfare of a nation is advanced through an increase in the flow of trade or through an alteration in the conditions of trade starting from a presumed initial equilibrium (Coldwell 2000). From Siggel’s (2006) point of view countries may compete for market share or for foreign investment, but the attribute of stability, good government and profitable investment opportunities, are better indicators of a favorable business climate than competitiveness. Garelli (2006) captured two very different definitions for the concept of competitiveness: on one hand, he says that competitiveness analyses how nations and enterprises manage the totality of their competencies to achieve prosperity or profit; on the other hand, he defines the competitiveness of nations to be a field of economic theory, which analyses the facts and policies that shape the ability of a nation to create and maintain an environment that sustains more value creation for its enterprises and more prosperity for its people. The issue of national competitiveness is a matter of considerable importance to both managers and public policy makers alike (Thompson, 2004). In his opinion the notion of national competitiveness is “controversial and has both (1) a narrow, concise conception that relates primarily to cost conditions as determined by exchange rate, and (2) a broader, more nebulous conception that comprises the institutional and systemic circumstances of an economy, such as legal, governmental, public policy and other factors framing countries` wider business environments. In the literature there are various institutions/organizations that define and measure the international competitiveness such as: The World Economic Forum, The Institute of Management Development, The European Commission and other ones. The European Commission in the European Competitiveness Report (2010) emphasizes the fact that competitiveness “is understood to mean high and rising standard of living in a nation with the lowest possible level of involuntary unemployment, on a sustainable basis. World Economic Forum (WEF) defines competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the sustainable level of


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Transition from stage 1 to stage 2

Table 1. The pillars of competitiveness and stages of development Stage of development Factordriven economies Stage 1 Competitiveness pillars 60% Basic requirements - Institutions - Infrastructure - Macroeconomic stability - Health and Primary Education 35% Efficiency enhancers - Higher Education and Training - Goods Market Efficiency - Labor Market Efficiency - Financial Market Sophistication - Technological Readiness - Market Size Innovation and sophistication 5% factors - Business Sophistication - Innovation Total (%) 100 GDP per capita (US$) < 2000 20003000

Efficiencydriven economies Stage 2 40%

50%

10%

100 3000-9000

Transition from stage 2 to stage 3

prosperity that can be earned by an economy. (Sala-I-Martin et al. 2009). Also, WEF has identified and developed (within the Global Competitiveness Report that is prepared each year) 12 pillars of competitiveness, grouped in 3 categories, serving as benchmarks (Table 1).

900017000

Innovationdriven economies Stage 3 20%

50%

30%

100 > 17000

Source: World Economic Forum, Global Competitiveness Report 2013-2014

2.3. National Intellectual Capital A country’s development level is determined not by a high level of natural resources but by intangible capital as: the sphere of information technologies and continuous innovations (Boldov, 2010), and intelligence of a nation given by genetics (Whetzel and McDaniel, 2006). There is no single and unanimously recognized approach about the conceptual content that the intellectual capital reflects. That may be because the term just relatively recently entered into the macroeconomic area of preoccupation. Despite this, there is a strong opinion lately considering that intellectual capital is (among other intangible assets) one of the most important source of sustainable economic development (Ogrean and Herciu 2006). According to Andriessen and Stam (2005) intellectual capital of nations is “a concept that applies the principles of intellectual capital measurement and management on a macro-economic level, in such a way that it helps to give direction to future economic developments… The main motivation for measuring the intellectual wealth of a nation is to get insight into the relative advantage of countries. The intellectual capital of a nation includes in Bontis (2004) opinion “the hidden values of individuals, enterprises, institutions, communities and regions that are the current and potential sources for wealth creation. These hidden values are the roots for nourishment and the cultivation of future wellbeing. As Stewart (1999) said in his book Intellectual Capital: The New Wealth of Organizations, “the emergence of the Information Age has changed the nature of wealth and wealth creation, and it offers powerful new ways of looking at what companies do and how to lead them. In an economy based on knowledge, intellectual capital – the untapped, unmapped knowledge of organization – has become a company’s greatest competitive weapon. It is found in the talent of the people who work there; the loyalty of the customers it serves and learns from; the value of its brands, copyrights, patents and other intellectual property; the collective knowledge embodied in its cultures, systems, management techniques, and history. But these vital assets are nowhere found on a balance sheet, only rarely managed, and almost never managed skillfully. In order to properly define the concept and to put it in its place (and in relationship with other “confusing ones), Ilidio Lopes and Maria do Rosario Martins conclude: “the emergence of a new economic order has resulted from the

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management of this new raw material, in which intangible assets, while supporting the main source of value creation, have assumed a preponderant role. In accountancy it is known as intangibles, in economic theory as knowledge assets and in management literature, as intellectual capital. Its essence represents an asset without physical existence, providing potential future returns. Those assets are generally very expensive. They are extremely difficult to manage and, even today, their associated property rights are confused. This assertion raises the need to rethink accounting and financial principles and, also, protection and management models, with a view toward creating a more appropriate match between accounting and market values (Lopes and Martins 2006). Even if there is now a large consensus about the invisible assets playing one of the biggest roles for gaining economic development, the last assumption raises some questions: can the intangible assets be properly evaluated – identified, categorized, measured – and then managed (Bontis, 1998)? Because the concept of intellectual capital itself is not unitary defined, it is very difficult to give just one kind of answer to those questions. The approaches are different (management versus accountancy), the points of view are different, the elements taken into consideration are different, the units of measurement are different, and the results are, obviously, different. According to Skandia Model for Measuring Intellectual Capital (Malhotra, 2000) there are four components of intellectual capital: human capital, market capital (also known as customer capital), process capital and renewal capital. Human capital (Bontis, 2001) is the property of individuals, it cannot be owned by the organization. This includes knowledge, wisdom, expertise, intuition, and the ability of individuals to realize organizational tasks and goals. Market Capital: In the context of the original model applied to market enterprises, this component of intellectual capital was referred to as customer capital to represent the value embedded in the relationship of the firm with its customers. Process Capital: Organizational processes, activities, and related infrastructure for creation, sharing, transmission and dissemination of knowledge for contributing to individual knowledge workers productivity. Renewal and Development Capital: This component of intellectual capital reflects the organization’s capabilities and actual investments for future growth such as research and development, patents, trademarks. But, intellectual capital on national level has recently emerged as a new area of research, where the focus is on understanding and measuring the intangible factors influencing national wealth creation…In the global economy IC research has the potential to make an important contribution to the understanding of the new nature of competitiveness. There is rather unified understanding about the importance of knowledge as a source of economic competitiveness, since an increasing proportion of GDP currently resides in economic commodities that have little or no physical manifestations (Stahle and Stahle, 2006). For measuring the national intellectual capital (National Intellectual Capital Index – NICI) we use as benchmark the model proposed by Bontis (2004) and data from Yeh-Yun and Edvinsson (2010). In this context, a high level of national intellectual capital reveals a country with knowledge-intensive activities (Edvinsson, 2004), with educated labor force that is better at creating, implementing, and adopting new technologies (Benhabib and Spiegel, 1994), with invisible wealth (Yen-Yun and Edvinsson, 2008) given by nation’s competences and capabilities (Malhotra, 2002). All these are, for sure, sources for economic development. 3. Data, methodology, interrelations and results The level of national wealth as GDP per capita, national competitiveness and national intellectual capital for 40 countries are shown in the table below (Table 2). We use as sources to identify the level of the three variables the Global Competitiveness Report 2011-2012 from World Economic Forum and the study “What national intellectual capital indices can tell about the global economic crisis of 2007-2009? published in Electronic Journal of Knowledge Management in 2010 by Lin Yeh-Yun and Edvinsson. Table 2. GDP per capita, GCI and NICI for 40 countries GDP per GCI NICI capita Country (US dollars) Argentina Australia Austria

9138 55590 44987

3.99 5.11 5.14

13.34 24.69 24.26

Country

GDP per capita (US dollars)

GCI

NICI

Korea Malaysia Mexico

20591 8423 9566

5.02 5.08 4.29

20.04 19.15 14.13

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Mihaela Herciu and Claudia Ogrean / Procedia Economics and Finance 27 (2015) 556 – 566 Belgium Brazil Canada Chile China Czech Republic Denmark Finland France Germany Greece Hungary Iceland India Ireland Italy Japan

42630 10816 46215 11828 4382 18288 56147 44489 41019 40631 27302 12879 39026 1265 45689 34059 42820 GDP per capita

5.2 4.32 5.33 4.7 4.9 4.52 5.4 5.47 5.14 5.41 3.92 4.36 4.75 4.3 4.77 4.43 5.4

23.32 13.98 25.56 18.27 15.06 17.98 28 29.47 21.64 23.86 16.53 19.06 26.13 13.7 24.08 18.36 24.13

Netherlands New Zealand Norway Philippines Poland Portugal Russia Singapore South Africa Spain Sweden Switzerland Taiwan Thailand Turkey United Kingdom United States

GCI

NICI

47172 32145 84444 2007 12300 21559 10437 43117 7158 30639 48875 67246 18458 4992 10399 36120 47284

5.41 4.93 5.18 4.08 4.46 4.4 4.21 5.63 4.34 4.54 5.61 5.74 5.26 4.52 4.28 5.39 5.43

23.84 20.83 25.45 14.5 14.83 18.06 15.09 26.8 15.41 19.03 29.25 28.46 23.17 16.02 14.43 22.5 27.64

Mean 29803.3 4.859 20.75125 STDEV 20059.36748 0.51612 5.016684 Source: World Economic Forum (2013) and Lin Yeh-Yun and Edvinsson (2010) Table 3. Correlation between GDP per capita, GCI and NICI N Pearson 0.7274 GDP per capita 40 and GCI 0.8659 GDP per capita 40 and NICI 40 0.8828 GCI and NICI N - number of observation p - level of significance Source: Table 2 and own calculation

R2 0.5291

p < 0.001

0.7498

< 0.001

0.7794

< 0.001

The Pearson index estimated to distinguish the connection between the GDP per capita and the national competitiveness is 0.7274 (Table 3.), with a strong and direct connection, that shows that the countries with better score for GCI are more developed and have a higher level of GDP per capita. Also the level of R2 (0.5291) reflects a significance of the correlation of 0.001 at 38 degree of freedom (Fig. 1).

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90000 80000


70000 60000 R2 = 0,5291 50000 40000 30000 20000 10000 0 0

1

2

3

4

5

6

7

Grow th Competitiveness Index

Fig. 1. GDP per capita and Growth Competitiveness Index

For the interrelation between the national intellectual capital and the GDP per capita the value of Pearson is 0.8659. This value underlines the fact that developed economies have a higher value of national intellectual capital than the developing economies. The value of R2 (0.7498) reflects a high level of correlation significance (Fig. 2).


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90000

80000

70000


60000 R2 = 0,7498 50000

40000

30000

20000

10000

0 0

5

10

15

20

25

30

35

National Intellectual Capital Index

Fig. 2. GDP per capita and National Intellectual Capital Index

It can be observed a direct and very strong correlation (Pearson = 0.8828) between the national competitiveness and national intellectual capital which means that in the countries where the value of NICI is high the competitiveness is high. This fact is emphasized also by the value of R2 that is 0.7794 (Fig. 3).

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7

6 Growth Competitiveness Index

R2 = 0,7794 5

4

3

2

1

0 0

5

10

15

20

25

30

35

National Intellectual Capital Index

Fig. 3. GCI and National Intellectual Capital Index

4. Conclusion National wealth, national competitiveness and national intellectual capital represent some of the most important objectives of a nation. Many studies have demonstrated that these objectives are in interrelations and capable to create great synergies for countries. The results obtained for Pearson and R2 demonstrate that between the national wealth, national competitiveness and national intellectual capital are a strong and direct correlation with significance of the model of 0.001. The Nordic European Countries, United States, Canada, Australia and Switzerland are countries with very high level of economic development based on the high GDP per capita, high competitiveness and national intellectual capital. The other developed European Countries (Germany, Austria, France, United Kingdom, Iceland, Ireland, and France), and Japan are countries with high competitiveness, high level of GDP per capita but with a medium level of national intellectual capital. Taiwan is in the second group because of its high level of competitiveness, not because of the level of GDP per capita that is lower middle. The emerging countries like Chile, Czech Republic, Poland, China, Thailand, and Hungary have lower middle level of GDP per capita, national competitiveness and national intellectual capital. Three of the BRIC countries (Russia, Brazil, and India) and two Latin American countries (Mexico and Argentina) have obtained a very low level of economic development index because their lower level for all three variables. In conclusion, for achieving and maintaining economic development a country must improve/increase in the same time the level of GDP per capita, the level of national competitiveness and the level of national intellectual capital. 5. References Adams, Gerard, Byron, Gangnes, and Yochanan Shachmurove, 2006. Why is China so Competitive? Measuring and Explaining China’s Competitiveness. The World Economy, 29(2): 95-122. Aiginger, Karl, 2006. Revisiting an Evasive Concept: Introduction to the Special Issue on Competitiveness. Journal of Industry, Competition and Trade, 6: 63-66. Andriessen, Daniel, and Cristiaan Stam, 2005. Intellectual Capital of the European Union. 7th McMaster World Congress on the Management of Intellectual Capital and Innovation Ontario, Canada. Arrow, Kenneth, Partha, Dasgupta, and Karl-Goran Maler, 2003. Evaluating Projects and Assessing Sustainable development in imperfect economies. Environmental & Resource Economics, 26: 647-685.


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