Refining Estimation of Global Stock of Knowledge Assets

The estimate I gave in the previous blog post of the global stock of knowledge assets can be refined further. Let me warn you that the estimation procedure requires making assumptions that are open to question.

I sorted the 215 Yahoo Finance industry groups into primary (agriculture, forestry, mining), secondary (agri-processing, industries, manufacturing) and tertiary (services) sectors, and averaged each sector’s price-to-book ratio (PBR) reported on April 5, 2009. I then computed the intangibles-to-price ratio as (PBR-1)/PBR. The results were 49.6%, 63.5% and 79.1%. As I expected, the service sector has the greatest intangibles-to-price ratio.

The latest World Bank’s data on Gross World Product (GWP) by sector are: 3%, 28% and 69%. Using the results above, the percent of GWP from intangible assets in the primary, secondary and tertiary sectors are, respectively, 1.5%, 17.8% and 54.6% or a total of 73.87% of Gross World Product are contributed by intangible assets. This is close to my previous assumption of 70%. The rest, or 26.1%, is contributed by tangible assets (book value).

Next we look at discount rate. As I said, central banks had recently been dropping interest rates, and so we cannot use the abnormally low prevailing interest rates (0.5%). I plotted the historical data of discount rates set by the US Federal Reserve since January 1950 from the Financial Forecast Center:

History of US Federal Reserve discount rate since 1950

The half-century average is 5.1% which we assume to hold over the next decades. However, US discount rates are normally lower than those in capital-scarce developing countries. So we adopt a 6% per annum figure for our global estimates, and a bracket of 5% to 7% per annum.

The NPV of the future stream of GWP from intangibles, using 2008 GWP = $62.25 trillion, is between $657 trillion and $920 trillion. At 6% per annum, the middle estimate of NPV of intangibles = $766 trillion.

If we assert that most of these intangibles are knowledge assets, then the (upper limit of) global stock of knowledge assets stand at about $766 trillion. This is an upper limit because we saw in F1- KM is not enough! that value creation is due to both cognitive (knowledge) and non-cognitive (motivational) factors.

Compare this figure with:

US GDP in 2008 = $14.33 trillion
World GDP in 2008 = $62.25 trillion
Global financial losses from recent crisis = $50 trillion
Total US Federal debt = $65.5 trillion
US human and social capital in 2006 = $153 trillion (estimated by Dr. Gary Becker of the University of Chicago)

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Towards a Global Balance Sheet

I compiled various estimates of entries in the expanded KM framework towards a global balance sheet.

Negative side (see diagram below):

• Annual cost of corruption = $1 trillion in 2001-2002 according to the World Bank Institute, when GWP = $30 trillion. Now that GWP is 62 trillion, this estimate may be approximately $2 trillion.
• Losses from the global financial crisis had been reported in my previous blog post: $8.3 trillion in Wall Street and $50 trillion worldwide according to the Asian Development Bank
• US federal obligations by end-2008 = $65.5 trillion according to Shadow Government Statistics
• Losses from global climate change = 5-20% of GWP (or at least $3 trillion in 2008) according to a study by the Government Economic Service, U.K. headed by Sir Nicholas Stern
• Annual forest loss = $2-5 trillion according to an EU-commissioned study The Economics of Ecosystems and Biodiversity; the losses from other forms of natural capital are currently being estimated.
• Depletion of oil in Gulf countries up to 2020 = Gulf countries’ cumulative oil earnings up to 2020 = $4.7 trillion according to Ernst & Young
• About $2 trillion worth of minerals are extracted yearly, according to Dr. Philip Brown of the University of Wisconsin
• My estimate of annual cost of risk from global nuclear war = $591 billion per year, or NPV of $11.8 trillion (see my previous blog post)

Positive side (see diagram below):

• US GDP in 2008 = $14.33 trillion according to CIA World Factbook
• China’s GDP in 2008 = $4.4216 trillion, according to its National Bureau of Statistics and China’s forex reserves by end-2008 = $2 trillion according to Christopher Barker
• GWP in 2008 = $62.25 trillion according to the CIA World Factbook
• Human and social capital in US in 2006 = $153 trillion according to Dr. Gary Becker and Kevin Murphy of the University of Chicago. If this is growing at 2.14% per year, then it would be about $163 trillion in 2009.
• Gulf countries’ cumulative oil earnings up to 2020 = $4.7 trillion according to Ernst & Young
• My estimate of global knowledge assets = $871.5 trillion. According to the World Bank’s World Development Report 2009, 69% of GWP is from services which is knowledge-intensive, while 28% is from industry which is technology-intensive. In the US, human and social capital constitute 74% of total assets, while the remaining 26% is financial assets. If we assume that 70% of GWP is contributed by knowledge assets over the next decades, the NPV is $871.5 trillion at 5% discount rate.

What do we notice?

• Total US federal debt exceeds the wealth (GWP) created by the world economy in one year.
• The world is drawing from its natural capital at an annual rate about equal to the 2008 Wall Street meltdown.
• Knowledge is our biggest and growing asset for creating wealth.

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A Value Driver behind Relationship Capital

My last blog post was about bridging leaders.

A town mayor who is a bridging leader is better able to bring various conflicted social groups in his town to talk and decide together. Why?

Some communities of practice (CoP) prosper and grow, but others do not. Why?

Early this year, Facebook backed off when millions of its users opposed its proposed new Terms of Service. Why?

The purchase order has not yet been received, but an urgent phone call from the president of a company to another fellow Rotarian president of the supplier company is enough for the latter to give instructions to his people to ship the goods immediately. Why?

A customer buys from Amazon.com and discloses her credit card number to the company. Why?

The technical qualifications of two competing consultants were practically equal, so the client chose the consultant they had worked with before. Why?

An ugly rumor sent the stock price of a company down 15% in one day, yet its tangible assets today are basically the same as yesterday’s. Why?

The answer is TRUST. Trust is a fundamental value driver behind all forms of relationship capital. Relationship capital and trust are both intangible yet they produce tangible benefits and outcomes.

Trust underlies the worst fears and threats to our planetary society. Trust underlies the efficient operation — or the threat of collapse — of the global knowledge economy. Trust is so important that we NEED to develop a new science and technology to understand and manage it. Our daunting global problems belie humankind’s ignorance of how to effectively work with this important factor.

The Philippines is a nation threatened by many societal divides: ethnic/upland-vs.-mainstream/lowland, Christian-vs.-Muslim, rich-vs.-poor, communist-vs.-free market, insurgents-vs.-government, Manila-vs.-provinces, etc. At the same time personal relationships are important to the common Filipino. These are some reasons why bridging societal divides and bridging leadership are active and growing development discourses in the Philippines. That is also why scientific research on relationships and social capital is also well-developed here.

The late Filipino psychologist Dr. Virgilio Enriquez developed an ordinal scale of Filipino social interaction, which of course is based on increasing (or deeper) levels of trust:

We really do need to develop a new science and technology of TRUST. What is your opinion on this?

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For Complex Development Problems: We Need Bridging Leaders

This afternoon I saw in CNN how residents in Fargo, North Dakota pulled themselves together to protect their town against rising floodwaters by piling sandbags over threatened dikes.

Knowledge management (KM) is about achieving effective group action. During crisis situations — when a common threat is publicly visible and cause-and-effect relationships are known to everyone — effective group action follows easily. In more complex situations, effective group action can happen if there is a leader who can see (better than most people can) and lead through three kinds of complexity:

• Dynamic complexity: when causes and effects are far apart in space and time, and therefore less publicly visible;

• Generative complexity: when the future is difficult for most to predict, or is likely to be unfamiliar or different; and
• Social complexity: when people who are affected or who should take action do not share similar assumptions, beliefs and interests.
  (Source: Adam Kahane’s book “Solving Tough Problems: An Open Way of Talking, Listening and Creating New Realities,” Berrett-Koehler, 2004)

This type of leader is called a bridging leader.

Bridging leadership is about creating or enhancing bridging social capital (see my previous blog post D13- Bridging social capital versus bonding social capital). Bridging leaders are those who can understand, engage and lead groups of people with diverse interests to effective group action to solve problems or achieve goals under conditions of complexity. Bridging leaders fight against social exclusions. To pull the inhabitants of Planet Earth through the difficult 21st century problems of poverty, environmental collapse, ethnic-religious wars and threat of nuclear war, we NEED more bridging leaders — a critical issue I have written about in my previous blogs.

Only a bridging leader can comfortably lead a “team of rivals” the way President Barack Obama does. President Obama borrowed the phrase “team of rivals” from President Abraham Lincoln whom he admires.

Bridging leadership is another core of human capital (see previous blog post on Q21- Rediscovering a Core of Human Capital: Sophia), the skill to work effectively in the intersection of relationship capital and motivational factors. Following our expanded KM framework:

Two days ago I received a phone call from a niece Ms. Aisa Villanueva, asking for assistance. She is co-founder and officer of a non-government organization — Bridging Leaders into Successful Societies. I was so impressed that young people fresh from college are inspired to work for the social good. I am properly reminded: there is hope for our Planet. Serendipity!

This month, another serendipity occurred: our NGO — CCLFI — started working with the Asian Institute of Management TeaM Energy Center for Bridging Societal Divides (CBSD). We are co-producing an e-manual on Post-Project Knowledge Capture that will be useful to development workers. We intend to give away the e-manual for free, and invite others to use and contribute to its enrichment.

There is a new and significant discourse a-forming around the new field of bridging leadership. If you wish to know more about it, you can check the AIM TeaM Energy CBSD website and that of their Bridging Leadership Fellows Program. You can also check out the Bridging Leadership Resource Center in the website of Synergos.

Tell us what you think.

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Metacapital

Have you heard of the term “positive psychological capital”? There is a discourse among a group of researchers and practitioners who find a need to use this term. My Indonesian counterpart, Prof. Dr. Jann Hidajat Tjakraatmadja uses this term. He also uses the term “integrity capital.”

Other discourses revolve around other concepts such as spiritual capital, emotional capital, cultural capital, social network capital, political capital, and so on. I have written about social capital in this blog. There is a wider discourse and broader usage of the term social capital, and much wider on human capital.

The meanings of these terms are still evolving, but the common theme across these concepts is that these forms of “X capital” are creators of value. For example, Claridge spent three years examining the meanings of the term “social capital” in more than 500 peer-reviewed articles. He concluded that the common theme across them is “social relations that have productive benefits.”

To complicate the picture, researchers and practitioners from the life sciences are beginning to use terms such as biological capital, natural capital, ecological capital, biodiversity capital, environmental capital, etc. Ecologists clearly distinguish between “natural capital” and the annual stream of “natural income” that the former produces. A mango tree is natural capital, and the mango fruits it produces yearly constitute natural income. Again, the common theme across these concepts is that these forms of capital are such because they are creators of value. They produce annual income streams, just like the more traditional factors of production, namely, land, labor and capital.

Knowledge management researchers and practitioners added more terms: intellectual capital, structural capital (or process capital), relationship capital (or stakeholder capital or customer capital). The consistent underlying meaning among KM researchers and practitioners is that these “things” are all creators of value. They produce wealth. Customer capital contributes to a corporation’s annual income stream just as much as a mango tree produces an annual income stream for the farmer-owner.

It is becoming clear that the factors of production is not just land, labor and capital. There are many more factors that can create wealth other than the traditional ones taught in Economics 101. Psychologists, biologists, ecologists, sociologists, etc. are showing us these many other forms of capital.

Last March 2008, at the conference on “Knowledge Architectures for Development” sponsored by the Singapore Management University, we proposed the cross-disciplinal term “metacapital” to encompass all the various forms of capital. Here is a slide in my PowerPoint presentation:

What do you think?

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Q11- Social Capital: Peace Creation = Value Creation?

You have probably read or heard of these terms (the first two are KM terms): stakeholder capital, customer capital, brand, old boy network, goodwill, corruption network, business development officer, social capital, customer relations management, etc. The same concept underlies these words. Speaking technically, these terms revolve around the common fact that relationships can and do create value. Speaking bluntly, one can make money out of relationships. We know from our own experiences that relationship is a form of asset. The generic term underlying all these is Relationship Capital.

Below is how we can break down the concept of Relationship Capital (this is a refinement of the earlier breakdown I introduced in a previous blog post, “D12- Relationship Capital versus Stakeholder Capital versus Customer Capital”)

The red text are negatives or opposites: when these are present, then they can and do destroy value. Another way of saying this is: trust in a relationship can create value, but mistrust can destroy value. Stephen M. R. Covey in his book “The Speed of Trust: The One Thing That Changes Everything” is saying that when trust is high, speed of work performance and transactions goes up, and business costs go down. Francis Fukuyama discovered that wealthy countries are also societies characterized by high social trust (see his book “Trust: The Social Virtues and The Creation of Prosperity”).

Trust and goodwill are among the most important intangible assets for good business. The same thing is true for world peace: building trust creates peace and opportunities for value creation. Losing trust can lead to conflict, war and value destruction.

It is a simple equation: building trust and peace = creating value.

Don’t you think so?

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F12- Relationships Do Create Value

The following examples tell us something:

• The explosive growth of the Internet and e-commerce
• GATT and the emergence and growth of many regional common markets: European Union, ECOWAS, MERCOSUR, GCC, CACM, AFTA, NAFTA, APEC, SARCC, SADC, EAC, ECOW, SAPTA, CARICOM, CER, Andean Community, etc.
• The emergence of new social networks and practices, together with a slew of new terms: “crowd sourcing”, “peer production”, “collective intelligence networks”, “massively distributed collaboration”, “wiki and collaborative authoring”, “prediction markets”, “open source communities”, “weapons of mass collaboration”, “peering”, etc.
• Networks being bought and sold: Yahoo bought Flickr for $30 million; News Corp. bought Myspace.com for $580 million; Google bought YouTube for $1.65 billion!

These examples all tell us that networks, connectivity or relationships create value. Social capital, like other forms of metacapital, create value. The examples in the last bullet point prove that networks do create market value.

The secret of success behind the large varieties of fast-emerging network-based business models are the following four principles:

• 1- Positive network externalities: additional network members create potential benefit to all network members
• 2- Metcalf’s Law: the value of a many-to-many network is proportional to n² (the square of n, where n is the number of network members)
• 3- Information and knowledge are shareable resources: copying and sharing to many others do not diminish the utility of the original to the sharer.
• 4- Trust between members.

Conversely, lack of trust can destroy value. The main point by Stephen M. R. Covey in his new book “The Speed of Trust: The One Thing That Changes Everything” is simple: when trust goes down, speed of work performance and transactions goes down, and business costs go up. Trust and goodwill are among the most important intangible assets for good business. Again, using the KM framework introduced earlier in this blog series:

When an organization is plagued by rivalry and factionalism, its performance suffers. Bad relationships and distrust can destroy value. Trust underpins relationship capital, one of the three components of intellectual capital of an organization.

When a nation is at war with itself: in Congo, Georgia, the Philippines, Somalia, Sri Lanka and many other places, millions and billions of dollars are diverted away from production to maintain armed forces. GNP suffers. This is negative social capital. No wonder that Francis Fukuyama in his book “Trust: The Social Virtues and The Creation of Prosperity” observed that developed economies are also societies characterized by high social trust.

At worst, when relationships between militarily powerful nations deteriorate, and a regional or global nuclear war threatens Planet Earth, we risk the destruction of all other forms of capital, natural and man-made, that have grown or been built over our home planet over the last centuries. Trust and goodwill are among the most important intangible assets for world peace.

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F3- KM is for Value Creation

In the private sector, value is measured in terms of how much consumers are willing to pay for a product or service, or how much stock market buyers are willing to pay for stocks of a corporation. The key element is how much a consumer is willing to pay, which in turn depends on her/his satisfaction. KM starts with recognizing what internal and external customers WANT. On these criteria hinge management decisions, including KM.

There is an ugly fly in this ointment: most consumers make decisions with almost zero knowledge of the human, social, environmental and cultural costs inflicted elsewhere while producing what she/he buys. Do you agree that most corporate KM contribute to perpetuating this situation?

In the public and civil society sectors, the mainstream development value is sustainable development — which can be restated in KM language as: development of social, natural and economic capital in ways that are not at the expense of each other. The World Bank proposed a four-pillar model of the Knowledge-Based Economy (KBE). They then developed a widely-used KAM or Knowledge Assessment Methodology for measuring the progress of national economies along the four pillars. The limitation of KBE is that the four pillars pertain only to the economic dimension. The Asian Development Bank subsequently proposed a broader framework, marrying KM with sustainable development, and came up with Knowledge-Based Development (KBD). However, it has not come up with similarly practical indicators.

Communities and social groups are the primary actors in development. KM for development starts with recognition of the needs and values of a community. You will surely agree with me that KM starts with what a community truly WANTS.

There is a messy fly in this ointment: results valued by a social group may be harmful to another social group. Al Qaeda and the US Government want valuable (to each of them) results extremely at odds with each other — and each uses KM along their own definitions of what to them is effective action (both use manuals, mentoring, technology, learning-by-doing, websites, networks, etc. — all KM tools). More, milder situations exist, where the KM framework of the more powerful group prevails (sometimes unwittingly) over that of the less powerful.

In many places in our planet, development can hardly proceed because of conflict — a sign of eroded or damaged social capital. In fact social capital can be double-edged: some social groups achieve unity among insiders (improving “bonding” social capital or exclusive social capital) by cultivating greater enmity against outsiders or enemies (worsening “bridging” social capital or inclusive social capital -from Putnam, Woolcock, Bourdieu,etc.).

It is utterly urgent to, using KM language, cultivate bridging social capital to heal the differences between warring nations, religions and ethnic groups — and failure can be in the form of a global or regional nuclear war that can destroy all other forms of capital in the planet.

This morning, I received an invitation to help the Center for Bridging Societal Divides of the Asian Institute of Management formulate their KM framework. One of their missions is to provide training on Bridging Leadership. I keep experiencing these interesting and seemingly random “connections” in my KM work. Jung called this synchronicity.

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